Private ruling: Capital Gains Tax - Life and remainder interests
Date of advice: 17 July 2017
Published: November 2017
Ruling period: 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Questions and Answers | 1. Will Person C and Person D be deemed to acquire the remainder interests at market value as at the date of death of Person B? | 2. Yes | 3. Will Person C and Person D be deemed to acquire the life interests from their relative at the date of its surrender at its market values? | 4. Yes | 5. On the understanding that the remainder interests are acquired by Person C and Person D at the date of death of Person B, does the property acquired by Person C and Person D need to be an active business asset for them for at least 7 ½ years (section 152-35) since the date of death of Person B to meet the requirements of the active business test under Division 152 of the ITAA 1997 in regard to small business relief? | 6. Yes | 7. Can section 152-78 of the ITAA 1997 be utilised to nominate Person C and Person D to be controllers in respect to loss year of 30 June 2004 for the purpose of being connected to The Family Trust under Section 328-125 of the ITAA 1997 for the purposes of Division 152 of the ITAA 1997? | 8. Yes

Relevant facts and circumstances: The Will of the late Person B bequeaths a life interest in certain property to Person A and upon Person A’s death this property is to be left equally to Person C and D at the date of Person A’s death. It is proposed that: a. Person A surrender their life interest in one or more of the properties they currently hold a life interest in. b. At some future date after the properties have been transferred to remainder beneficiaries (being Person C and Person D), that Person D will transfer their 50% interest in some or all of the property received from the Estate of Person B to Person C. Person C may also transfer their 50% interest in certain property to Person D. The Family Trust has operated the property in question since 1 July 2001. Except for a loss year (2004), Person A and their spouse have received distributions from the Trust in each tax year and the minimum combined distribution they have received in any year was X%. Person A is also the sole Appointor for the Family Trust. Person C and Person D are beneficiaries of the Trust. The Family Trust carries on a business which uses exclusively the property that Person A has a life interest in. Person B passed away after 20 September 1985. The land owned by the late Person B was pre CGT land at the date of their death. Person A is over 55 years old. The combined market value of the assets Person A, their spouse and The Family Trust are less than $X. The turnover of the Family Trust is less than $X. Except for the loss year (2004) every year has had at least one individual who has received a trust distribution of X% or more since 1 July 2001. Person A has previously claimed a small business retirement exemption amount of $X The surrender of the life interest will not be made in connection with Person A’s retirement. Person A will not index the cost base of the life interest. It is contemplated that Person C and Person D will transfer certain portions of their property to each other sometime over the next two financial years.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 subsection 112-20(1) | Income Tax Assessment Act 1997 subsections 128-15(4) and (5) | Income Tax Assessment Act 1997 paragraph 152-35(1)(b) | Income Tax Assessment Act 1997 section 152-78

Reasons for decision: Summary: Subsection 110-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the first element of the cost base of a CGT asset as the total of: a. The money you paid, or are required to pay, in respect of acquiring it; and b. The market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). The cost base is the market value of the asset if no expenditure is given to acquire it or you did not deal at arm's length in relation to the acquisition: subsection 112-20(1) of the ITAA 1997. The remainder owners acquire their interests in the property at the date of death based on a reasonable apportionment of the legal personal representative's cost base and reduced cost base: subsections 128-15(4) and (5) of the ITAA 1997. This is no difference in principle from what happens when other interests in an estate asset pass to beneficiaries. An apportionment based on the relative market values of the interests created would be considered reasonable. If a life interest owner surrenders or releases their interest CGT event A1 happens. Where the entity disposes of the asset to you, you are taken to have acquired the asset at the time the disposal contact is entered into or, if none, when the entity stops being the asset’s owner. The party acquiring the interest may be taken to have paid market value if no expenditure is given to acquire it or they did not deal at arm's length in relation to the acquisition. The remainder owners acquire their interests in the property at the date of death. Under paragraph 152-35(1)(b) of the ITAA 1997 and asset satisfies the active asset test if, you have you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years. As Person C and Person D are the remainder owners they are taken to have acquired their interest in the property at the date of death of Person B. Accordingly, the asset must be an active asset for a total of at least 7 ½ years. In determining whether an entity is connected with you, section 152-78 of the ITAA 1997 allows the trustee of a discretionary trust to nominate not more than four beneficiaries as being controllers of the trust for an income year for which the trustee did not make a distribution of income or capital if the trust has a tax loss, or no net income, for that year. As the Trust made a loss in the year ending 30 June 2004, the trustee may nominate not more than four beneficiaries to be controllers. The nomination must be in writing and signed by the trustee and by each nominated beneficiary.