Private ruling: CGT - deceased estate
Published: November 2011
Ruling period: 1 July 2011 - 30 June 2012 | 1 July 2012 - 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the transfer by X of their interest in the properties known as Lots B, C, E, F and G to Y result in an amount being included in X's assessable income under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If the answer to question 1 is yes, which transfers of properties will result in amounts being included in X's assessable income under section 102-5 of the ITAA 1997? | A2: Lot B, C, E and F. | Q3: If the answer to question 1 is yes, what amount will be included under section 102-5 of the ITAA 1997? | A3: While we do not provide calculations, general guidance has been provided to assist you calculate the resulting capital gains. | Q4: If X transfers their interest in the properties known as Lots B, C, E, F and G to Y, what will be the cost base for the purpose of Part 3-1 of the ITAA 1997 of Y's interests in each of those properties? | A4: The cost base of each interest will be worked out with reference to Subdivision 110-A and 112-A of the ITAA 1997. | Q5: If X and Y sell Lots A, D, and the H during the year ended 30 June 2011 or in a subsequent year of income, will any amount be included in their assessable incomes under section 102-5 of the ITAA 1997 as a result of the sales? | A5: Yes. Except Lot A which retains pre CGT status. | Q6: If the answer to question 5 is yes, what amount will be included under section 102-5 of the ITAA 1997? | A6: While we do not provide calculations, general guidance has been provided to assist you calculate the resulting capital gains.

Relevant facts and circumstances: X and Y are currently the co-owners of each of Lots A, B, C, D, E, F, G and H. They became the co-owners of the land as beneficiaries under the will of their late father. Their father died prior to September 1985 and was survived by his wife, Z, and children, X and Y. Following his death, all titles became registered in the names of Z as life tenant and X and Y as remaindermen, pursuant to the will. In 1988 X, Y and Z executed transfers changing the ownership of a number of the titles from that of life tenant and remaindermen to tenants in common. The parties executed these transfers as a result of new titles issuing for the allotments under a planning scheme approved some years prior. The planning scheme involved a restrucuture plan developed jointly by a number of government planning boards. Under the Restructure Plan new titles were issued for all of the lots, except for the Lot G and A. The boundaries of the new Lot A coincided exactly with the boundaries of the old Lot, so the titles to that land remained intact, still registered in the names of the life tenant and remaindermen. In relation to all other lots, X, Y and Z executed a Transfer of Land at a time after September 1985 that enabled the titles to these restructured lots to issue in the names of Z in a certain proportion, and X and Y equal remaining proportions, which the family considered reflected the relative values of the life interest and remainder interests. That configuration was registered. The family executed the transfer changing their ownership of the lots because they were advised that under a section of the relevant state act as it then stood the new titles could not show interests such as life and remainder interests but could only be issued with fractional interests expressed as tenancies in common. Although X, Y and Z became registered as tenants in common their intention was that Z was to continue to own her interest beneficially as the life tenant and X and Y were to continue to be the remainder beneficiaries. Written evidence of this intention appears in a Heads of Agreement produced by the parties. The purpose of the Heads of Agreement was to implement a family decision that a number of the lots should be earmarked for one or other of X and Y. In the Heads of Agreement X, Y and Z agreed that - (a) X would transfer to Y their half-interest in remainder in Lot B, E,F and G. (b) Z gifted Y her interest in those Lots. (c) X retained their half-interest in remainder in Lots A and C. (d) despite the transfers required to overcome the problem in the state act the beneficial ownership would remain as set out in the Heads of Agreement. X, Y and Z also executed a Declaration of Trust at a time after September 1985 under which they declared that they held their interests in Lot B, E,F and G beneficially for Y. The Heads of Agreement, which earmarked restructured lots to X and Y, indicated that X retained their interest in Lot C. X, Y and Z agreed informally to earmark Lot C Y. Z later died and was survived by X and Y. Under her will, Z left to Y her interest as tenant in common in lots B, C, E and F , which had been formally or informally earmarked for Y. Her remaining interests as tenant in common fell into residue and were divided equally between X and Y. Apart from the interests left to Y under the will, the only remaining land where Z appears on title as a tenant in common is lot D and H. The Titles Office has issued Certificates