Private ruling: Capital gains tax - Deceased estate - Life tenancy - Partial surrender
Published: January 2014
Ruling period: 2013-14 income year
Date scheme commenced: 1 July 2000


Relevant facts and circumstances: The Deceased is the spouse of the Taxpayer. The Taxpayer is the Life Tenant of the Estate and one of the Trustees. The Remainder Beneficiaries of the Estate are children of the Taxpayer. The Estate is an Australian resident trust estate and the Taxpayer and Remainder Beneficiaries are all Australian residents. The Deceased was the owner of certain residential apartments at the time of death some years ago. The Deceased acquired these properties after 19 September 1985. Probate of the Deceased's Will was granted to the Trustees by the relevant Supreme Court shortly afterwards. Under Clause 2(a) of the Will, the Taxpayer was granted a life interest in the income of the Estate which consisted of rents from the residential apartments. Upon the death of the Taxpayer, the Will provided that the properties pass to the children, as tenants in common in equal shares. The Estate has been conducted and administered in this way in accordance with the Will since its establishment. Under a general power prescribed by Clause 4 of the Will, the Trustees are empowered to sell any of the properties. Due to a number of factors, the Taxpayer and the fellow Trustees propose to sell property A and realise that part of the Estate. It is proposed that the Taxpayer would surrender their life interest in the property in return for a payment commensurate with the fair value of the life interest at the operative date. Under the terms of the Will, following the surrender, the children would receive the balance of the proceeds of the sale, net of any costs and taxes payable by the Trustees, in remainder and would agree to make a compensatory payment to the Taxpayer. It is envisaged that the life interest in respect of the income from the other properties will continue under the terms prescribed by the Will; that is, until the death of the Taxpayer. For the purpose of this ruling: · The relevant parties will complete the proposed actions within the period covered by this ruling · Property A will be sold for a capital gain · The Trustees will make the choice under section 115-230 of the Income Tax Assessment Act 1997 (ITAA 1997). Certain documents were provided with the private ruling request and are to be read with, and form part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 115-C, | Income Tax Assessment Act 1997 Subsection 995-1(1) and | Income Tax Assessment Act 1936 Division 6 of Part III.

Reasons for decision: Detailed Reasoning - Detailed reasoning: The capital gains provisions operate at two levels in relation to trusts. The trustees of the trust own the trust assets and the beneficiaries have rights in respect of the trust. The beneficiaries' rights are also CGT assets for capital gains purposes. The Taxpayer currently has rights in the Estate that were granted by the Will of the Deceased. For the purpose of this ruling, the Taxpayer will partially surrender those rights. The effect of the partial surrender of those rights is that they will be transferred to the Remainder Beneficiaries. CGT event A1 happens when ownership of a CGT asset is transferred from a taxpayer to another entity. CGT event A1 will happen when the Taxpayer partially surrenders their rights in the Estate. See paragraphs 66 to 70 of Taxation Ruling TR 2006/14 for more information in relation to the surrender of a life interest. | Detailed Reasoning - Detailed reasoning: The general rules about capital proceeds provide that they are the total of: · The money received or receivable in respect of the CGT event, and · The market value of any property received or receivable in respect of the CGT event (worked out at the time of the event). The general rules about capital proceeds are modified where the parties to the transaction are not dealing with each other at arm's length as in this case. In such cases, the capital proceeds are replaced with the market value of the CGT asset that is the subject of the CGT event. (The market value is worked out at the time of the event.) So: · If the Taxpayer receives an amount equal to the market value of the part of the interest in the income of the Estate that is being surrendered, then that amount will be the capital proceeds · If the Taxpayer receives an amount that is more or less than the market value of the part of the interest in the income of the Estate that is being surrendered, then the market value substitution rule mentioned above will apply so that the market value of the interest replaces the amount received as capital proceeds. | Detailed Reasoning - The initial stages of the Estate: Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries. During the initial stage of the administration no beneficiary is presently entitled to the income derived. During the intermediate stage of administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries. The administration of an estate is complete once the assets of the estate have been called in and the deceased's debts and liabilities have been paid. | Detailed Reasoning - Creating an equitable life tenancy: The creation of equitable life and remainder interests involves the creation of a trust over an original asset(s). There are consequences for the original owner of the asset, the trustee and the life interest and remainder owners. If the trust is created under the will of a deceased person then CGT event E1 (creating a trust over a CGT asset) happens when the administration of the deceased's estate in respect of the original asset is completed. The Taxpayer acquired the equitable life interest in the Estate when the Taxpayer commenced to own it; that is once administration of the Estate was completed. | Detailed Reasoning - The capital gains provisions - cost base: The general rule about the cost base of a CGT asset provides that the first element of the cost base is the total of: · The money paid or payable in respect of acquiring the CGT asset, and · The market value of any property paid or payable in respect of acquiring the CGT asset (worked out at the time of the acquisition). The general rules about cost base are modified where nothing is paid to acquire the CGT asset or the parties to the transaction are not dealing with each other at arm's length as in this case. In such cases, the first element of the cost base is replaced with the market value of the CGT asset that is acquired. (The market value is worked out at the time of acquisition.) Note: the cost base of a CGT asset is apportioned where the CGT event only occurs to part of the asset. In this case, only the part of the life interest that relates to property A is being surrendered. The Taxpayer continues to own the part of the life interest that relates to the other properties. | Detailed Reasoning - Detailed reasoning: The calculation of a capital gain or loss in respect of an asset sold by the trustees of a trust is a matter for those trustees. The distributions of net capital gains made by those trustees to beneficiaries of the trust may generate tax liabilities for those beneficiaries. For the purpose of this ruling: · Property A will be sold for a capital gain · The Taxpayer will not receive any funds from the sale, and · The Taxpayer, as the sole income beneficiary, would be assessable on the capital gain This outcome entitles the Trustees to choose that subsection 115-230(4) of the ITAA 1997 applies in relation to the capital gain. For the purpose of this ruling, the Trustees have made that choice. One consequence of the Trustees making the abovementioned choice is that the Taxpayer is no longer assessable on the capital gain made due to the sale of property A.