Private ruling: Testamentary trust
Published: December 2011
Ruling period: 1 July 2010 to 30 June 2012

Ruling: Question and Answer | Is the treatment of the assets different, when winding up the testamentary trust, if distribution is in the form of shares or cash? | Not applicable | Is the cost base of a post Capital Gains Tax (CGT) asset, acquired by the testamentary trust, received as a distribution from a trust to a beneficiary the market value as the date of vesting? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. After 20 September 1985 your parent passed away. You and your sibling are residuary beneficiaries in two testamentary trusts created by the Will of your late parent. Your parent left a sibling a life interest in the income of certain assets with you and your sibling as residuary beneficiaries of the capital. Your parent's sibling passed away recently. The Trustee believes the Capital Gains Tax event to have occurred on the date of your parent's sibling's death. As that is the day you and your sibling became absolutely entitled to the trusts assets. The trust's assets comprised cash and shares. You and your sibling received equal parcel of shares (50/50) in Australian Public Companies. All the shares were purchase after your parent's death. On you parent's sibling's death the market value of the shares was below the cost at which they were purchased by the Trustee. The Trustee is about to distribute the trust's assets to you and your sibling. You and your sibling have been given the following options; § The Trustee sells the shares and pays you in cash § Transferring the shares into you and your sibling's names

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 subsection 104-75(2) | Income Tax Assessment Act 1997 subsection 104-75(3) | Income Tax Assessment Act 1997 subsection 104-75(5) | Income Tax Assessment Act 1997 subsection 104-75(6)(a)

Reasons for decision: Summary: Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you can make a capital gain or capital loss if and only if a Capital Gains Tax (CGT) event happens. There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when a person dies, an asset they owned passes; § to their legal personal representative or to a beneficiary, or § from their legal personal representative to a beneficiary. Testamentary Trust If an asset is acquired by an executor subsequent to the deceased's death, and subject to a life interest, that asset will be held by the trustee of a trust which is not the 'estate of a deceased person'. Therefore Division 128 of the ITAA 1997 does not apply to that asset. CGT event E5 happens when the remainderman becomes absolutely entitled to the asset, i.e. when the life interest comes to an end. The E5 event applies to the asset held by the Trustee and the remainderman's right to receive a benefit form the trust. A beneficiary with a vested and indefeasible interest in trust assets where one or more others also have an interest in those assets will nonetheless be considered absolutely entitled to a specific umber of the trust's assets if; § The asset is exchangeable, at lest to the extent to which a person would reasonably be expected to be indifferent to the replacement of any one asset with another. § It must be the case that equity would permit the beneficiary to have their interest in all those assets satisfied by a distribution or allocation in their favour of a specific number of them. § There must be a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to a specific number of the trust's assets. Section 104-75 of the ITAA 1997 contains the rules dealing with CGT event E5. CGT event E5 happens if a beneficiary of a trust becomes absolutely entitled to an asset of the trust as against the trustee of the trust (subsection 104-75(2) of the ITAA 1997). | Detailed Reasoning - Trustee: When CGT event E5 happens, a 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 that market value is less than the asset's reduced cost base (subsection 104-75(3) of the ITAA 1997). As the beneficiary is absolutely entitled the beneficiary will need to include the distribution of the net capital gain in their assessable income under subparagraph 97(1)(a)(i) of the Income Tax Assessment Act 1936. | Detailed Reasoning - Remaindermen: The beneficiary will make 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 will make a capital loss if that market value is less than the reduced cost base of that interest to the extent it relates to the asset (subsection 104-75(5) of the ITAA 1997). Paragraph 104-75(6)(a) of the ITAA 1997, however, provides that the capital gain or capital loss the beneficiary makes is disregarded where the beneficiary does not incur any expenditure to acquire the CGT asset that is the interest. As the remaindemen received their right to the testamentary trust for no cost, the gain they make on the disposal of their right to the assets of the testamentary trust is disregarded. Note: this gain is a different gain from the gain made by the trustee discussed above which will be assessable to the beneficiaries as they are presently entitled to the trust distribution. Application to your circumstances Under the Will, the remaindermen are residuary beneficiaries in two testamentary trusts created by the Will of their late parent. The beneficiaries' parent left a sibling a life interest in the income of certain assets with remaindermen as residuary beneficiaries of the capital. When the parent's sibling passed away, the asset is exchangeable and the beneficiaries became 'absolutely entitled' to the shares. The shares purchased by the trustee after death will be treated as follows: Shares acquired by the trustee after 20 September 1985 will give rise to an assessable gain or loss to the trustee, and will be acquired by the beneficiaries at market value on the day they became absolutely entitled. The remaindermen will need to include the distribution of the net capital gain in their assessable income for financial year in which the parent's sibling died. Whether the beneficiaries elect for the trustee to sell the shares and distribute cash or have the shares distributed in-specie the E5 event has already occurred. Therefore whatever happens to the shares will be as if the beneficiaries sold or transferred the shares themselves.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.