Private ruling: Capital gains tax on deceased estate
Date of advice: 9 October 2020
Published: November 2020
Ruling period: 01 July 2019 to 30 June 2020 | 01 July 2020 to 30 June 2021
Date scheme commenced: 01 July 2019

Ruling: Q1: To the extent that the executor is assessable on the net income of the trust, will the Commissioner exercise the discretion to assess the trustee under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) rather than section 99A? | A1: Yes, the Commissioner will exercise the discretion to assess the trustee under section 99 of the Income Tax Assessment Act 1936 | Q2: Will the Commissioner apply the 50% discount percentage under subparagraph 115-100(a)(ii ) Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain on the sale of the XXXX property? | A2: Yes | Q3: Will the Commissioner apply the 50% discount percentage under subparagraph 115-100(a)(ii ) Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain on the transfer of the XXXX property to the deceased's son and to his ex-spouse? | A3: Yes | Q4: Will the transfer of the XXXX property to the deceased's son as to 95% and to the deceased's ex-spouse as to 5% cause a CGT event to occur? | A4: Yes | Q5: Is any capital gain or capital loss from that CGT event fully disregarded under subsection 128-15(3)? | A5: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your tax agent advised that: § the late XXXX (the deceased), a resident of XXXX , died intestate on XXXX. § at the date of death, the deceased was no longer a tax resident of Australia, having ceased to be such in XXXX. § Mr XXXX, of XXXX, XXXX, was appointed as administrator of the deceased's Australian estate by the Supreme Court of New South Wales on XXXX. § the deceased also owned assets in XXXX which will be administered under intestacy provisions of that country. It is understood these assets were acquired after the deceased ceased to be a tax resident of Australia in XXXX. § the Australian estate consisted of two properties, namely XXXX in XXXX, and XXXX also in XXXX. These were acquired by the deceased in XXXX and in XXXX respectively. § neither property had been at any time the main residence of the deceased. § the XXXX property was sold on XXXX, with the sale proceeds being remitted to the XXXX and applied to other debts of the estate. § the sale of the XXXX property triggered a CGT liability to the estate. § the ex-spouse of the deceased, who does not benefit under normal intestacy rules, has lodged a family provision claim under the Succession Act NSW 2006. § a draft Deed of Settlement has been prepared among the parties, where: o the ex-spouse of the deceased and XXXX will ensure, by arrangements satisfactory to the administrator, that the administrator will be placed in funds as needed to meet the capital gains tax liability on the XXXX property (and any capital gains tax liability that may, contrary to our view, arise on the transfer of the XXXX property), o the XXXX property is to be transferred to the deceased's son, XXXX as to 95% and to the ex-spouse of the deceased, who has made the family provision claim, as to 5% on the proviso that its existing mortgage and loan can be renegotiated in a way satisfactory to the administrator. o A court order under the Succession Act NSW 2006, which may be a consent order, will be obtained in relation to the above arrangement

Relevant legislative provisions: Income Tax Assessment Act 1936, s97 | Income Tax Assessment Act 1936, s98 | Income Tax Assessment Act 1936, s99 & s99A | Income Tax Assessment Act 1997, s115-5 | Income Tax Assessment Act 1997, s115-222 | Income Tax Assessment Act 1997, s115-30 | Income Tax Assessment Act 1997, s115-230 | Income Tax Assessment Act 1997, s128-15 | Income Tax Assessment Act 1997, s128-10 | Income Tax Assessment Act 1997, s128-20

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Question 1: Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled, which is retained or accumulated by the trustee. In considering these sections, we must first consider section 99A. Section 99A applies in relation to all trusts unless: § the trust is a deceased estate; subparagraph 99A(2)(a)(i) and (ii) § the trust is a bankrupt estate; paragraphs 99A(2)(b) and (c) § the trust is a trust that consists of property referred to in paragraph 102AG(2)(c)and the Commissioner forms the opinion that it would be unreasonable to apply section 99A in such circumstances. Subsection 99A(2) of the ITAA 1936 outlines the circumstances when the Commissioner may apply his discretion for section 99A not to apply. The relevant part of subsection 99A(2)(ii) states that the discretion may be exercised where a trust estate resulted from an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate. The discretion is exercised where the Commissioner is of the opinion that it would be unreasonable for section 99A to apply. Consequently, the favourable exercise of the Commissioner's discretion under subsection 99A(2) of the ITAA 1936 means the highest rate of income tax does not apply to trust estates resulting from a will, codicil, etc. These include both the estate of a deceased person and 'testamentary' trusts established pursuant to the terms of a will. If no part of the net income is distributed to beneficiaries, and section 99A is considered not to apply, then the trustee is assessed under section 99 of the ITAA 1936 as if the income were that of an individual. In forming an opinion pursuant to section 99A(2) of the ITAA 1936 whether it would be unreasonable for section 99A to apply to a particular trust estate in relation to a particular year of income, the Commissioner is directed by subsection 99A(3) of the ITAA 1936 to have regard to certain matters. It specifies the matters to be considered to include: § the manner and price at which the trust acquired its assets; § whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property; and § such other matters as the Commissioner thinks fit. These matters look at the source of the trust capital, including whether any loans have been made to the trust. The source(s) of the trust's income are also considered, as are any benefits conferred upon the trust, and any rights and privileges conferred on or attached