Private ruling: Capital gains tax
Published: January 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will entering into the 'Deed of Absolute Entitlement' trigger capital gains tax (CGT) event E5, because the Life Tenant and Remaindermen will become absolutely entitled to the Residence and Shares of the estate as against the trustees? | A1:  | Q2: Will the trustees make a capital gain or loss on the transfer of Shares to the beneficiaries under CGT event E5 if the market value of the Shares at the date of the Deed is more than the cost base of those shares? | A2:  | Q3: Will the trustees make a capital gain or loss on the transfer of the Residence to the absolutely entitled beneficiary under CGT event E5 if the market value of the Residence at the date of the Deed is more than the cost base of the Residence? | A3:  | Q4: Will the trustees be able to disregard any capital gain or loss made on transfer of the Residence to the absolutely entitled beneficiary under CGT event E5 by virtue of section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4:  | Q5: Will any capital gain or loss made by the beneficiaries on the transfer of the Residence and/or Shares to them under CGT event E5 be disregarded as they acquired their interests for no consideration? | A5: 

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: o your application for private ruling 012 o Copy of deceased's will o Copy of Deed of Absolute Entitlement o Copy of Certificate of title of residence o Copy of Estate share register The deceased died prior to 1990. Pursuant to the deceased's Will, the deceased left a life interest in their estate to their child (Life Tenant) and the remainder interest on their child's death to the deceased's two grandchildren (Remaindermen). The deceased estate included the deceased's main residence. The estate is currently made up of the following assets; · property (Residence) which is not the deceased's main residence · Various shareholdings of listed ASX shares and other marketable securities (Shares) The Life Tenant and the Remaindermen did not provide any consideration nor property to obtain their interests in the Estate, it occurred as a result of the Will. The deceased's main residence was the Life Tenant's main residence from the date of the deceased's death until the trustees contracted and settled on the acquisition of the Residence. The deceased's main residence was contracted for sale in 19XX with the sale having settled that year. The trustees contracted to purchase the Residence in 19XX to allow the Life Tenant to occupy the Residence pursuant to the deceased's Will. Settlement occurred that same year. The trustees disposed of the deceased's main residence and acquired the Residence pursuant to clause 4(a) and 4(b) of the deceased's Will. The Life Tenant has occupied the Residence as their main residence since it was purchased by the Trustees. The Residence was rented by the trustees to the Life Tenant during the period. Rent was charged by the trustees to the Life Tenant during that period. As the Residence had a greater market value than the deceased's main residence, the Estate took out a loan to cover the price difference between the two properties. To assist the Estate in funding the interest component of the loan, the trustees were of the view that the Life Tenant should contribute to this, by paying rent. On completion of repaying the loan, rental ceased. The Residence was the Life Tenant's main residence. The trustees are required to permit the Life Tenant to occupy any house property owned by the deceased as the date of their death, pursuant to clause 4(c). Some shares were sold and/or acquired by the trustees following the death of the deceased. The Life Tenant and the Remaindermen wish to execute a Deed of Absolute Entitlement (Deed) making the Life Tenant and the Remaindermen absolutely entitled to the assets of the Estate. The Life Tenant and the Remaindermen will become absolutely entitled to the assets of the Estate for no consideration (i.e. no money or property). The Life Tenant will become absolutely entitled to the following assets resulting from the execution of the Deed; · the Residence, and · a proportion of the Shares equating to: o Y% of the total market value of the Estate less o the market value of the Residence at the date of the Deed The Remaindermen will become absolutely entitled to the balance of the total market value of the Shares at the date of the Deed in equal proportion.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-75(1) | Income Tax Assessment Act 1997 Subsection 104-75(2) | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Subsection 104-75(3) | Income Tax Assessment Act 1997 Subsection 104-75(4) | Income Tax Assessment Act 1997 Subsection 104-75(5) | Income Tax Assessment Act 1997 Subsection 112-20(1) | Income Tax Assessment Act 1997 Subsection 104-75(6) | Income Tax Assessment Act 1997 Subsection 118-210(1) | Income Tax Assessment Act 1997 Section 118-210 | Income Tax Assessment Act 1997 Subsection 118-210(2) | Income Tax Assessment Act 1997 Subsection 118-210(3) | Income Tax Assessment Act 1997 Subsection 116-30(1) | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 115-45

