Private ruling: Capital gains tax
Date of advice: 18 November 2015
Published: February 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the capital gains tax (CGT) event be disregarded when the property is transferred from the estate to the beneficiary? | A1: Yes.

Relevant facts and circumstances: The deceased owned a number of residential properties. One of these was the deceased's principal place of residence. The deceased's child, Individual A, resided in the property with his/her parent for approximately two years prior to her/his death. This property was acquired by the deceased and their late spouse prior to 19 September 1985. The deceased became the sole owner of the property when her/his spouse passed. The second property was acquired by the deceased after 1985. The deceased relatives, Individual A and Individual B, were to share the estate equally. The relatives have entered into an agreement as to the division of the estate of their late parent. Under the agreement, one property will be transferred to Individual A and the other property will be transferred to Individual B. Given the difference in the values of each property the agreement requires a compensating payment of cash from Individual A to Individual B. A more complete agreement will be executed by the relatives prior to the transfers taking place.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-20(1)

Reasons for decision: Summary: General rules regarding capital gains (or losses) as a result of death are covered under Division 128 of the ITAA 1997. According to section 128-10 of the ITAA 1997 any capital gain or capital loss resulting from a CGT event in relation to an asset owned by the deceased person immediately prior to the time of death is disregarded. Section 128-15 of the ITAA 1997 provides that if a CGT asset owned by the deceased immediately prior to death devolves to the LPR or passes to a beneficiary of the estate, the LPR and the beneficiary is deemed to have acquired the asset on the date of death of the deceased owner. Any capital gain or capital loss made by the LPR when the asset passes to a beneficiary is also disregarded (subsections 128-15 (2) & 128-15(3) of the ITAA 1997). Subsection 128-20(1) of the ITAA 1997 provides that an 'asset passes to a beneficiary' if the beneficiary becomes the owner of the asset: a) under the will of the deceased person or that will as varied by a court order; or b) by operation of an intestacy law, or such other law as varied by a court order; or c) because it is appropriated to the beneficiary by the LPR in satisfaction of a pecuniary legacy or some other interest or share of the estate of the deceased; or d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and (ii) 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 your estate. The section also states that it does not matter whether the asset is transmitted to the beneficiary directly or through the LPR. An arrangement such as that considered in Crowden & Anor v Aldridge & Ors (1993) 3 All ER 603 where the beneficiaries under the deceased's will executed a memorandum that incorporated the terms of the arrangement and stated that the parties would enter into a deed (which they in fact never did), would not satisfy the requirements of subparagraph 128-20(1)(d) of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: In this case, the will of the deceased called for the assets of the estate to be divided equally between Individual A and Individual B. The beneficiaries entered into an agreement as to the division of the estate. The beneficiaries agreed that one property will be transferred from the Estate to Individual B. Individual A is required to make a payment to Individual B, however Individual B is not required to give any consideration under the agreement. The agreement states that a 'more complete agreement' will be executed by both parties. We consider that in the circumstances, the property will pass to the beneficiary, that is to Individual B, under subparagraph 128-20(1)(d) of the ITAA 1997. Therefore, Division 128 of the ITAA 1997 will apply to disregard any capital gain (or loss) made by the estate as a result of the transfer.