to property held by the trust. In determining the weight to be given to the matters described in subsection 99A(3), Windeyer J has stated in Giris Pty Ltd v FCT (1969) 119 CLR 365; 69 ATC 4015; (1969) 1 ATR 3 that: The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate.... That purpose I take it is to enable the Commissioner to keep sec 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose. In effect, section 99A of the ITAA 1936 applies only in circumstances where the Commissioner, having regard to the circumstances outlined in subsections 99A(3) and (3A) of the ITAA 1936, forms the opinion that it would not be unreasonable to apply the provision in relation to that trust estate in relation to that year of income. The trust arose out of an intestate estate, the major remaining asset of which is the XXXX property. There are no special rights or privileges of any type attached to the estate or the property and there have been no other transfers of property to the estate. Further, there are no other circumstances which could warrant the Commissioner forming the view that what is, in effect, the penalty rate of tax under section 99A should apply. It would be unreasonable for the Commissioner to apply section 99A. Therefore, the Commissioner will apply his discretion to allow section 99 of the ITAA 1936 for the trustee to be taxed at ordinary marginal rates. | Detailed Reasoning - Questions 2 & 3: Under section 115-5 of the Income Tax Assessment Act 1997(ITAA 1997) you make a discount capital gain if the following requirements are satisfied: § you are an individual, a trust or a complying superannuation entity § a capital gains tax (CGT) event happens to an asset you own § the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1985 § you acquired the asset at least 12 months before the CGT event, and § you did not choose to use the indexation method. The trustee can make a choice to be assessed on the capital gain on behalf of the beneficiaries, even if the beneficiaries are presently entitled, as long as capital gains have not been distributed on the assets of the estate. Section 115-230 of the ITAA 1997 allows a resident trustee to choose to be assessed on capital gains where no trust property representing the capital gain has been paid or applied for the benefit of the beneficiaries of a trust. If the trustee makes a choice, then the following occurs: § The beneficiary is not assessable on the gain under subdivision 115-C of the ITAA 1997 (paragraph 115-230(4)(a)). § The trustee is not assessable on the capital gain under section 98 of the ITAA 1936. § The trustee is taken to be specifically entitled to the capital gain and is assessable under section 99 or 99A of the ITAA 1936 by reference to section 115-222 of the ITAA 1997. (Section 115-222 provides special rules for assessing a trustee under section 99 or 99A.) Generally capital gains tax (CGT) doesn't apply when you inherit an asset. However, it may apply when you later sell or otherwise dispose of the asset. Unless the asset you inherit is fully exempt, you'll need to know the cost base of the asset to work out your capital gain when you sell it. The cost base may be based on the value of the asset when the deceased acquired it or the value when they died, depending on the circumstances. When a person dies an asset in their estate can pass: § directly to beneficiaries known as people entitled to the assets of the deceased estate § directly to their legal personal representative such as their executor or an administrator appointed to wind up the estate § from a legal personal representative (LPR) to a beneficiary. If you're a beneficiary or LPR, you acquire the asset on the day the person died. Capital gains tax (CGT) does not apply when you acquire the asset, it may apply if you later dispose of the asset. The date of the person's death may be relevant when you calculate the capital gain. Under the NSW Probate and Administration Act 1898 , all real and personal estate of the deceased shall as from the death of such person pass to and become vested in the executor on intestacy. It states that: § All real estate held by any person in trust or by way of mortgage, and vesting as aforesaid under this part, shall as from the death of such person vest in the person's executor or administrator, subject to the trusts and equities affecting the same. § Such executor or administrator for purposes of administration may sell such real estate, or mortgage the same with or without a power of sale, and convey the same to a purchaser or mortgagee in as full and effectual a manner in law as the deceased person could have done in the person's lifetime. | Detailed Reasoning - XXXX property: In the case of the XXXX property for a CGT discount to apply the administrator must have acquired the CGT asset at least 12 months before the CGT event. Section 115-25 (1) of the ITAA97 states that: To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset ...acquired ... at least 12 months before the CGT event. The property was acquired by the deceased in XXXX and sold on XXXX. As this is a post-CGT asset, we need to look at timing of the property being acquired by the administrator to satisfy s115-25(1). According to s115-30(3) of the ITAA97, the trustee is treated to have acquired the asset immediately before the death. s115-30(3) states that the timing of the CGT asset acquired is when the deceased acquired the asset: a CGT asset the acquirer acquired as the legal personal representative of a deceased individual, except one that was a pre-CGT asset of the deceased immediately before his or her death. As per s115-30(3) of the ITAA97, the timing of the acquisition is when the deceased acquired the asset. Therefore, the XXXX property would be regarded as being acquired by the administrator on XXXX, the date the deceased acquired the property. As the property was acquired by the executor/administrator more than 12 months before the CGT event, he will be entitled to a 50% CGT discount. | Detailed Reasoning - XXXX property: The XXXX property is still held by the trustee to be transferred to the claimant beneficiaries after the decision made by the court. There is no determination as to when the property