Private ruling: Variation of rights under a testamentary trust
Published: September 2013
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: A1: No | Q1: Will you make a capital gain or a capital loss on the vesting date, when the assets of the testamentary trust are distributed to you as a beneficiary? | A2: No

Relevant facts and circumstances: You are the trustees of a testamentary trust. You are the beneficiaries of a testamentary trust. All assets held by the testamentary trust are cash or shares listed on the Australian Stock Exchange. In accordance with the will upon the vesting date you will be entitled to specified assets of the testamentary trust. A deed of variation was entered into to vary your entitlements under the testamentary trust. An additional deed of variation was entered into to extend the vesting date of the testamentary trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Subsection 104-75(1) | Income Tax Assessment Act 1997 Subsection 104-75(6) | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-20

Reasons for decision: Summary: Where a beneficiary is absolutely entitled to a capital gains tax (CGT) asset as against the trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. | Detailed Reasoning - Example:: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. Draft Taxation Ruling TR 2004/D25 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee. TR 2004/D25 explains that the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. You, as beneficiaries of the testamentary trust are not entitled to call for the relevant assets to be transferred to you until the vesting date. Accordingly, until the vesting date has been reached, you are not absolutely entitled to any assets of the testamentary trust and section 106-50 of the ITAA 1997 will not apply. | Detailed Reasoning - Date of the first deed of variation: When the deed to vary your entitlement to the residual assets of the estate was executed, you were not absolutely entitled to those assets. Accordingly, there are no CGT implications for you on this date. | Detailed Reasoning - Vesting Date: On the vesting date, you will become absolutely entitled to the residual assets of the testamentary trust. CGT event E5 occurs when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. However, subsection 104-75(1) of the ITAA 1997 provides an exception that CGT event E5 will not occur to unit trusts or 'a trust to which Division 128 applies'. Where this exception applies Taxation Ruling TR 2006/14 provides that it is not necessary to consider whether any other CGT event occurred. Division 128 of the ITAA 1997 applies to the passing of an asset from a deceased individual's legal personal representative to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death). Accordingly, 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate. The Commissioner considers that the words 'a trust to which Division 128 applies' should be interpreted as a deceased estate to the extent that it is a trust over an asset originally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 of the ITAA 1997 (TR 2006/14). | Detailed Reasoning - Assets of the testamentary trust that were owned by the deceased prior to their death: Section 128-20 of the ITAA 1997 provides the ways in which an asset can 'pass' to a beneficiary for the purposes of Division 128 of the ITAA 1997. Paragraph 128-20(1)(d) of the ITAA 1997 provides that for CGT purposes an asset 'passes' to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset under a deed of arrangement provided that: · the beneficiary entered into the deed to settle a claim to participate in the estate; and · the consideration given by the beneficiary consisted only of the variation or waiver of a claim to an asset or 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) of the ITAA 1997, that they have a valid 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. We consider that an asset can 'pass' to a beneficiary within the meaning of section 128-20 of the ITAA 1997 prior to legal transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee (Taxation Determination TD 2004/3). In your case, you entered into a deed of variation to the will to vary your rights as beneficiaries of the testamentary trust created by the will. The only consideration provided by you as beneficiaries in executing the deed of variation was the variation of your rights to the assets of the estate. To the extent that the assets of the testamentary trust are assets which were owned by the deceased just prior to their death, when you become absolutely entitled to these assets they will 'pass' to you in accordance with section 128-20 of the ITAA 1997. Accordingly, to the extent that the assets of the testamentary trust are assets which were owned by the deceased just prior to their death, the testamentary trust is a trust to which Division 128 of the ITAA 1997 applies and CGT event E5 will not occur. In accordance with TR 2006/14, it is not necessary to consider whether any other CGT event occurred. | Detailed Reasoning - Assets of the testamentary trust that were not owned by the deceased prior to their death: The exception in subsection 104-75(1) of the ITAA will not apply to prevent CGT event E5 from occurring to the extent that assets of the testamentary trust are assets acquired by the trustees following the deceased's death. Accordingly, CGT event E5 will occur on the vesting date to the extent that assets of the trust were not owned by the deceased just prior to her death. However, any capital gain made by a beneficiary under CGT event E5 will be disregarded where the beneficiary acquired their interest in the trust for no expenditure (subsection 104-75(6) of the ITAA 1997). You acquired your interests in the testamentary trust as a result of the deceased's will and incurred no expenditure. Accordingly, any capital gain you make as a result of CGT event E5 occurring on the vesting date will be disregarded under subsection 104-75(6) of the ITAA 1997.

Subject: Variation of rights under a testamentary trust: Will you make a capital gain or a capital loss on the date the deed to vary your entitlement to the residual assets was executed?