Private ruling: CGT - testamentary trust
Date of advice: 29 April 2026
Published: 13 July 2026
Ruling period: Income year ending 30 June 20XX | The scheme commence d on: | 1 July 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does a CGT event occur under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the vesting of 35 fully paid ordinary shares in Company ACN xx xx xx (Company) (the Shares) from the trustee of Trust A on the trustee of Trust B? | A1: Yes. | Q2: Does CGT event E5 occur pursuant to section 104-75 of the ITAA 1997 as a result of vesting of the Shares from the trustee of Trust A to the trustee of Trust B? | A2: Yes. | Q3: Does Division 128 of the ITAA 1997 apply to disregard any capital gain or loss that occurs as a result of CGT event E5 occurring on the vesting of the Shares from the trustee of Trust A to the trustee of Trust B? | A3: Yes - the Commissioner's administrative practice allows the capital gain to be disregarded subject to the trustee of Trust B calculating the cost base and reduced cost base of the Shares in the same way as it would have been if the Shares had passed to the trustee of Trust B from the deceased's legal person representative.

Relevant facts and circumstances: 1. The late xxx (the Deceased) died on xx xx xxxx. 2. The Deceased executed a Last Will and Testament dated xx xx xxxx (the Will). 3. Individual A, being the surviving spouse of the Deceased, was nominated as the executrix of the Will. 4. On xx xx xxxx, Probate of the Will was granted to Individual A by the Supreme Court of xx xx xx (the Grant of Probate). 5. The sole asset of the estate of the Deceased (the Estate) was the shares in Company (the Shares). Trust A 6. Clause xx of the Will creates a testamentary trust known as 'Trust A'. Specifically, clause xx of the Will provides as follows: [Will provided] 7. Pursuant to clause xx of the Will, [the relevant assets of the Deceased's estate are the Shares]. 8. Pursuant to clause xx of the Will, Individual A is the trustee of Trust A and the appointer of Trust A. 9. Individual A has at all relevant times been a tax resident of Australia. 10. On or about xx xx xxxx, the Shares were transferred from the Estate to Individual A (in their capacity as trustee of Trust A). 11. The assets of Trust A comprise the Shares and any accumulated income attributable to distributions of income from the Shares. Trust B 12. 'Trust B' is created pursuant to clause xx. of the Will. Specifically, clause xx of the Will provides as follows: [Will provided] Vesting of Trust A 13. As set out above, clause xx. of the Will provides that the Vesting date of Trust A will be the date of death of Individual A or such earlier date as the trustee of Trust A determines. 14. Pursuant to clause xx of the Will, on the vesting of Trust A, the trustee of Trust B under clause xx of the Will, will be entitled to the Shares as against the trustee of Trust A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 subsection 100-25(2) | Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 subsection 104-55(1) | I ncome Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 subsection 104-75(6) | Income Tax Assessment Act 1997 subsection 104-85 | Income Tax Assessment Act 1997 subsection 106-50 | Income Tax Assessment Act 1997 subsection 108-5 | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-15(3) | Income Tax Assessment Act 1997 section 128-20 | Income Tax Assessment Act 1997 paragraph 128-20(1)(c) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1997 section 960-100

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. | Detailed Reasoning - Questions: 1, 2 and 3 | Summary: CGT event E5 in section 104-75 applies when Trust A vests and the trustee of Trust B becomes absolutely entitled to the Shares as against the trustee of Trust A for the purposes of the CGT provisions. However, the Commissioner will apply the principles set out in Division 128 and allow the trustee of Trust A to disregard the CGT gain or loss that arises, subject to the trustee of Trust B calculating the cost base and reduced cost base of the Shares in the same way as it would have been if the Shares had passed to the trustee of Trust B from the deceased's legal person representative. | Detailed Reasoning - CGT event giving rise to a capital gain or loss: Section 102-20 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset. Shares in a company are CGT assets (subsection 100-25(2) and subsection 108-5(2)). A CGT event occurs at the time specified for that particular CGT event in Part 3-1. The Table in section 104-5 sets out a summary of the CGT events. Section 102-25 of the ITAA 1997 provides that where more than one event can happen, the one you use is the one that is most specific to your situation. | Detailed Reasoning - CGT event E5: CGT event E5 in section 104-75 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. The