Private ruling: Life interest in a deceased estate
Date of advice: 12 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is a payment received by the taxpayer from the legal personal representative of the deceased estate under a deed of arrangement required to be included in the assessable income of the taxpayer? | A1: No | Q2: Does entering into a deed of arrangement whereby the taxpayer waives the right to a life interest in the deceased estate result in a CGT event for the purposes of Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: In accordance with the Will of the deceased, the taxpayer has been granted a life interest in the income of the deceased estate. The taxpayer proposes to enter into a Deed of Arrangement whereby they agree to waiver the right to the life interest in the income of the deceased estate and accept a lump sum amount from the deceased estate in full satisfaction of the taxpayer's entitlement to the life interest. The Deed of Arrangement will be entered into prior to the administration of the deceased estate being completed.

Relevant legislative provisions: Section 97 of the ITAA 1936 | Division 104 of the ITAA 1997 | Division 128 of the ITAA 1997 | Section 128-20 of the ITAA 1997

Reasons for decision: Summary: Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) requires that where a beneficiary of a trust estate is presently entitled to a share of the income of the trust estate, that amount shall be included in their assessable income. In this instance, what the taxpayer is receiving is not a share of income of the trust estate to which they are presently entitled, but a capital payment from the corpus of the estate in full satisfaction of a life interest in the estate. For this reason, the payment made in accordance with the deed of arrangement will not be included in assessable income. Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss in respect of a CGT asset. Division 128 more specifically contains provisions relating to the effects of death for capital gains tax purposes. This division broadly provides that where a CGT asset passes to a legal representative or a beneficiary of an estate, any CGT events are disregarded. Section 128-20 explores the concept of when an asset passes to a beneficiary: 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. In this case, the taxpayer will be entering into a deed of arrangement in order to waive any claim to the life interest in the deceased estate for the right to be paid a lump sum amount. The Commissioner's view on capital gains tax consequences of creating or varying life and remainder interests is contained in Taxation Ruling TR 2006/14 . Paragraphs 33 to 37 provide guidance on deed of arrangements to vary terms of a deceased's will: 33. Beneficiaries in a deceased estate who have been granted life and remainder interests may be dissatisfied with the provision that the deceased person made for them under their will. The beneficiaries may enter into a deed of arrangement under which they agree to share the deceased's assets rather than their life and remainder interest. 34. Assets may pass to them as a beneficiary in the estate under paragraph 128-20(1)(d). If this occurs, there will be no consequences for the life and remainder interests as the intended owners of those interests are treated as if they had not been bequeathed them. 35. A deed of arrangement will be effective for the purposes of paragraph 128-20(1)(d) provided that it is entered into: · to settle a claim to participate in the estate; and · any consideration given by the beneficiary consisted only of the variation or waiver of a claim to an asset or assets that formed part of the estate. 36. For the purposes of paragraph 128-20(1)(d) a deed of arrangement must be entered into prior to the administration of the estate being completed unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entertained their application for family provision, or an extension of time in which to make such an application. (Paragraphs 209 to 223 of this Ruling further explain this requirement. Importantly, determining whether a Court would entertain applications such as these depends on the succession laws in each State.) 37. A taxpayer is not required to commence legal proceedings in order to establish, for the purposes of paragraph 128-20(1)(d), that they have a claim to participate in the distribution of the assets of the estate. A claim may be established by a potential beneficiary communicating to the trustee their dissatisfaction with the will. In this situation, the taxpayer will enter into a deed of arrangement to exchange their interest for a lump sum amount, and the deed will be entered into prior to the administration of the estate being completed. Therefore, the requirements specified in TR 2006/14 are met, and there will be no capital gains tax consequences for the taxpayer as a result of entering into a deed of arrangement.