will be sold. The XXXX property will be similar to the XXXX property discussed above. The administrator would have acquired the asset on XXXX, the date the deceased acquired the property. The property will only be passed to the beneficiaries after the court has made a decision on the percentage allocation to the deceased's son and ex-spouse. At the time of sale, the beneficiaries will be entitled to a 50% CGT discount. | Detailed Reasoning - Question 4: If a trust transfers an asset to a beneficiary for no consideration, the trust is treated as disposing of the asset for its market value for capital gains tax purposes. CGT event A1 would happen as there would be a change of ownership from the administrator to the deceased's son and ex-spouse. While CGT does not apply when the beneficiaries acquire the asset, it may apply if they later dispose of the asset. The date of the person's death may be relevant when calculating the capital gain. | Detailed Reasoning - Question 5: Division 128 sets out how capital gains and losses are dealt with, and how this affects a trustee, LPR and beneficiaries of the estate. As stated in s128-15(2) of the ITAA97, a deceased person's assets are taken to have been acquired by their LPR on the day of their passing away therefore, any capital gain or loss on death is disregarded (s128-10 of the ITAA97). Similarly, as per s128-15(3) of the ITAA97, when an asset of the deceased is transferred from the LPR to a beneficiary, any capital gain or loss made by the LPR is disregarded. While a capital gains event occurs technically, it is does not give rise to the CGT. In considering this exemption, the asset that is transferred must be an asset of the deceased. It: § cannot be an asset that the LPR has acquired after death. § the LPR cannot acquire an asset during the estate administration process and then subsequently transfer the asset to a beneficiary without triggering CGT. § during estate administration process the property cannot be strata titled, subdivided or improved. § the asset must pass to the beneficiary in their capacity as a beneficiary. If the beneficiary buys an asset from the estate (which is a common occurrence), CGT applies. While the capital gains or losses of a property passed through an estate are generally disregarded, the calculation of the new cost base must be done in the hands of the LPR or the beneficiaries. The cost base is critical because it will determine the CGT payable by the LPR if they sell the property. If the LPR does not sell the property, but instead distributes it to a beneficiary, the beneficiary will have the same cost base. When the beneficiary sells the property a capital gain or loss may arise on that sale, and they will need to know the cost base. The new cost base will depend on whether the deceased purchased the property pre-CGT or post-CGT. The cost base will be in accordance with the table of "modifications to cost base and reduced cost base" found in s128-15(4) of the ITAA97. | Detailed Reasoning - Application to your circumstances: The trust arose out of an intestate estate, the major remaining asset of which is the XXXX property. There are no special rights or privileges of any type attached to the estate or the property and there have been no other transfers of property to the estate. Further, it is submitted there are no other circumstances which could warrant the Commissioner forming the view that what is, in effect, the penalty rate of tax under section 99A should apply. In our view, it would be manifestly unreasonable for the Commissioner to apply section 99A. Rather, as a resident trust for tax purposes, we consider income tax should be levied against the administrator under subsection 99(2) or (3) as relevant. Therefore, it would be reasonable for the Commissioner to apply his discretion to allow section 99 of the ITAA 1936 to apply and the trustee to be taxed at ordinary marginal rates. In your case, the trustee of a deceased estate, has disposed of assets held by the deceased in the form of properties. As the properties was held by the administrator for more than 12 months, 50% CGT discount would be available. Subsection 128-15(3) provides that any capital gain or capital loss the LPR (which is defined in subsection 995-1 to include an administrator) makes is disregarded if an asset the deceased owned just before dying (subsection 128-15(1)) passes to a beneficiary in the deceased estate. Furthermore, as stated in s128-15(2) of the ITAA97, a deceased person's assets are taken to have been acquired by their LPR on the day of their passing away therefore, any capital gain or loss on death is disregarded (s128-10 of the ITAA97). Section 128-15(3) of the ITAA97 states that when an asset of the deceased is transferred from the LPR to a beneficiary, any capital gain or loss made by the LPR is disregarded. The XXXX property was owned by the deceased just before death and is an asset of his estate. His son is a beneficiary of that estate under Australian intestacy law, and his ex-spouse has lodged a family provision claim under the Succession Act NSW 2006 and thus may become a beneficiary in the estate. An asset 'passes' to a beneficiary in an estate for CGT purposes when the requirements in subsection 128-20 of the ITAA97 is met. Subsection 128-20(1) of the ITAA97 states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: (a) under your will, or that will as varied by a court order; or (b) by operation of an intestacy law, or such a law as varied by a court order; or (c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; 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. As advised by your tax agent, the son and the ex-spouse of the deceased will most likely have 95% and 5% of ownership respectively in the XXXX property. By operation of the laws of intestacy or as varied by a court order or by reason of deed of arrangement the ownership will satisfy the requirements under s128-20(1) of the ITAA97. Furthermore, if there is any variation to the share of the property by a court order it would still satisfy the requirements for the purposes of section 128-20(1) and subsection 128-15(3) of the ITAA97.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for XXXX.