Private ruling: Capital gains tax - deceased estate
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Where a distribution of shares is made to non-resident beneficiaries of a deceased estate, does the capital gains tax event K3 occur? | A1: Yes | Q2: Is the capital gains payable on event K3 accounted for in the deceased person's date of death return? | A2: Yes | Q3: Where a distribution of shares is made to Australian resident beneficiaries of a deceased estate, are there any capital gains tax implications? | A3: No | Q4: Can any potential future capital gains tax liability of the Australian resident beneficiaries be accounted for in the date of death return? | A4: No

Relevant facts and circumstances: You are one of the executors of a deceased estate. The deceased passed away during the 2012-13 financial year. The assets of the estate are to be distributed to two Australian resident beneficiaries and two beneficiaries who are non-residents of Australia. The assets of the estate include shares in publicly listed companies. The shares were all purchased after 20 September 1985.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 128-10 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Section 855-15

Reasons for decision: Detailed Reasoning - Questions 1 and 2: Capital gains tax (CGT) is the tax you pay on any capital gain you make and include on your annual income tax return. You make a capital gain or a capital loss if a CGT event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). Generally, where a change of ownership occurs because a person dies, and an asset passes from their legal personal representative to a beneficiary, any capital gain or capital loss made on the change of ownership is disregarded. However, section 104-215 of the ITAA 1997 states that where the asset passes to a non-resident beneficiary, any capital gain or capital loss is not disregarded when the asset is not taxable Australian property. This is capital gains tax event K3. Section 855-15 of the ITAA 1997 states that taxable Australian property does not include shares where the taxpayer's total shareholding is less than 10% of the issued capital of the company issuing the shares. Therefore, in respect of the non-resident beneficiaries the transfer of the shares owned by the deceased at the date of death will trigger a CGT event K3. This will result in a capital gain or capital loss being made by the deceased. This capital gain or loss will be declared in the deceased date of death taxation return. In your case, the beneficiaries of the estate include two non-residents of Australia. The deceased owned shares which were purchased after 20 September 1985, and are not considered taxable Australian property. As the shares are to be distributed to non-resident beneficiaries, the shares therefore are deemed to have been disposed of just before the deceased's death, and any resulting capital gain must be declared in the deceased's date of death return. | Detailed Reasoning - Questions 3 and 4: As stated above, generally a change of ownership of a CGT asset will trigger a CGT event. However, sections 128-10 and 128-15 of the ITAA 1997 state that where an asset of the deceased passes to their legal personal representative or to a beneficiary, or from the legal personal representative to a beneficiary, any capital gain or loss is disregarded. In your case, when the shares are distributed to the Australian resident beneficiaries, any capital gain or loss is disregarded. The beneficiaries will be responsible for accounting for any capital gain or loss when they eventually sell the shares in the future. There is no facility for the capital gain or loss to be accounted for in the date of death return of the deceased. When the shares that formed part of the estate of the deceased are disposed of by the beneficiaries, the first element of the cost base and reduced cost base of the shares is the cost base and reduced cost base of the shares at the date of death of the deceased.