time of the event is when the beneficiary becomes absolutely entitled to the asset. The trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. The beneficiary makes 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. A capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure (subsection 104-75(6)). Further, TR 2018/6 confirms that on a trust's vesting date, the interests in the property of the trust become vested in interest and possession Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) provides the Commissioner's view on what is meant by absolute entitlement. The main CGT provisions to which the concept of absolute entitlement is relevant apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability): see section 106-50 and CGT event E5 in section 104-75 (paragraph 8 of TR 2004/D25). The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5, neither is the CGT asset to which the relevant provisions refer (paragraph 9 of TR 2004/D25). The core principle underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries). Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction. | Detailed Reasoning - Division 128: Division 128 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or passes to a beneficiary in a deceased estate. Under section 128-10, when a person dies, any capital gain or loss from a CGT event that results from a CGT asset the person owned just before dying is disregarded. Relevantly, LPR is defined in subsection 995-1(1) to mean an executor or administrator of an estate of an individual who has died. | Detailed Reasoning - Legal personal representative or trust: In Whitby and Secretary, Department of Social Services (Social services second review) [2019] AATA 246 at [45-54]. Dr I Alexander, Member explains the difference between a testamentary trust and a deceased estate: 45. A testamentary trust is a trust established by will, or in some circumstances by law. 33 46. The estate of a deceased person is the 'entire complex of the testator's rights and liabilities' and upon death the deceased estate vests in the deceased person's legal representative, that is, the executor. 34 47. The duties of the executor are to carry out the administration of the deceased estate. This involves calling in all assets of the deceased, paying all of the deceased's liabilities, paying all specific legacies, ascertaining the net estate for distribution and being ready to transfer the assets either to those entitled to them absolutely or to trustees. Before these duties are carried out, the estate is to be wholly or partly un-administered. 35 48. Where a testator declares that the property in their estate is to be a trust property in a testamentary trust, that property actually becomes trust property in the testamentary trust 'only when that property has been administered' by the executor. At that point, the property ceases to be the property in the deceased estate, and the executor holds the property as trustee. The property becomes trust property, and 'is available to be transferred to the trustee of the testamentary trust'. 36 49. It is useful to emphasise that the roles of trustee of a testamentary trust and executor of a deceased estate are significantly different. 50. If the executor of the deceased estate is also to act as the trustee of a testamentary trust, their role will change into a trusteeship when 'that part of the deceased estate that is the subject of the testamentary trust is fully administered and the assets become the subject of the testamentary trust'. 37 51. The role of a trustee is to hold the trust property, carry out the terms of the trust and deal with beneficiaries' propriety interests. The role of an executor is to preserve the deceased assets, pay the deceased debts and distribute the estate. 38 52. Both trustee and executor hold property and both owe fiduciary obligations. A significant difference is that, in the case of a trust, a beneficiary has an equitable interest in the trust property, even if it is 'not an ownership interest'. 39 However, for a deceased estate during the period of administration, no beneficiary 'has an equitable proprietary interest in any of the estate property'. 40 53. The interest of the beneficiaries is to require the executor to properly administer the estate. Although the executor is often referred to as a trustee, the deceased estate is not actually a trust because no person, other than the executor, has a proprietary interest in the estate's property. 