Reasons for decision: Summary: On executing the 'Deed of Absolute Entitlement' capital gains tax (CGT) event E5 will be triggered as the Life Tenant and Remaindermen will become absolutely entitled to the Residence and Shares of the estate as against the trustees. The trustees will make a capital gain on the transfer of the Residence and Shares to the beneficiaries under CGT event E5 if the market value of the asset (at the time of the event) is more than its cost base. The trustee makes a capital loss if the market value is less than the asset's reduces cost base. The trustees will not be able to disregard any capital gain or loss made on the transfer of the Residence to the absolutely entitled beneficiary as the Residence was is not considered to have been acquired 'under the deceased's will' for the purposes of section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the beneficiaries will be able to disregard any capital gain or loss made on the transfer of the Residence and/or Shares to them under CGT event E5 as they acquired their interests for no consideration. | Detailed Reasoning - CGT event E5: Subsection 104-75(1) of the ITAA 1997 states that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2) of the ITAA 1997). Taxation Ruling TR 2006/14 at paragraph 202 to 203 states: 202. Division 128 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). 203. 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 (that is, under the will, by intestacy and so on). Therefore, the trust is not 'a trust to which Division 128 of the ITAA 1997 applies' as the assets of the trust will not pass to the beneficiary under the will until such time as the 'Deed of Absolute Entitlement' is executed. Accordingly, the exception will not apply and CGT event E5 will occur at the date the Deed is executed. Subsection 104-75(3) of the ITAA 1997 provides that the trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee makes a capital loss if the market value is less than the asset's reduces cost base. Subsection 104-75(4) of the ITAA 1997 explains that a capital gain or loss made by the trustee is disregarded if it acquired the asset before 20 September 1985. Subsection 104-75(5) of the ITAA 1997 explains that the beneficiary makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset. In this context, the cost base of the beneficiary's interest, if the beneficiary did not incur expenditure to acquire it, would be subject to the market value substitution rule in subsection 112-20(1) of the ITAA 1997. This would make the first element of the cost base of the interest its market value at the time the beneficiary becomes absolutely entitled to the asset constituted by the interest, as the beneficiary would not have any interest in the trust capital before becoming absolutely entitled to the trust asset. Subsection 104-75(6) of the ITAA 1997 states that a capital gain or capital loss the beneficiary makes is disregarded if: a) the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or b) the beneficiary acquired it before 20 September 1985; or c) all or part of the capital gain or capital loss the trustee makes from the CGT event is disregarded under Subdivision 118-B (about main residence). In your case, prior to the date of the deed, neither the Life Tenant nor the Remaindermen were absolutely entitled to the shares or the residence. Because their interests are successive, the shares and residence are not held for either of them alone and they could not have been transferred to either of them as to do so would defeat the interests of the other. On execution of the 'Deed of Absolute Entitlement', the Life Tenant and the Remaindermen will become absolutely entitled to the CGT assets of the trust as against the trustee. The terms agreed to in the 'Deed of Absolute Entitlement' are as follows; · Life Tenant will be absolutely entitled to the Residence. · Life Tenant will be absolutely entitled to shares equating to Y% of the market value of the total market value of the estate less the market value of the residence (at the date of the deed). · Remaindermen will be absolutely entitled to the balance of the total market value of the shares (at the date of the deed) in equal proportion. At the date of the deed, CGT event E5 will occur. Generally, both the trustees and the beneficiaries would make a capital gain or loss as a result of CGT event E5 happening. As the assets were not acquired by the trustees prior to 20 September 1985, the trustees can not disregard any capital gain or loss made on the event. However, as the beneficiaries (Life Tenant and Remaindermen) will acquire the CGT assets (Residence and Shares) for no expenditure, they will be able to disregard any capital gain or loss made from the event by virtue of subsection 104-75(6) of the ITAA 1997. | Detailed Reasoning - Transfer of residence (main residence exemption): When a beneficiary is granted a life interest to reside in a dwelling formerly owned by the deceased, a form of testamentary trust is created. There are a number of exemptions or partial exemptions from capital gains tax that may apply in certain situations. One of these exemptions is the main residence exemption. Special rules apply if you acquire the dwelling as trustee of a deceased estate. Subsection 118-210(1) of the ITAA 1997 states that section 118-210 of the ITAA 1997 applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual. Subsection 118-210(2) of the ITAA 1997 provides that if a CGT event happens to the interest in relation to the individual and you receive no money or property for it: a) a capital gain or capital loss you make from the event is disregarded; and b) the first element of the dwelling's cost base and reduced cost base in the hands of the individual is its cost base and reduced cost base in your hands at the time of the event; and c) the individual is taken to have acquired it when you did. Subsection 118-210(3) of the ITAA 1997 explains that if; a) you receive money or property for the CGT event happening or the event happens in relation to another entity; and b) the dwelling was the main residence of the individual from the time you acquired the interest until the time of the event; you do not make a capital gain or capital loss from the CGT event. Taxation Determination TD 1999/74 discusses the circumstances in which a trustee of a deceased estate acquires an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the ITAA 1997. It requires that there must be a connection between the trustee's acquisition of an ownership interest in a dwelling and the deceased's will. Paragraphs 2 to 4 of TD 1999/74 state that: A trustee acquires an ownership interest in a dwelling under the will of a deceased person for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the will, or in accordance with the terms of the will as