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

Ruling: Q1: Are you entitled to disregard any capital gain made on the disposal of the asset from the Estate to a beneficiary under subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: The deceased's will, named the deceased's children as the beneficiaries to the estate. The deceased's asset was left as part of the estate. One of the beneficiaries had expressed interest in retaining the asset. The beneficiary was offered the asset at market value. The beneficiary made a claim on the Estate for an entitlement to the asset at less than market value. After litigation, the beneficiary finally agreed to purchase the asset for market value.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 128, | Income Tax Assessment Act 1997 Section 128-15 and | Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision: Summary: The capital gains tax (CGT) provisions that deal with the effect of death are located in Division 128 of the ITAA 1997. When a person dies, the assets that make up their estate can: · pass directly to a beneficiary (or beneficiaries), or · pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries). A legal personal representative can be either: · the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will) · an administrator appointed to wind up the estate if the person does not leave a will. Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died. Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded. Subsection 128-20(1) of the ITAA 1997 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 Subsection 128-20(2) of the ITAA 1997 provides that a CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your legal personal representative transfers it under a power of sale. In this case, the beneficiary has obtained a court order in relation to the acquisition of the asset, however the result of this court order did not entitle them to have the asset passed to them under the will and receive the asset for no monetary consideration; the beneficiary was required to pay the estate for the asset. As the asset was transferred to the beneficiary as a purchaser and did not 'pass' to them 'under the deceased's will', subsection 128-15(3) of the ITAA 1997 will not apply to disregard the capital gain made by the executor on the transfer of ownership of the asset. Therefore, the executor will be liable for any capital gain made on the transfer.