41 54. Clearly the purpose of a testamentary trust is to establish a trust by a will in which assets can be placed and managed by a trustee for a nominated beneficiary. Section 995-1 defines an 'entity' to have the meaning in section 960-100: • (a) an individual; • (b) a body corporate; • (c) a body politic; • (d) a partnership; • (e) any other incorporated association or body of persons; • (f) a trust; • (g) a superannuation fund; • (h) an approved deposit fund. Consequently, the trustee of a trust is the legal (and for CGT purposes, the relevant) owner of the assets. The term 'trust' is not defined in the taxation legislation. The Commissioner, in Taxation Determination TD 2019/14 Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? provides the following explanation: 30. A trust has been described as: (a) 'An obligation enforceable in equity which rests on a person (the trustee) as the owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons...'. 8 [Ford and Lee Principles of the Law of Trusts at [1.010]]. (b) 'A relation between the trustee and beneficiary in respect of certain property... which arises when the owner of a legal or equitable interest in property is bound by an obligation recognised by and enforced in equity to hold that interest for the benefit of others'. 9 [Jacobs Law of Trusts (8th ed at [1-01])] 31. In DKLR Holding Co (No 2) Pty Ltd v. Commissioner of Stamp Duties 10 [[1980] 1 NSWLR 510 at 518-519], Hope JA described the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another. Hope JA emphasised that both elements were necessary for the existence of a trust: a personal obligation not annexed to property is insufficient to constitute a trust and, conversely, a right annexed to property but without any concomitant personal obligation is likewise insufficient. 32. Each description highlights the dual character of a trust, comprising both personal obligations of a trustee and concomitant rights of the beneficiaries annexed to the trust property. In order to 'create' a trust there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property. Section 128-15 states: (1) This section sets out what happens if a CGT asset you owned just before dying: (a) devolves to your legal personal representative; or (b) passes to a beneficiary in your estate. (2) The legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died. (3) Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded. The meaning of an asset 'passing to a beneficiary' is provided by section 128-20: (1) 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. (2) 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. Paragraph 128-20(1)(c) states that an asset passes to a beneficiary if the beneficiary becomes the owner of the asset because it is 'appropriated' to the beneficiary. The term 'appropriated' is not defined in the tax laws. The concept was considered in Yule v Irwin & Ors (No. 2) [2016] SASC 178 where the Court observed: The power of appropriation applies to any form of property. An executor has absolute dominion over the estate of a deceased for the purposes of distribution. ... 168. There are some basic rules concerning the exercise of a power of appropriation. At common law an executor cannot force a beneficiary to accept a particular asset in partial satisfaction of the share of the residuary estate. Essential to an appropriation is the beneficiary's consent to the receipt of a particular asset in lieu of a monetary sum to which the beneficiary is entitled. However, an appropriation in favour of one beneficiary, even if that beneficiary is themself one of the personal representatives, can be effected without requiring the consent of and notwithstanding the objection by any other beneficiary. ... It does not matter whether the asset is transferred directly to the beneficiary or is transferred to the beneficiary by your legal personal representative. In instances where assets are not passing from the legal personal representative of the deceased to the beneficiary of the will, but from the trustee of a testamentary trust to the beneficiary of the trust, Division 128 of the ITAA 1997 does not have application. However, Practice Statement Law Administration PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust (PSLA 2003/12) confirms the Commissioner's longstanding administrative practice of treating the trustee of a testamentary trust (being a trust created under a will or by the operation of statute, such as intestacy laws) in the same way as a legal personal representative for the purposes of Division 128, in particular subsection 128-15(3): Broadly stated, the ATO's practice is not to recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the LPR or testamentary trustee to a third party of CGT event K3 applies). ... The 'Commissioner's general administrative practice' is not defined in the Income Tax Assessment Acts: guidance is provided by the Explanatory Memorandum to Tax Laws Amendment (Improvements to Self Assessment) Bill (No 2) 2005 (EM) and Taxation Determination TD 2011/19 Tax administration: what is a general administrative practice for the purposes of protection from administrative penalties and interest charges? The EM explains a general administrative practice is usually adopted for the efficient