Private ruling: Capital gains tax
Published: August 2016
Ruling period: Year ended 30 June 2003 | Year ended 30 June 2004 | Year ended 30 June 2005 | Year ended 30 June 2006 | Year ended 30 June 2007 | Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 28 August 2002

Ruling: Questions and Answers | 1. Is the deceased estate a fixed trust? | Yes. | 2. What CGT event has occurred in the sale of the foreign country assets? | CGT event K3 occurred. | 3. Can the non-resident beneficiary and the Trustee disregard the capital gain that is made as a result of a CGT event happening? | Yes.

Relevant facts and circumstances: The deceased died. Probate was granted by a court. The probate was re-sealed by the Court. The deceased at all material times was a resident for tax purposes in Australia. The deceased bequeathed foreign country assets to different foreign country charities. All charities were given the power to sell provided the proceeds were used for their respective charitable causes. The trustee acts as trustee for the deceased's estate. During an income year, foreign country assets were sold by the trustee, with consent of the charities in the course of the administration of the estate.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 272-5 | Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F | Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F | Income Tax Assessment Act 1997 Subsection 104-10 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Section 128-10 | Income Tax Assessment Act 1997 Section 128-20 | Income Tax Assessment Act 1997 Section 855-10 | Income Tax Assessment Act 1997 Section 855-15 | Income Tax Assessment Act 1997 Section 855-40 | Income Tax Assessment Act 1997 Subsection 995-1(1) Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997

