Private ruling: transfer of shares and Part IVA

Ruling: The taxpayer (the Deceased) died leaving a will and named executors who are unrelated parties. | The Deceased's estate comprised of a combination or real property, bank accounts, listed share portfolio and other assets. | In the Deceased's last will, a copy of which has been provided, the Deceased gave legacies, disposed of assets by specific gifts and gave the residue of the estate after payment of the legacies and all expenses to named institutions as residuary beneficiaries in specific proportions. | The executors anticipate a request from the residuary beneficiaries that the balance of the listed shares be transferred to them in specie. | The executors' proposal | For the purpose of maximising the value the residuary beneficiaries will receive, the executors propose: | 1. to apply the proceeds from the sale of certain assets and the Deceased's bank accounts towards legacies and expenses, and | 2. to sell a sufficient quantity of the listed shares with the lowest likely capital gain to pay the balance, then | 3. to transfer the remaining listed shares to the residuary beneficiaries in the specified proportions. | The residuary beneficiaries are all on the Commissioner's list of deductible gift recipients as at the date of this ruling. | It appears that each of the residuary beneficiaries is a deductible gift recipient and that a capital gains tax (CGT) benefit may apply if the estate donates the shares to the residual beneficiaries as opposed to selling the shares within the estate. | When fully administered the estate will have no assets or liabilities and will cease to exist. This will be so whether the shares are sold and the residual cash distributed or the shares are transferred directly to the residual beneficiaries. | Valuation of the share portfolio | The executors have requested that the Commissioner determine the value of the share portfolio which is to be gifted to the named charities in accordance with section 30-212. | The Australian Valuation Office (AVO), as a business line of the Tax Office, is responsible for providing these valuations on behalf of the Commissioner. The valuation cannot be obtained until after the date of the donation. | In a letter in response to the ruling request the ATO provided the executors with the following documentation to assist the executors in obtaining the valuation. | · AVO publication Philanthropy Guide which provides information regarding the valuation process | · Request for valuation - The Request for valuation is a two page form that must be completed by the donor of the property. A deposit of $174.00 must be included with the request | · Certificate of Donation - The Certificate of donation is a two page form that must be completed by the donor, signed by the officer who accepted the gift on behalf of the eligible recipient and submitted to the Philanthropy Valuations Team at AVO with the Request for valuation and any other relevant documents. | This ruling has been issued on the basis of an agreed fact that the executors will undertake the donation of the share portfolio in accordance with AVO procedures.


Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 Division 30 | Income Tax Assessment Act 1997 Section 30-15 | Income Tax Assessment Act 1997 Section 30-17 | Income Tax Assessment Act 1997 Section 30-212 | Income Tax Assessment Act 1997 Part 3.1 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Section 128-10

