Private ruling: Capital gains tax
Date of advice: 12 September 2017
Published: January 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022 | Year ended 30 June 2023
Date scheme commenced: 1 July 2017

Ruling: Q1: Does the property that was transferred to you and your siblings maintain its pre-CGT status? | A1: No. | Q2: Will the capital gains tax provisions apply when you dispose of your share of the property? | A2: Yes.

Relevant facts and circumstances: The deceased died and in their will the estate was left to the children of two relatives. You are one of the children of the one of the relatives. A stipulation of the will was that the assets of the estate were used to produce income for the two relatives. In 198X, the original property of the estate was sold and the proceeds were split equally between the two relatives for each to invest in income producing property as trustees for their children. Prior to 20 September 1985, you and your parent applied your relevant share of the estate to the purchase of a property as trustees of a newly created trust estate. The trust was created to comply with the will of the deceased. The property has been rented for the duration of the ownership. Your parent died in 20XX and subsequently the title was transferred to you and your siblings.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-25 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-85 and | Income Tax Assessment Act 1997 Division 128.

Reasons for decision: Detailed Reasoning - CGT Event: Subsection 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT event A1 happens if you dispose of a CGT asset. Subsection 104-85(5) of the ITAA 1997 states that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital. Where more than one CGT event can apply, the event that is most specific to the situation is used. | Detailed Reasoning - Division 128: Division 128 of the ITAA 1997 contains rules about the passing of an asset from a deceased individual’s legal personal representative to a beneficiary in a deceased estate. In certain circumstances, where an asset passes to a beneficiary the Commissioner treats the trustee of a testamentary trust in the same way as he treats a legal personal representative (Law Administration Practice Statement PS LA 2003/12). Where an asset passes to a beneficiary of a deceased estate within the meaning of section 128-20 of the ITAA 1997, the beneficiary will be taken to have acquired the asset on the date of the deceased’s death. However, it is important to note that these rules only apply to an asset that was owned by the deceased prior to their death. As discussed above, CGT event E7 contains an exception which provides the event does not happen if the trust is ‘a trust to which Division 128 applies’. The term 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate (or testamentary trust). 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 (that is, under the will, by intestacy and so on). | Detailed Reasoning - Application to your circumstances: In this case, as there was a disposal of the property from the trustee of a trust to the beneficiaries both CGT event A1 and CGT event E7 are applicable. However, as CGT event E7 is more specific to your situation, it would have applied on the transfer. Further, as the property was not an asset that was owned by the deceased prior to their death, the exception for trusts to which Division 128 of the ITAA 1997 applies is not relevant. As you did not pay anything to acquire your interest in the trust, you can disregard any capital gain that may arose from the E7 event in 2012 (subsection 104-85(6) of the ITAA 1997). The trust disposed of a pre-CGT asset by transferring the asset to you and your siblings. As CGT event E7 will occur at the time of this disposal, which is in this case after 20 September 1985, you acquired your share of the asset after 20 September 1985. The pre-CGT status of the asset is therefore not maintained. You will be taken to have acquired your share of the property on the date it is transferred into your name and any subsequent disposal of your share of the property by you may therefore be subject to capital gains tax. Consequently, when you dispose of your share of the property CGT event A1 will occur on the transaction. Therefore, you must calculate any capital gain made on the disposal of your share of the property and include it in your income tax return in the income year in which you dispose of the property. For the purposes of calculating the capital gain or capital loss, the first element of the cost base of your share will be the market value of that share on the day it was transferred to you.