Private ruling: Deceased estate - capital gains tax
Date of advice: 23 March 2017
Published: August 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: If you sign the Deed of Family Arrangement would it constitute a deed of arrangement for the purposes of section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Would you be taken to have acquired the property being left to each of you under the will, as affected by the Deed of Family Arrangement, as at the date the Deceased died? | A2: Yes. | Q3: Would the Deed of Family Arrangement trigger a capital gain tax (CGT) event? | A3: No. | Q4: Would you be taken to have disposed of any CGT assets to the other? | A4: No. | Q5: Would you have to include any resulting capital gain in their assessable income? | A5: No.

Relevant facts and circumstances: The deceased died early 20XX leaving a Will. At clause X of the deceased's Will, the deceased left all their assets (apart from XXX and other articles) to two beneficiaries as tenants in common in equal shares. The beneficiaries are the sole two beneficiaries under the Will. The beneficiaries are dissatisfied with the manner in which the Deceased's assets have been left and a Deed of Family Arrangement has been drafted to enter into. The only consideration that will be given by the beneficiaries to enter into the proposed Deed of Family Arrangement will be the variation of their claims to assets in the Deceased's estate and waiver of any family provision claims they could bring against the assets of the Deceased's estate. No other consideration is being provided by either beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: Paragraph 128-20(1)(d) of the ITAA 1997 provides that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: (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. In your case, as proposed, the Deed of Family Arrangement constitutes a deed of arrangement for the purposes of paragraph 128-20(1)(d) of the ITAA 1997. | Detailed Reasoning - Question 2 and 3: Under Division 128 of the ITAA 1997 when a person dies a capital gain or capital loss from a CGT event that results for a CGT asset owned just before dying is disregarded. In accordance with subsection 128-15(2) of the ITAA 1997, a legal personal representative (LPR) or a beneficiary is taken to have acquired the asset on the day the deceased died. In your circumstances, the signing of the Deed of Family Arrangement does not in itself trigger a CGT event however; any subsequent disposal by the LPR or beneficiary is a CGT event which will result in a capital gain or loss. | Detailed Reasoning - Question 4: Gifts made under the terms of a Deed of Family Arrangement for the purposes of paragraph 128-20(1)(d) of the ITAA 1997, are treated as having been made under the Will of the deceased. In this case, the assets of the estate will pass directly to each beneficiary as though under the Will of the deceased, there is no disposal of any CGT asset from one person to another. | Detailed Reasoning - Question 5: There is no inheritance duty or gift duty in Australia. However, as mentioned in the reason for decision in questions 2 and 3 above, any subsequent disposal by the beneficiary will trigger a CGT event which will result in a capital gain or capital loss.