Private ruling: Capital gains tax - asset passing to a tax-advantaged entity
Date of advice: 8 September 2015
Published: September 2015
Ruling period: Income year ending 30 June 2016, | Income year ending 30 June 2017, | Income year ending 30 June 2018; and | Income year ending 30 June 2019.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Will capital gains tax event K3 happen when the property passes to the Testamentary Trust? | A1: Yes. | Q2: Will any capital gain or loss made from the capital gains tax event K3 happening to the property be disregarded? | A2: Yes.

Relevant facts and circumstances: You own a property (the property). You have completed a will which will enable certain actions to be taken upon you passing away. In accordance with your will: • a testamentary trust will be created (the Trust) which will consist solely of the property. The purpose of the Trust is to establish a bequest to a Foundation (the Foundation), • The Trust will be administered by the Foundation, which will also be the Trustee of the Trust • The Foundation will retain the property held by the Trust and will only sell the property when the Trust's Committee deems it to be appropriate to do so, unless the Foundation determines that it is not commercially viable to do so at that time. For the purposes of this private ruling: • You will pass away during the period covered by this private ruling, • The necessary actions will be taken to ensure that the testamentary trust set up under your will, being the Trust, is a deductible gift recipient (DGR) before the ownership in the property passes to it; and • The trust being set up under your will, being the Trust, is a testamentary trust that meets the requirements as outlined in section 118-60 of the ITAA 1997. Documents You have provided copies of documents, which should be read in conjunction with and forms part of the scheme of this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 30-15 | Income Tax Assessment Act 1997 Division 50 | Income Tax Assessment Act 1997 Section 50-52 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Subsection 104-215(3) | Income Tax Assessment Act 1997 Section 118-60 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-10 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-20 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Asset passing to a tax-advantaged entity: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that when a person dies, a capital gain or capital loss from a capital gains tax (CGT) event happening to a CGT asset the person owned just before death is disregarded (section 128-10 of the ITAA 1997). However, Division 128 does not apply if the CGT assets pass to a beneficiary who is an exempt entity, also known as a tax advantaged entity. In these circumstances CGT event K3 happens. CGT event K3 in section 104-215 of the ITAA 1997 occurs when a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that is, when the asset passes, an exempt entity. CGT event K3 is taken to happen just before the deceased's death in accordance with subsection 104-215(3) of the ITAA 1997. An exempt entity is an entity whose ordinary and statutory income is exempt because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997). A trust that is a registered charity will only be exempt if it is endorsed as such by the Tax Office in accordance with section 50-52 of the ITAA 1997. ATO Interpretative Decision ATO ID 2004/458 (ATO ID 2004/458) outlines the Commissioner's view in relation to CGT event K3 occurring when assets pass to a tax exempt testamentary trust. ATO ID 2004/458 considered a scenario where assets owned by a deceased person at the date of their death passed to a trust established under the deceased's will, and the trust qualified as an exempt entity. Under the terms of the trust, the assets were to be held in the trust in perpetuity with the trust income being applied for public charitable purposes. The Australian Taxation Office concluded that the testamentary charitable trust set up under the will was a beneficiary in the deceased's estate and the assets passed to the beneficiary. However, any capital gain or capital loss made as a result of CGT event K3 happening may be disregarded if the testamentary trust is a deductible gift recipient in accordance with section 118-60 of the ITAA 1997. Section 118-60 of the ITAA 1997 outlines that a capital gain or capital loss made from a testamentary gift of property is disregard if the gift would have been deductible had it not been a testamentary gift under section 30-15 of the ITAA 1997. Application to your situation In accordance with your will, after you die a testamentary trust (the Trust) will be set up and the property will pass from your estate to the Trust. The Foundation will administer and be the Trustee of the Trust. The Trust will be registered as a DGR before the property passes to it and will meet the requirements outlined in section 118-60 of the ITAA 1997. Your situation can be considered to be similar to the circumstances outlined in ATO ID 2004/458 as the testamentary trust set up under you will also be endorsed as an exempt entity under Subdivision 50-B of ITAA 1997 before the property passes to it. CGT event K3 will apply when the property passes to the Trust because it will be an exempt entity at the time the property passed. However as the Trust will be an endorsed DGR, and the other necessary conditions as outlined in section 118-60 of the ITAA 1997 will be met, any capital gain or capital loss made as a result of the property passing to the Trust from your estate will be disregarded.