Reasons for decision: Detailed Reasoning - Summary of Advice: • The trust founded by the deceased's estate is a fixed trust under section 272-5 of the ITAA 1936, giving the beneficiaries, foreign country charities, a vested and indefeasible entitlement. • The CGT event which has occurred is K3, therefore the deceased must include the CGT event in the final tax return lodged on behalf of the deceased. • Both the beneficiaries and the trustee can disregard any net capital gain under section 855-40 of the ITAA 1997. | Detailed Reasoning - Question 1: Is the deceased estate a fixed trust under section 272-5 of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997?: The trust instrument, for the purpose of subsection 272-5(1) of Schedule 2F of the ITAA 1936, consists of the Will of the deceased. A fixed trust is defined in subsection 995-1(1) of the ITAA 1997, providing that a trust is fixed trust if entities have fixed entitlements to all of the income and capital of the trust. The term "fixed entitlement' is then defined in subsection 272-5(1) of Schedule 2F of the ITAA 1936. Providing that a fixed entitlement in a trust is where a beneficiary has a vested and indefeasible interest in the income or capital of the trust. To determine if the foreign country charities have a fixed entitlement, it must be determined if they have a "vested and indefeasible interest". This term is not defined in tax legislation. The ordinary meaning can therefore be applied. Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 reflect what this meaning may be. A "vested interest" means an individual has a present right to something, and "vested indefeasible interest" means that right cannot be lost. The Will provides a vested interest for the foreign country charities in receiving the foreign country assets. The other entities named in the Will that have or will receive bequests have no interest in the foreign country assets. The Trustee only has discretion for administrative matters of the deceased estate. There is no clause within the Will that authorise the Trustee that could cause a beneficiaries' entitlement to be defeased. Since, all parties bequeathed within the Will have a vested and indefeasible interest in a share of the deceased estate, they all have fixed entitlements, in accordance with subsection 272-5(1) of Schedule 2F of the ITAA 1936. Therefore, the trust founded by the estate of the deceased is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936. | Detailed Reasoning - Question 2: What CGT event has occurred?: In the current set of facts there is more than one potential CGT event which has occurred being CGT events A1, E5 and K3. | Detailed Reasoning - CGT event A1: The disposal of a CGT asset is considered a CGT event A1, under subsection 104-10(1) of the ITAA 1997. Disposal is defined in subsection 104-10(2) as the change of ownership of a CGT asset between two entities, whether it is because of some act, event or operation of law. A disposal occurred when the assets changed ownership, the Trustee sold the assets to a third party. The proceeds from this sale were passed on to the foreign country charities. Therefore, a CGT event A1 has occurred. | Detailed Reasoning - CGT event E5: Section 104-75 of the ITAA 1997 provides that a CGT event E5 occurs 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, such as a deceased estate) against the trustee, disregarding any legal disabilities the beneficiary may be under. The beneficiaries became absolutely entitled to the assets of the estate upon the passing of the deceased. Therefore, CGT event E5 has occurred. | Detailed Reasoning - CGT event K3: Under section 128-10 of the ITAA 1997 when an individual dies, any capital gain or loss made by them in respect of a CGT asset owned by them just before they passed away is disregarded unless CGT event K3 applies. A CGT event K3 is triggered when a CGT asset owned by an Australian resident for tax purposes just before they died, passes to a beneficiary in their estate who is, when the asset is passed a non-resident of Australia for taxation purposes and the asset is not taxable Australian property. This is stated in section 104-215 of the ITAA 1997. Section 855-15 of the ITAA 1997 defines when an asset is taxable Australian property. The property is assets that reside within the foreign country, therefore the assets fall outside of the definition of taxable Australian property. In the current facts, the deceased, an Australian resident, held the foreign country assets just prior to passing. These assets are not taxable Australian property. The beneficiaries are not Australian residents for taxation purposes. Therefore a CGT event K3 has also occurred. The applicant has argued that CGT event K3 cannot have occurred as the foreign country assets have not "passed" to the nominated foreign country charities. The argument is put that the foreign country charities never became absolutely entitled in possession as the administration of the estate was incomplete. Section 128-20 of the ITAA 1997 provides that a CGT event passes to a beneficiary, if the beneficiary becomes the owner of the asset under a will. An asset is considered to be passed to a beneficiary through a will when it has been bequeathed specifically to that beneficiary. ATO Interpretative Decision 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 provides that an asset can pass under a will, provided there is no other person to whom the asset of the trust will eventually pass. The charities have a vested and indefensible entitlement over the foreign country assets. This has been devised and bequeathed under the deceased's will. The assets have therefore passed to the beneficiaries under the will for the purposes of section 128-20 When CGT K3 event applies the time of the event is just before the deceased dies, which mean the resulting capital gain or loss is accounted for in the final tax return lodged on behalf of the deceased. | Detailed Reasoning - Summary of Question 2: Subsection 102-25(1) of the ITAA 1997 provides that if there are more than one relevant CGT event that happens in your situation, the event most specific to your situation applies. CGT event A1 and E5 have a broader application than CGT event K3. The current situation is a direct example of CGT event K3, the deceased has passed a CGT asset to the foreign country charities, the beneficiaries in the estate and the charities are not Australian residents and the assets are not taxable Australian property. Therefore, CGT event K3 is the most specific event in this situation. | Detailed Reasoning - Question 3: Can the non-resident beneficiary and the Trustee disregard the capital gain that is made as a result of a CGT event happening?: Section 855-10 of the ITAA 1997 specifies that a person, who is a foreign resident, just before the CGT event occurs, may disregard a capital gain or loss made where the CGT event occurs in relation to a CGT asset that is not taxable Australian property. Under section 855-40 of the ITAA 1997 a CGT exemption is available where a capital gain or loss is made by a foreign resident on an interest in a fixed trust and that interest is not taxable Australian property. Specifically, subsection 855-40(2) of the ITAA 1997 provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if: • you are a foreign resident when you make the gain; • the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust; and • the asset is not taxable Australian property for the CGT event trust at the time of the CGT event. The foreign country charities are and have always been foreign residents. The gain has occurred from a K3 CGT event. All requirements of subsection 855-40(2) of the ITAA 1997 have been fulfilled therefore the capital gain of the beneficiary can be disregarded. Further, subsection 855-40(3) of the ITAA 1997 provides that as a trustee of a trust you are not liable were the capital gain has been disregarded for the beneficiary under subsection 855-40(2) of the ITAA 1997. The Trustee in this case is therefore not liable for any CGT. Although, section 855-40 of the ITAA 1997 provides that a capital gain or loss can be disregarded for both the Trustee and the beneficiary, as CGT event K3 has occurred the deceased must include the CGT event in the final tax return lodged on behalf of the deceased. | Detailed Reasoning - Conclusions: The trust established under the deceased estate is a fixed trust, as the beneficiaries have fixed entitlements. CGT event K3 has occurred, as the foreign country assets were owned by the deceased an Australian resident for tax purposes prior to their death, and the assets were passed to non-resident beneficiaries, the charities, and the assets are not taxable Australian property. The deceased must include the CGT event in the final tax return lodged on behalf of the deceased. Both the CGT on the beneficiaries and the Trustee can be disregarded under section 855-40 of the ITAA 1997.

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