of Title Absolute for Lot A and G both registered in the names of X and Y as tenants in common in equal shares for those lots. The unsold land now consists of: Lot A which is the homestead block and stood in the names of life tenant and remaindermen; Lot D standing in tenancy in common; Lot B, C, E and F - all of these properties were earmarked for Y and presently stand in tenancies in common; Lot G (which had remained registered in names of life tenant and remaindermen) but was earmarked for Y; and Lot H - standing in tenants in common. The only land that has not been earmarked for one or other of X or Y is Lot A and D, which they intend to sell. Under the Heads of Agreement X's share in Lot G and in Lot B , E and F and also in Lot C are to be transferred from X to Y.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 subdivision 110-A | Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 Subdivision 112-A | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 subsection 116-30(2) | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 subsection 128-15(2) | Income Tax Assessment Act 1997 section 128-20 | Income Tax Assessment Act 1997 subsection 128-20(1) | Income Tax Assessment Act 1997 paragraph 128-20(1)(d) | Income Tax Assessment Act 1997 subsection 109-5(1) | Income Tax Assessment Act 1997 subsection 109-5(2)

Reasons for decision: Summary: The legislative references referred to are from the ITAA 1997, unless otherwise stated. Under Division 128 when a person dies a capital gain from a CGT event that results for a CGT asset the person owned just before dying is disregarded. The legal personal representative (or beneficiary) is taken to have acquired the asset on the day the deceased died (subsection 128-15(2)). Subsection 128-15(4) sets out modified cost base rules of CGT assets in the hand of a beneficiary where a CGT asset has passed to them under section 128-20. Section 128-20 sets out the ways in which an asset can pass to a beneficiary. An asset will only be considered to pass to a beneficiary if it happens by will, by operation of an intestacy law, in satisfaction of some other interest in the estate or under a deed of arrangement satisfying certain conditions. Under paragraph 128-20(1)(d) a CGT asset passes to a beneficiary of the estate if the beneficiary becomes the owner of the asset under a deed of arrangement where: · the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate, and · any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate. A taxpayer is not required to commence legal proceedings in order to establish, for the purposes of paragraph 128-20(1)(d), that they have a claim to participate in the distribution of the assets of the estate. A claim may be established by a potential beneficiary communicating to the trustee their dissatisfaction with the will. Taxation Ruling TR 2006/14 deals with the consequences of creating life and remainder interests in property and of later events affecting those interests that are primarily post CGT as any capital gain or loss arising from pre capital gains tax (CGT) assets is usually disregarded. Example 4 in TR 2006/14 sets out the CGT consequences in the situation where equitable life and remainder interests are created by will and a later agreement between the parties alters the will. | Detailed Reasoning - Application to your situation: In relation to the restructure agreement, the exceptions for trusts to which Division 128 applies, do not apply (with limited exceptions for Lot A and G) because the land is not passing to the beneficiaries in accordance with section 128-20. The interests in the land did not pass under the will, nor did they pass under a deed of family arrangement entered into to settle a claim to participate in the estate. The interests in the lots did not pass under a deed of family arrangement under paragraph 128-20(1)(d) as the Heads of Agreement was not entered into to settle a claim to participate in the estate. In effect the purpose of the Heads of Agreement was to identify the source of the proceeds for each taxpayer. Each taxpayer was already beneficially entitled to equal proceeds under the will of their father. | Detailed Reasoning - Lot A: The interests in this lot were originally held as life tenant and remaindermen. This lot was not subject to the restructure plan. The interests in the lot are currently held as tenant in common between X and Y, a certificate of absolute title has been issued. The remaindermen interests passed under will to X and Y and are taken to have been acquired when their father died (subsection 128-15(2)). The interests in the asset will retain pre CGT status when disposed of by X and Y. | Detailed Reasoning - Lot D: The interests in this lot were originally held as life tenant and remaindermen. This lot was subject to the restructure plan and the interests are currently held as tenants in common between X, Y and Z. Z's remaining interest fell into residue and was divided equally between X and Y. The transfer of land resulted in CGT event E6 happening in relation to the part of the land transferred to Z (paragraph 52 of TR 2006/14) and CGT event E7 