Private ruling: CGT in deceased estate
Date of advice: 11 January 2016
Published: March 2016
Ruling period: Income years ended 30 June 20YY and 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the Estate a fixed trust? | A1: Yes | Q2: Is the non-resident residuary beneficiary presently entitled to 100% of all capital gains after the death of the beneficiary with the life interest? | A2: Yes | Q3: Can a capital gain that the non-resident residuary beneficiary is presently entitled to be disregarded if the gain is not on taxable Australian property? | A3: Yes

Relevant facts and circumstances: Mrs/Mr X passed away in 1992, leaving her/his child as the sole life tenant in her/his Estate. In her/his will, her/his grandchildren are nominated as residuary beneficiaries of the Estate on the life tenant's death, upon reaching the age of 21. The life tenant had less than 5 children. One of these had passed away prior to the death of Mrs/Mr X. The life tenant passed away during the 20YY income year. The surviving child, over 21 years of age at the time of the life tenant's passing, is the sole residuary beneficiary in the Estate. The beneficiary lives overseas and is a non-resident for Australian tax purposes. The assets of the Estate consist of equities listed on the Australian Stock Exchange. In the 20YY financial year, the beneficiary may be entitled to net capital gains. The applicant has advised that the assets from which the capital gains were made were not taxable Australian property.

Relevant legislative provisions: Subsection 272-5(1) of Schedule 2F of the ITAA 1936 | Section 272-65 of Schedule 2F of the ITAA 1936 | Section 855-15 of the ITAA 1997 | Section 855-40 of the ITAA 1997

Reasons for decision: Summary: The Estate is a fixed trust for the relevant years in accordance with section 272-65 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: A 'fixed trust' is defined in section 272-65 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936). That definition provides that: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in a trust: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. The term 'vested and indefeasible' is not defined in the taxation legislation. However, the ordinary meaning of the term is provided by the general law, which is reflected in the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997: 13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring. 13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be 'vested in interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest. 13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until sometime in the future. | Detailed Reasoning - When is a vested interest indefeasible?: 13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement. 13.8 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy her/his or her share of the income or capital which has been accumulated. In this instance, as the beneficiary with the life interest in the Estate has died, and the remaining beneficiary had already reached the age of 21, the beneficiary has a vested interest in all of the income and capital of the estate. The beneficiary has a present right to future enjoyment of all of the income and capital. Their interest in the Estate is indefeasible. There is no condition in the trust instrument, the Will, by which the beneficiary could now lose its interest in the Estate. As the residuary beneficiary has a vested and indefeasible interest in all of the income and capital of the estate, they have a fixed entitlement to the income and capital of the estate, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. Therefore, the trust is a fixed trust for the relevant years in accordance with section 272-65 of Schedule 2F to the ITAA 1936. | Summary: The beneficiary is presently entitled to 100% of the capital gains of the Estate as the only remaining beneficiary of the Estate. | Detailed Reasoning - Detailed reasoning: As discussed in detail in question 1 above, the beneficiary has a vested and indefeasible interest in all of the income and capital of the Estate, and is therefore presently entitled to 100% of the capital gains of the Estate. | Summary: The capital gain that the non-resident residuary beneficiary is presently entitled to may be disregarded if the assets from which the capital gains are made are not taxable Australian property. | Detailed Reasoning - Detailed reasoning: Section 855-40 of the ITAA 1997 provides for capital gains and losses of foreign residents through fixed trusts. Subsection 855-40(1) states that the purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a fixed trust, by foreign residents of CGT assets that are not taxable Australian property. Subsection 855-40(2) of the ITAA 1997 states that a capital gain you make in respect of your interest in a fixed trust is disregarded if: (a) You are a foreign resident when you make the gain; and (b) The gain is attributable to a CGT event happening to a CGT asset of a trust that is: (i) The fixed trust; or (ii) Another fixed trust in which that trust has an interest (directly, or indirectly through a chain of fixed trusts); and (c) Either: (i) The asset is not taxable Australian property for the CGT event trust at the time of the CGT event; or (ii) The asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied. Subsection 855-40(3) of the ITAA 1997 states that you are not liable to pay tax as a trustee of a fixed trust in respect of an amount to the extent that the amount gives rise to a capital gain that is disregarded for a beneficiary under subsection (2). Subsection 855-40(4) of the ITAA 1997 states that, to avoid doubt, subsection (3) does not affect the operation of subsections 98A(1) or (3) of the ITAA 1936. In this situation, as the beneficiary is a foreign resident, the Estate is a fixed trust in the relevant years, and you have advised that the assets were not taxable Australian property, the capital gain may be disregarded.