administration of the tax system documented in various ways including a Law Administration Practice Statement: 3.130 General administrative practice will usually be established by the ATO having communicated consistently to a wide range of taxpayers on a particular issue. A general administrative practice is usually adopted for the efficient administration of the taxation system and will often be documented in a Law Administration Practice Statement, General Administration Law Administration Practice Statement, an ATO policy document (eg, the ATO Receivables Policy), or other precedential material (such as an ATO Interpretive Decision). An example is Law Administration Practice Statement PS LA 2003/8 which sets out the rules developed to lessen the cost of accounting for low cost assets for taxpayers carrying on a business. Where a draft public ruling represents the Commissioner's only public statement on an issue, the draft ruling will usually represent the Commissioner's general administrative practice. | Detailed Reasoning - Interaction between Division 128 and section 104-85: The Commissioner's view on the application of the Division 128 exception in section 104-85 is set out at paragraph 207 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests, which explains that the phrase a '... trust to which Division 128 applies' is in relation to the administration of a deceased estate only and does not apply to a testamentary trust that arises after administration. | Detailed Reasoning - Application to your circumstances: In this case, upon Trust A vesting the trustee of Trust B's interest in Trust A's estate, the Shares, vested in possession, which could properly be described as absolute and unconditional. As a result, there is a change of ownership of the Shares for CGT purposes. On the date Trust A's trustee, pursuant to clause x of the Trust A deed, exercises the discretion to vest the trust, the trust will vest and the trustee of Trust B will have a vested and indefeasible interest in the assets described in Trust A's Deed as Component One (1), the Shares. The trustee of Trust B will be absolutely entitled, as against the trustee, to the Shares (being CGT assets) of Trust A, and the trustee of Trust A will transfer those assets to the trustee of Trust B. Therefore, in the case of the trustee of Trust A, CGT event E5 will happen on the date of vesting and the trustee of Trust A will make a capital gain or loss at that time. In the case of the beneficiary, the trustee of Trust B will make a capital gain or loss from CGT event E5 happening; however, the gain or loss will be disregarded as the beneficiary acquired the CGT asset that is the interest for no expenditure. In this case the asset does not pass from the Legal Personal Representative who is administrating the Deceased's estate to a beneficiary consequently Division 128 does not apply. Trust A was established in accordance with the terms of the Deceased's Will (i.e., a 'testamentary trust'), all assets of the deceased estate were transferred to the trustee of Trust A at completion of administration of the Deceased's estate. Consequently, when Trust A vests and the assets are transferred to the trustee of Trust B, it is necessary to consider the Commissioner's general administrative practice as stated in PS LA 2003/12 to determine whether the trustees can disregard any capital gain arising from the transfer of the assets to the beneficiaries similar to the provisions of under section 128-15. That is, whether the trustees of the testamentary trusts are to be treated in the same way as a legal personal representative under Division 128. Relevantly, the trust deed of Trust A, clause x, prescribes that upon vesting the 'Component one' assets (being the only assets that remain of those owned by the Deceased just before they died) are to pass to a trust created for the specific purpose of holding those assets, being Trust B. Consistent with PS LA 2003/12, Trust A is a testamentary trust and the Commissioner will apply the principles set out in Division 128 to the trustee of Trust A when the CGT assets, the Shares, are transferred to the trustee of Trust B in accordance with the terms of the deed of the Testamentary Trust; Trust A. Therefore whilst CGT event E5 applies when Trust A vests and the trustee of Trust B becomes absolutely entitled to those Shares as against the trustee of Trust A for the purposes of the CGT provisions, the Commissioner will apply the principles set out in Division 128 and allow the trustee of Trust A to disregard the CGT gain or loss that arises, subject to the trustee of Trust B calculating the cost base and reduced cost base of the Shares in the same way as it would have been if the Shares had passed to the trustee of Trust B from the deceased's legal person representative.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar .