Private ruling: Taxing of deceased estate
Published: March 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Would any capital gain resulting from the transfer of assets, in particular and shares from testamentary Trust A to testamentary Trust B, be disregarded under Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.

Relevant facts and circumstances: Individuals A and B both passed away in the relevant financial year less than 30 days apart. The wills of individuals A and B mirrored each others and provided the following: • A 30 day survivorship clause allowing for the passing of the assets to a trust for each other where they survive the other for 30 days after the other passes. • Where either individual fails to survive the other by 30 days, then their respective assets are held in trust for listed beneficiaries. • Currently, each respective deceased estate requires a separate testamentary trust to be established. • The terms of the testamentary trusts are specifically provided for under the wills as follows: • The trust's name • The trustee • The primary beneficiary • The secondary beneficiaries • Other beneficiaries are associated beneficiaries defined as: n Extended family members including nieces and nephews and cousins of the primary beneficiary n Any other dependants of the primary beneficiary n Spouses of any of the above defined beneficiaries n Entities, including companies and trusts, in which the primary or secondary beneficiaries are a director or directly or indirectly have an interest. • The trustee may pay all or part of the income or all or part of the capital of the trust to any one or more of the beneficiaries of the trust in the shares and amounts and whenever the trustee in his or her absolute discretion thinks fit. In order to maximise investment opportunities and limit administration costs, the trustee of the testamentary trust created under Individual A's will proposes to transfer all assets then held to the trustee of the testamentary trust created under Individual B's will.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Division 6AA | Income Tax Assessment Act 1936 - Section 102AC | Income Tax Assessment Act 1936 - Section 102AE | Income Tax Assessment Act 1997 - Section 128-15

Reasons for decision: Summary: Subsection 125-15(3) of the ITAA 1997 states that any capital gain or capital loss a legal personal representative makes when an asset passes to a beneficiary is disregarded. Because a 'legal personal representative' does not include a testamentary trustee that provision would not apply to a transfer of an asset from a testamentary trust to a beneficiary of that trust. However the Commissioner has an administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA: see Law Administration Practice Statement PSLA 2003/12. Section 99A of the ITAA 1936 will not apply to a trustee in an income year where the trust estate resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil if the Commissioner considers that it would be unreasonable to do so. Having regard to the factors in subsection 99A(3), in particular that the property to be transferred to Trust B from Trust A is property of a trust that resulted from a will, the Commissioner considers that it would be unreasonable to apply section 99A. Division 6AA of Part III of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person. A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to include any person, other than an excepted person (as defined in subsection 102AC(2) of the ITAA 1936), who is under 18 years of age on the last day of the income year. In this case, where a beneficiary is under the age of 18 years, they will be a prescribed person for the purposes of subsection 102AC(1) of the ITAA 1936. Section 102AG of the ITAA 1936 provides that Division 6AA will not apply to that part of a prescribed person's share of the net income of a trust estate that is attributable excepted trust income. Paragraph 102AG 2(a) provides that income of a trust estate that resulted from a will, codicil or an order of a court that varied or modified the provisions of a will or codicil is excepted income. Subsection 102AG(4) provides that an amount will not be treated as excepted trust income if it was derived by a trustee directly or indirectly as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income. This provision will not apply to income attributable to assets transferred from Trust A because that income would have been excepted trust income in Trust A.

2. Would the funds received by trust B from trust A retain their character as being held by a trust established under a will? | 3. Should the trustee of trust B make distributions to a beneficiary of the trust under the age of 18 years, from income derived from funds transferred from trust A, would that income retain its character as having been from a deceased estate and be 'excepted' trust income for tax purposes?