happening in relation to the parts of the land transferred to X and Y (paragraph 59 of TR 2006/14). The gains from the respective events are disregarded as the assets were acquired at the date of death of the father and are therefore considered pre CGT. Each acquired their respective tenant in common interest at market value (section 112-20). X and Y acquired another interest in the property on the death of Z. Each interest passed under will and was acquired on the date of death of Z. Each is a separate CGT asset (TD 2000/31). The cost base of each newly acquired interest is Z's cost base of the asset (reasonably apportioned between the interests) on the day she died (section 128-15(4)). The interests in the asset will be subject to the CGT provisions when disposed of by X and Y. | Detailed Reasoning - Lot C: The interests in this lot were originally held as life tenant and remaindermen. This lot was subject to the restructure plan and the interests are currently held as tenants in common between X, Y and Z. This lot was the subject of an informal agreement to leave to Y. Z's remaining interest fell into residue and was divided equally between X and Y. In accordance with the informal agreement X may pay to Y their share of proceeds. While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. The informal agreement is unenforceable. As was the case for Lot D, X and Y acquired another interest on the date of death of Z. The interests in the asset will be subject to the CGT provisions when disposed of by X and Y for the same reasons as set out for Lot D. | Detailed Reasoning - Lot H: The interests in this lot were originally held as life tenant and remaindermen. This lot was subject to the restructure plan and the interests are currently held as tenants in common between X, Y and Z. Z's interest was left to Y under her will. The transfer of land resulted in CGT event E6 happening in relation to the part of the land transferred to Z (paragraph 52 of TR 2006/14) and CGT event E7 happening in relation to the parts of the land transferred to X and Y (paragraph 59 of TR 2006/14). The gains from the respective events are disregarded as the assets were acquired at the date of death of the father and are therefore considered pre CGT. Each acquired their respective tenant in common interest at market value (section 112-20). Y also acquired Z's interest in the property which passed under her will and this was acquired on her date of death. This is a separate CGT asset (TD 2000/31). The cost base of the newly acquired interest is Z's cost base of the asset on the day she died (section 128-15(4)). The interests in the asset will be subject to the CGT provisions when disposed of by X and Y. | Detailed Reasoning - Lot B, E and F: The interests in these lots were originally held as life tenant and remaindermen. These lots were subject to the restructure plan. The interests are currently held as tenants in common between X, Y and Z. Z's interest in each lot was left to Y under her will. A trust was declared over X and Z's interests which were to be held for the benefit of Y. An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. For trust purposes, property is anything that can be legally transferred to the trustee. To be trust property, the ownership of that property must vest in the trustee. Usually a beneficiary of a trust is absolutely entitled to an asset (and therefore in a position to call for transfer of legal ownership) if they can direct the trustee to transfer the asset to them. If there are multiple beneficiaries with successive interests, as a life tenant and a remainderman, then neither beneficiary can demand satisfaction of their share of the trust estate. They would not have legal ownership of the asset. The transfer of land was undertaken converting their respective interests to tenants in common. The transfer of land resulted in CGT event E6 happening in relation to the part of the land transferred to Z (paragraph 52 of TR 2006/14) and CGT event E7 happening in relation to the parts of the land transferred to X and Y (paragraph 59 of TR 2006/14). The gains from the respective events are disregarded as the assets were acquired at the date of death of the father and are therefore considered pre CGT. Each tenant in common acquired their respective interest at market value (section 112-20). The restructure enabled the trustees of the declared trust to legally hold their interests in the assets for Y. If a trust over an original asset is created by declaration or settlement, CGT event E1 in section 104-55 happens at the time the trust is created. The time of the trust's creation may not necessarily correspond to the date of execution or when the terms of the trust are put into writing. The time when the trust is created is subject to determination, the critical factor being the time at which beneficial interests in the subject property were created. X acquired a tenant in common interest at market value as a result of the restructure. Any resulting gain from CGT event E7 was ignored as the interest was a pre CGT asset. The tenant in common interest was subject to the declaration of trust. This effectively triggered CGT event E1. A capital gain would be calculated in accordance with subsection 104-55(3) as a result. X legally holds their interest as trustee for the benefit of Y. Y is absolutely entitled to the interests. Under section 106-50 a subsequent transfer of the interest to Y will be treated as a transfer by Y to himself. Z's interest in each lot was left to Y under her will. As the interests passed under her will, Y acquired each interest on the date of death of Z. Each is a separate CGT asset to the interest already held in each lot (TD 2000/31). The cost base of each newly acquired interest is Z's cost base of the asset on the day she died (section 128-15(4)). Y's initial interest in the land as remaindermen was a pre CGT asset, the subsequent restructure resulted in the disposal of that interest and acquisition of the tenant in common interests at market value. The interests in each of the three lots will be subject to the CGT provisions when disposed of by Y. | Detailed Reasoning - Lot G: The interests in this lot were originally held as life tenant and remaindermen. This lot was not subject to the restructure plan. The interests in the lot are currently held as tenant in common between X and Y, a certificate of absolute title has been issued. X acquired their half interest in this lot on the death of Z as remaindermen under their fathers will. As their father died prior to 20 September 1985 they are taken to have acquired this original half interest pre CGT (subsection 128-15(2)). X's interest was a legal interest only. If a trust over an original asset is created by declaration or settlement, CGT event E1 in section 104-55 happens at the time the trust is created. As X is taken to have acquired the asset prior to September 1985 any capital gain or loss from the CGT event will be subsequently disregarded (subsection 104-55(6)). As Y is absolutely entitled to the asset, under section 106-50 the subsequent transfer of the land to Y will be treated as a transfer by Y to himself. Y will acquire X's half interest on transfer at market value (section 112-20). Y acquired their original half interest in this lot on the death of Z as remaindermen under their father's will. As their father died prior to 20 September 1985 they are taken to have acquired this original half interest pre CGT (subsection 128-15(2)). When Y disposes of the asset, the interest acquired from X will be subject to the CGT provisions. | Detailed Reasoning - Calculating a capital gain: A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. The disposal of property, a CGT asset, causes a CGT event A1 under section 104-10 of the ITAA 1997 to occur. You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base (subsection 104-10(4) of the ITAA 1997). Conversely, you make a capital loss if those capital proceeds are less than the assets reduced cost base. If you create a trust over an asset by declaration or settlement, CGT event E1 under section 104-55 happens at the time the trust is created. You make a capital gain if capital proceeds from the creation of the trust over the asset are more than the asset's cost base. You make a capital loss if capital proceeds are less than the asset's reduced cost base (see subsection 104-55(2) and subsection 104-55(3) of the ITAA 1997). | Detailed Reasoning - Capital Proceeds: Section 116-20 of the ITAA 1997 defines the capital proceeds of a CGT event as the money received (or entitled to receive) in respect of the event happening, or the market value of any property received in respect of the event happening. | Detailed Reasoning - Cost Base: The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997. It consists of the following five elements. Money or property given for the asset Incidental costs of the CGT event, or of acquiring the CGT asset Non-capital costs associated with owning the asset. (Third element costs are not included in the cost base of assets acquired prior to 21 August 1991.) Capital costs associated with increasing the value of your asset, and Capital costs of preserving or defending your ownership of or rights to your asset. The third element of the cost base, which includes interest, does not include costs if you have claimed a deduction for them in any income year or omitted to claim a deduction but can still claim it by amending your income tax return. | Detailed Reasoning - Market value substitution: Section 112-20 of the ITAA 1997 states that the first element of the cost base is its market value if you did not incur expenditure to acquire it, some or all of the expenditure you incurred to acquire it cannot be valued or you did not deal at arms length with the vendor. Similarly subsection 116-30(2) states that the capital proceeds are replaced with the market value where some or all of the proceeds cannot be valued or the capital proceeds are more or less than the market value and you did not deal at arms length with the purchaser. Further information can be obtained from the publication Guide to capital gains tax 2011 available on our website www.ato.gov.au

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.