Reasons for decision: Summary: Will the capital gain on the proposed transfer of listed company shares from the estate of the deceased to the residuary beneficiaries be disregarded under section 118-60 of the ITAA 1997? Part 3.1 of the ITAA 1997 contains the capital gains tax (CGT) provisions. When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the ITAA 1997) CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (subsection 104-215(1) of the ITAA 1997). The time of the event is just before the deceased died. Section 118-60 of the ITAA 1997 provides that any capital gain or loss made as a result of CGT event K3 happening may be disregarded if the testamentary gift of property would have been deductible under section 30-15 of the ITAA 1997 if it had not been a testamentary gift. Division 30 of the ITAA 1997 sets out the rules for working out deductions for certain gifts or contributions that you make. Section 30-15 provides a table of gifts or contributions that you can deduct. This table tells you: · who the recipient of the gift or contribution can be; and · the type of gift or contribution that you can make; and · how much you can deduct for the gift or contribution; and · any special conditions that apply. This section applies to gifts to a range of charitable organisations that are endorsed as deductible gift recipients under section 30-17 of the ITAA 1997. If the gift is property valued at more than $5,000 and you did not purchase the property during the 12 months before making the gift, the amount you can deduct will be the value of the property as determined by the Commissioner. If the gift is shares in a listed company the amount you can deduct will be the market value of the shares on the day you make the gift. If the property is to be valued by the Commissioner the requirements of section 30-212 of the ITAA 1997 must be satisfied. Section 30-212 requires that if you make a gift or contribution that is covered by a provision of Division 30 that refers to the value of property as determined by the Commissioner, you must seek a valuation from the Commissioner. The Commissioner may charge you the amount worked out in accordance with the regulations for making the valuation. The Australian Valuation Office (AVO), as a business line of the Tax Office, is responsible for providing these valuations on behalf of the Commissioner. The valuation cannot be obtained until after the date of the donation. The donor is required to lodge a Request for Valuation form with the AVO accompanied by the completed Certificate of Donation , which describes the gift and confirms its donation to and receipt by the eligible recipient. | Detailed Reasoning - Application to your circumstances: You are the executors of the Deceased estate and are in the process of distributing the assets to the named beneficiaries in accordance with the Deceased's will. The estate consists of real property, bank accounts, shares and other specific assets. As executors you are required to administer the estate in accordance with the Deceased's will. The Deceased's will, a copy of which has been provided, gave specific legacies and disposed of other listed assets as specific gifts. The residual beneficiaries in the will are named institutions which operate in the local community area. The institutions are all endorsed as deductible gift recipients and are covered by Item 1 of the table in section 30-15 of the ITAA 1997. The gift is a gift of shares that were not purchased within the 12 months before making the gift. The shares have a value of more than $5,000. You have requested that the Commissioner determine the value of the share portfolio which is to be gifted to the named charities in accordance with section 30-212. The Australian Valuation Office (AVO), as a business line of the Tax Office, is responsible for providing these valuations on behalf of the Commissioner. The valuation cannot be obtained until after the date of the donation. Provided the Request for Valuation form and the Certificate of Donation form are lodged in accordance with AVO procedures the capital gain on the proposed transfer of listed company shares from the estate to the residuary beneficiaries will be disregarded under section 118-60 of the ITAA 1997. This ruling has been issued on the basis of an agreed fact that the executors will undertake the donation of the share portfolio in accordance with AVO procedures. | Detailed Reasoning - Question 2: Will the method of administering the estate and transferring the shares result in the application of Part IVA of the ITAA 1936? Part IVA of the ITAA 1936 is the general anti-avoidance rule for income tax. Generally speaking, Part IVA of the ITAA 1936 will only apply to an arrangement if the answer is yes to both of the following questions: 1. Did you obtain a tax benefit from the scheme - a benefit that would not have been available if the scheme had not been entered into? 2. Having regard to the eight matters specified in Part IVA, section 177D of the ITAA 1936, would it be objectively concluded that you or any other person entered into or carried out the scheme, or any part of it, for the sole or dominate purpose of obtaining a tax benefit? | Detailed Reasoning - Application to your circumstances: The nature of the scheme is that executors of the estate intend to limit the number of shares sold from the estate to cover legacies and expenses to maximise the benefit of the gift to the named charities in the will by transferring the remaining shares CGT free. The shares that will be sold by the estate were those with the least capital gain. If the estate were to sell the shares and distribute cash to the charities the estate would incur a significant CGT expense. There will be a tax benefit from the scheme as the estate will not incur a CGT liability by gifting the shares to the charities. The charities are deductible gift recipients and will receive a benefit because the shares they receive will have a greater value than the amount of residual cash if the shares were sold by the estate. The executors for the Deceased's estate are unrelated to each other and unrelated to the charities. The executors are considering the most appropriate method of distributing the estate assets to the beneficiaries. The executors are choosing between two methods of dealing with the listed shares, either by selling the shares within the estate and distributing cash or transferring the shares as a gift to the charities. When fully administered the estate will have no assets or liabilities and will cease to exist. This will be so whether the shares are sold and the residual cash distributed or if the shares are transferred directly to the charities as a gift. Based on your facts and the nature of the transaction it is considered that Part IVA of the ITAA 1936 would not apply as the transaction is contemplated under sections 118-60 and 30-15 of the ITAA 1997.

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