Private ruling: Capital gains tax - deceased estate - shares - non main resident beneficiary
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Subsection 104-215(3) | Income Tax Assessment Act 1997 Section 855-15 | Income Tax Assessment Act 1997 Section 855-20

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on any capital gain you make and include on your annual income tax return. You make a capital gain or a capital loss if and only if a CGT event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Generally, where a change of ownership occurs because a person dies, and an asset passes from their legal personal representative to a beneficiary, any capital gain or capital loss made on the change of ownership is disregarded. However, any capital gain or capital loss is not disregarded where the beneficiary of an asset acquired by the deceased after 20 September 1985 is a non-resident of Australia for taxation purposes and the asset is not taxable Australian property. | Detailed Reasoning - Passing of the shares: An asset will 'pass' to the beneficiary of a deceased estate when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee. While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, we consider that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes 'passing' dependent upon the acquisition of legal ownership. On the splitting of the estate between the two beneficiaries they became absolutely entitled to their part of the estate. | Detailed Reasoning - Not taxable Australian property: Section 855-15 of the ITAA 1997, states that taxable Australian real property is considered taxable Australian property. Section 855-20 defines taxable Australian real property as real property that is situated in Australia. There are five categories of assets that are taxable Australian property: 1. Taxable Australian real property (directly held) 2. Indirect Australian real property interests (other than category 5) 3. Business assets used in an Australian permanent establishment of a foreign resident 4. Options or rights over assets in categories 1-3 5. Assets where a CGT gain or loss is deferred when an entity ceases to be an Australian resident. An indirect Australian real property interest refers to an interest in an entity, including a foreign entity, where you and your associates hold 10% or more of the entity and the value of your interest is principally attributable to Australian real property. The shares inherited from the deceased by the non-resident do not meet any of the five above categories and therefore are not a 'taxable Australian property' asset. | Detailed Reasoning - CGT event K3: CGT event K3 happens if a CGT asset owned by a person who was an Australian resident for tax purposes just before they died, passes to a beneficiary in their estate who is, when the asset passes, a non resident of Australia for taxation purposes and the asset is not taxable Australian property (in the hands of the non-resident beneficiary) (section 104-215 of the ITAA 1997). Under subsection 104-215(3), CGT event K3 is taken to happen just before the deceased's death. Where CGT event K3 happens, the trustee of the deceased estate will be required to calculate any capital gain or capital loss made on post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died. A capital gain is made if the market value of the asset on the day the deceased died is more than the assets cost base. A capital loss is made if that market value is less than the assets reduced cost base. As the shares are not taxable Australian property (in the hands of the non-resident beneficiary), when the shares are subsequently sold, the non-resident will not be subject to further capital gains tax in Australia on their portion of the shares.

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. | Subject: Capital gains tax - deceased estate - shares - non main resident beneficiary: Is capital gains tax (CGT) event K3 triggered when CGT assets are transferred from a deceased estate to a testamentary trust established pursuant the will, where a primary beneficiary of the testamentary trust is a non- resident for tax purposes? | Relevant facts: You are the executor of an estate. | The estate consists of shares and cash. | You have provided a document, which forms part of and should be read in conjunction with this private ruling: | The following information has been obtained from this document: | A clause of the will provides that a testamentary trust be created for the benefit of the primary beneficiaries. | After a specific bequest, the assets of the deceased are to be split equally between the two beneficiaries. | Clause 14.1 of the will provides that a testamentary trust could be created for the benefit of each of the primary beneficiaries at the request of that beneficiary. | One of the primary beneficiaries is a non resident of Australia for tax purposes.