Private ruling: Capital gains tax - testamentary trust
Date of advice: 13 November 2025
Published: 5 January 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the testamentary trust for Person C and their children, a fixed trust from the date of death of the life tenant (Person C), pursuant to section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are the non-resident remainder beneficiaries specifically entitled to capital gains made by the trustee of the testamentary trust after the death of the life tenant? | A2: Yes. | Q3: Do the non-resident remainder beneficiaries disregard capital gains made from assets of the testamentary trust that are not taxable Australian property, from the date of death of the life tenant? | A3: Yes.

Relevant facts and circumstances: The deceased, an Australian resident, died before 20 September 1985 leaving a will and supporting codicil. Probate was granted on XX/XX/19XX to the co-executors named in the will including the deceased's spouse, Person A. The estate consisted of cash, shares, government bonds and a property located overseas. The will provided a life interest in the overseas property to Person A with the remainder to their childres Person B and Person C. The will provided for other specific bequests, with the residue of the estate to be divided equally with one half held on trust for Person A and the other half held on trust for Person B and Person C. On Person A's death or remarriage, the one half of the residue held on trust for them was to be divided between the trusts for Person B and Person C. The will also provided that: ...the share of each child shall be retained by my Trustees and held by them UPON TRUST to pay the income thereof to my child entitled thereto for their separate use during their life And from and after the death of same child as to as well the capital as the income thereof IN TRUST for the children of my same child who shall being attain the age of twenty-one years or being attain that age or be married under that age such children if more than one to take in equal shares And if any child of mine shall die without leaving issue their surviving then the share and interest of such child shall accrue to the survivor of my said children. In 19XX, the co-executors entered into a deed appointing a company that provides fiduciary services to take over the role as executor of the estate. In 19XX, Person A died. Prior to 20 September 1985, the executor sold the overseas property. The proceeds of the sale were divided equally and distributed directly to Person B and Person C pursuant to the will, that is, the proceeds didn't form part of the testamentary trusts. Person B died on XX/XX/199X. On XX/XX/199X, the testamentary trusts for each of Person B and Person C, and their respective children were formally established with the assets of the estate transferred to the testamentary trusts. The testamentary trust for Person B and their children was finalised with its trust capital distributed to their remainder beneficiaries leaving only the testamentary trust for Person C and their children (Person C's testamentary trust). Person C was an overseas resident. Person C had three children: Persons D, E and F who each reached the age of 21. Person D died on XX/XX/19XX. On XX/XX/199X, the Supreme Court of the relevant State, ruled that the death of Person D did not divest them of their interest in Person C's testamentary trust, and therefore their estate was an equal one third remainder beneficiary with Persons E and F. On XX/XX/202X, Person C died. Persons E and F are non-residents of Australia for tax purposes. Person D's estate is a non-resident of Australia for tax purposes. The trustee of Person C's testamentary trust reinvested the assets transferred from the estate through acquiring listed shares and investments in managed funds. Since Person C's death, the testamentary trust's investment assets have been disposed of such that the trust's only remaining asset is cash.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 272-5(1) of Schedule 2F | Income Tax Assessment Act 1936 section 272-65 of Schedule 2F | Income Tax Assessment Act 1997 Subdivision 115-C | Income Tax Assessment Act 1997 section 115-228 | Income Tax Assessment Act 1997 section 855-40 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Having regard to the facts, from Person C's death the three remainder beneficiaries of Person C's testamentary trust each have a vested and indefeasible interest and therefore, fixed entitlements to a share of the income and capital of the trust estate, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936. Consequently, the testamentary trust is a fixed trust pursuant to section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 995-1(1) of the ITAA 1997, a 'fixed trust' is defined as: A trust is a fixed trust if entities have *fixed entitlements to all of the income and capital of the trust. It is similarly defined in section 272-65 of Schedule 2F to the ITAA 1936 as: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. 'Fixed entitlement' is explained in subsection 995-1(1) of the ITAA 1997 as: An entity has a fixed entitlement to a share of the income or capital of a company, partnership or trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936 . Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in trust as: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. 