Private ruling: Capital gains tax
Published: June 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015

Ruling: Q1: Will capital gains tax apply to the transfer of the property from a Testamentary Trust to its primary beneficiary? | A1: No

Relevant facts and circumstances: The Rulee's parent died in 20XX and in accordance with his/her Last Will & Testament bequeathed a property to a Testamentary Trust with the Rulee being the Primary Beneficiary, Trustee and Appointer. The said property was originally acquired by the Rulee's parent in 19YY, was never his/her principal place of residence, has a cost base of less than $200,000 and a current market value of less than $400,000. The Rulee is not a foreign resident. The Rulee is considering transferring the property from the Testamentary Trust to himself/herself as the primary beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-85(1), | Income Tax Assessment Act 1997 Subsection 104-75(1) and | Income Tax Assessment Act 1997 Subsection 128-15(3).

Reasons for decision: Summary: Subsection 104-85(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiaries interest, or part of it, in the trust capital. Subsection 104-75(1) of the ITAA 1997 states that a 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 (disregarding any legal disability the beneficiary is under). However, CGT events E7 and E5 do not apply if Division 128 of the ITAA 1997 applies to the trust. Division 128 deals with the effect of death. Subsection 128-15(3) of the ITAA 1997 states that any capital gain or loss the legal personal representative passes to a beneficiary in your estate is disregarded. The trustee of a testamentary trust which is a trust which has been created under the terms of a will is treated the same way that a legal personal representative is treated for the purpose of Division 128 of the ITAA 1997. Any capital gain or loss that arises to the trustee of the testamentary trust is therefore disregarded when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under the deceased's will. Capital gains tax can only apply to any transfer or sale of an asset by the trustee of the testamentary trust where the asset was disposed of to someone other than a beneficiary. If the trustee decides to exercise the discretion to distribute any of the capital to the beneficiary, the asset will have passed to that beneficiary and any capital gain or loss is also disregarded pursuant to subsection 128-15(3) of the ITAA 1997.