modified by any court order. The trustee also acquires an interest under the deceased's will if they acquire it in pursuance of the will or under the authority of the will ( Evans v. Friedmann (1981) 53 FLR 229 at 238). The acquisition need not be in strict conformity with the will or expressly by force of the will but, if it is, the requirements of subsection 118-210(1) are, in any case, satisfied. In your case, you disposed of the deceased's main residence in 19XX when the deceased's main residence was contracted for sale. You state that you then contracted to purchase the 'new' Residence that same year to allow the Life Tenant to occupy it according to the terms of the will. You state that pursuant to clause 4 (a) and 4 (b) of the deceased's Will and to the powers provided to the trustees under subsections 12(1), 12(2) and 12(3) of the Trustee Act 1936 (SA) (Trustee Act), the purchase of the Residence by the trustees is under the deceased's will' for the purposes of subsection 118-210(1) of the ITAA 1997. Section 12 of the Trustee Act states that; 1) Subject to the instrument creating the trust, a trustee may- a. purchase a dwelling house for a beneficiary to use as a residence; or b. enter into any other agreement or arrangement to secure for a beneficiary a right to use a dwelling house as a residence. 2) Despite the terms of the instrument creating the trust, a trustee may, if to do so would not unfairly prejudice the interests of other beneficiaries, retain as part of the trust property a dwelling house for a beneficiary to use as a residence. 3) A dwelling house purchased, retained or otherwise secured for use by the beneficiary as a residence may be made available to the beneficiary for that purpose on such terms and conditions consistent with the trust and the extent of the beneficiary's interest as the trustee thinks fit. Clauses 4(a), (b) and (c) of the deceased's will provides the trustees the power; a) to sell call in and convert into moneys the whole or any portion or portions of my estate at such times and at such price or prices and upon such terms and conditions as my trustees shall think fit b) to retain all or any of my real or personal property in its present form of investment without being responsible for any loss c) to permit my said son to occupy any house property owned by me at the date of my death free of rent he paying all rates taxes insurances and other outgoings whilst in occupation' Based on the clauses in the will of the deceased, there does not appear to be any scope for the trustees to sell the deceased's main residence in order to purchase another house for the Life Tenant to reside in, despite section 12 of the Trustee Act 1936 (SA). We consider that section 12 of the Trustee Act only gives the power to purchase a dwelling for a beneficiary to use as a residence, subject to the terms of the trust. There does not appear to be any such term within the will of the deceased that allows the Estate to purchase a residence for the Life Tenant. Therefore, as there is no connection between your acquisition of an ownership interest in the replacement dwelling and the deceased's will, section 118-210 of the ITAA 1997 cannot apply. Accordingly, as section 118-210 of the ITAA 1997 does not apply in the current situation, the trustees will not be able to disregard any capital gain or loss made from the disposal or transfer of the Residence. Further, as no consideration will be received by the trustees on transfer of the residence, they will be deemed to have received the market value of the Residence at the time of the event (subsection 116-30(1) of the ITAA 1997). However, as the beneficiary (Life Tenant) will acquire the Residence for no expenditure, they will be able to disregard any capital gain or loss made from the event by virtue of subsection 104-75(6) of the ITAA 1997. | Detailed Reasoning - Transfer of shares: On transfer of the shares to the beneficiaries, as per the terms in the "Deed of Absolute Entitlement' the trustees will make a capital gain or loss. Subsection 104-75(3) of the ITAA 1997 explains that the trustee will make a capital gain if the market value of the asset at the time of the event is more than its cost base. The trustee will make a capital loss if the market value is less than the asset's reduced cost base. However, a capital gain or loss will be disregarded if it acquired the asset prior to 20 September 1985 (subsection 104-75(4) of the ITAA 1997). The time of the event is when the beneficiary becomes absolutely entitled to the asset (subsection 104-75(2) of the ITAA 1997). Subsection 116-30(1) of the ITAA 1997 provides that if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. (The market value is worked out as at the time of the event). When a person dies, their assets devolve (that is, are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant where the deceased owned those assets as joint tenant with another person. The LPR, beneficiary or surviving joint tenant is taken to have acquired the assets on the date of death. In your case, the shares were deemed to be acquired at the date of the deceased's death. Accordingly, any capital gain or loss will not be disregarded under subsection 104-75(4) of the ITAA 1997. As no consideration will be received by the trustees on the transfer of ownership of the shares to the absolutely entitled beneficiaries, the shares will be deemed to have been disposed of at market value at the time when the beneficiaries become absolutely entitled to the assets, that is, the date of the execution of the Deed. Accordingly, the trustees will make a capital gain under CGT event E5 if the market values of the Shares at the date of the Deed are greater than their cost base. However, as the beneficiaries (Life Tenant and Remaindermen) will acquire the Shares for no expenditure, they will be able to disregard any capital gain or loss made from the event by virtue of subsection 104-75(6) of the ITAA 1997.

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