'Vested and indefeasible' is not defined in taxation legislation. However, paragraph 13.4 of the Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 describes a 'vested interest' as: A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. Paragraph 13.7 of the EM proceeds to explain that a vested interest is indefeasible where: ...in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement. Paragraph 13.8 of the EM further explains that: Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated. Under the will, on Person C's death, entitlement to the testamentary trust funds passed to the three remainder beneficiaries, being Persons E and F as they had reached the required age of 21 and Person D's estate as he had reached the required age of 21 before passing. From the death of the life tenant, Person C, the three remainder beneficiaries have a vested interest in the income and capital of the testamentary trust as they each have a present right to the future enjoyment of their equal share of the income and capital of the testamentary trust. Also, their interest is indefeasible because there is nothing in the Will which could cause any of the remainder beneficiaries to lose their interest in the testamentary trust. Consequently, from Person C's death, Person C's testamentary trust is a fixed trust pursuant to section 272-65 of Schedule 2F to the ITAA 1936 and subsection 995-1(1) of the ITAA 1997. | Summary: The non-resident remainder beneficiaries can reasonably expect to receive, in accordance with the terms of the trust, all of the financial benefit referable to any capital gains made by the trustee after the death of the life tenant. Also, the will which created the trust, meets the description of a record of the trust in which is recorded the financial benefit that the remainder beneficiaries are expected to receive in its character as a benefit referable to the capital gain - the will records the remainder beneficiaries' vested and indefeasible entitlement to the trust's assets. Consequently, the remainder beneficiaries are specifically entitled to capital gains made by the trustee of the testamentary trust after the death of the life tenant. | Detailed Reasoning - Detailed reasoning: The capital gains tax streaming provisions in Subdivision 115-C of the ITAA 1997 ensure that a beneficiary of a trust who is 'specifically entitled' to a capital gain made by the trustee (a 'trust capital gain') will be assessed on it. Section 115-228 of the ITAA 1997 states that for a beneficiary to be specifically entitled to a capital gain, the financial benefit that is referable to the capital gain must be: • received, or reasonably be expected to be received, by the beneficiary; and • recorded, in its character as referable to the capital gain, in the accounts or records of the trust no later than 2 months after the end of the income year. ATO Interpretative Decision 2013/33 Capital gains tax: specifically entitled (ATO ID 2013/33) concluded that after the death of the life tenant, a remainder beneficiary of a trust created over a deceased's estate by their will, was specifically entitled to capital gains made by the trustee. The ATO ID stated that the remainder beneficiary could reasonably be expected to receive all of the financial benefit referable to capital gains made by the trustee after the death of the life tenant. It also stated that the will which created the trust meets the description of a record of the trust in which is recorded the financial benefit that the remainder beneficiary is expected to receive in its character as a benefit referable to the capital gain - the will records the remainder beneficiary's entitlement to the asset. Having regard to ATO ID 2013/33, it is considered that the remainder beneficiaries in this case are specifically entitled to any capital gains made by the trustee after the death of the life tenant as: • they can reasonably expect to receive, in accordance with the terms of the trust, all of the financial benefit referable to those capital gains; and • the will which created the trust, meets the description of a record of the trust in which is recorded the financial benefit that the remainder beneficiaries are expected to receive in its character as a benefit referable to the capital gain - the will records the remainder beneficiaries' vested and indefeasible entitlement to the trust's assets. As the non-resident remainder beneficiaries are specifically entitled to any capital gains made by the trustee after the death of the life tenant, section 855-40 of the ITAA 1997 requires consideration as to whether the capital gains in relation to the trust's investment assets that are not taxable Australian property, are disregarded. | Summary: As Person C's testamentary trust is a fixed trust after her death and all the remainder beneficiaries are foreign residents, any capital gains subsequently made from assets of the testamentary trust that are not taxable Australian property are disregarded under section 855-40 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 855-40 of the ITAA 1997 deals with the tax treatment of capital gains and losses made by foreign residents through fixed trusts. Subsection 855-40(2) of the ITAA 1997 provides that a person who is a foreign resident may disregard a capital gain made where the CGT event happens to a CGT asset of a fixed trust that is not 'taxable Australian property'. Further, subsection 855-40(3) of the ITAA 1997 specifies that the trustee of a fixed trust is not liable to pay tax on a capital gain that is disregarded for a beneficiary under subsection (2). In this case, the remainder beneficiaries are foreign residents and the testamentary trust is a fixed trust after Person C's death. Therefore, section 855-40 of the ITAA 1997 applies so that any capital gains made after Person C's death from assets of the testamentary trust that are not taxable Australian property are disregarded.