Private ruling: Assets passing through deceased estates
Date of advice: 30 June 2021
Published: September 2021
Ruling period: 30 June 20XX | 30 June 20XX | 30 June 20XX
Date scheme commenced: 1 June 20XX

Ruling: Q1: Will the appropriation to the beneficiaries under the proposed transaction satisfy paragraph 128-20(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) and mean the assets pass to the beneficiaries for the purpose of section 128-15 of the ITAA 1997? | A1: Yes | Q2: If the answer to question 1 is yes, will the first element of the cost base be apportioned across the beneficiaries in proportion to the Relevant Proportions of the asset they would own? | A2: Yes | Q3: If the answer to question 1 is yes, will expenditure of the Executors that would have been included in the cost base be apportioned across the beneficiaries in proportion to the relevant proportions of the asset they would own? | A3: Yes

Relevant facts and circumstances: The deceased was an old age pensioner at their death and had minimal sources of other income at that time. Child A and Child B are the two children of the deceased who died in 20XX. Child A and Child B are also the executors of the deceased estate The deceased's last will and testament was made pre 20 September 1985 Probate of the Will of the Deceased was granted by the Supreme Court of State A to Child A and Child B The only remaining asset of the estate of the Deceased is a large parcel of land. At the time of the Deceased's death, it was the Deceased's main residence and was not being used by the deceased for the purpose of producing any assessable income. The property was purchased by the Deceased many years before 1985. After obtaining a Grant of Probate of the Will, the Executors lodged a transmission Application transferring the Property into the names of the Executors. The Will contains no express power of appropriation. The Property is diagonally divided by a strip of land originally delineated as "water main". Historically, the Property, together with the water main land, were operated as a market garden in the mid 1960's. There is a residence and shedding that was developed on the road frontage which still remains. It also encroaches over the water main land. Child A has three children. Child B has two children. In your application, you stated that the Will was prepared many years ago and its terms are impractical. The executors want to divide the property differently to the Will. The respective beneficiaries will be simply consenting to the appropriation based on their respective appropriate entitlements and nothing more. The executors have taken planning advice and understand a division of the Property into the three lots 101, 102 and 103 shown on the plan is achievable. The executors propose to take valuation and actuarial advice to ensure that between them Child A, Child B and Child B's children receive appropriate interests in the respective blocks reflecting their respective interests in the Property under the Will. This is likely to include reducing the area of the proposed lots 102 and 103 and the interest that Child B's children take as tenants in common in lot 101. In effect the interests in the Property appropriated to them will reflect their respective interests in the Property under the Will having regard to current values and actuarial interests as at the valuation date and the appropriation effected very shortly thereafter on that basis (each receiving their Relevant Proportion and collectively each of their Relevant Proportion being referred to as Relevant Proportions). Nothing has happened to the property since the death of the deceased in 20XX. The property was occupied by a family member for a couple of years after the death of the deceased but has remained vacant since that time. The administration of the estate has not gone beyond paying the debts of the deceased because of the complexities and practical difficulties created by the terms of the Will and the presence of the water main. Accordingly, the executors regard the administration of the estate of the deceased as incomplete. Assumption The value of the interest received by each beneficiary under the proposed transaction will be the same as the value of the interest they had under the original will.

Relevant legislative provisions: 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 subsection 128-20(1) | Income Tax Assessment Act 1997 paragraph 128-20(1)(c) | Income Tax Assessment Act 1997 subsection 128-20(2)

Reasons for decision: Summary: The interests in the property will pass to the beneficiaries for the purpose of section 128-15 of the Income Tax Assessment Act 1997. The cost base of the property will be apportioned across the beneficiaries in line with their respective interests after the proposed transaction is undertaken. Similarly, relevant expenditure incurred by the executors can be apportioned across the beneficiaries in line with their respective interests after the proposed transaction is undertaken. | Detailed Reasoning - Detailed reasoning: Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative or to a beneficiary in a deceased estate. Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary of a deceased estate is disregarded. Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset: (a) under a will, or that will as varied by a court order, or (b) by operation of an intestacy law, or such law as varied by a court order, or (c) because it is appropriated to the beneficiary by the deceased 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 the deceased 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 the estate. 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. The Explanatory Memorandum to the Tax Law Improvement Bill (No.1) that introduced this provision stated that: "the rewritten law makes it clear that an asset can 'pass' to a beneficiary where, for example, it is not specifically bequeathed to them. This concessions change is consistent with administrative practice". The foundations of this change were expressed in IT 2664 Income tax: capital gains and losses: the transfer of assets to beneficiaries in deceased estates (withdrawn). That ruling concerned the previous provisions and whether assets were passing to beneficiaries under a will. It was found the words under the will do not mean "in strict conformity with the will", "expressly by force of the will" or "by virtue of the will". Rather those words have a meaning akin to "in pursuance of the will" or "under the authority of the will". It stated at paragraph 24: It also stated that where there is no specific bequest of devise but an executor of a will distributes an asset in specie to a beneficiary in or towards satisfaction of that beneficiary's entitlement in the will (e.g. to a share of the residue) that asset comes into ownership of the person "as a beneficiary under the will". This ruling was withdrawn as the law was made clear by the addition of provisions in paragraph 128-20(1)(c) and subsection 128-20(2) ITAA 1997 in the rewritten provisions. Therefore, the Commissioner has long recognised that assets can pass to beneficiaries when they are not specifically bequeathed to them in a will and instead have assets appropriated to them in satisfaction of a share in the estate. There is no definition of appropriated contained in the Income Tax Acts. Therefore, it takes its ordinary meaning. In the context of trusts, it is where trustees transfer trust property to a beneficiary. A trustee's power to appropriate is usually found in the Trust deed or will. If they do not have an express power in the Trust Deed or will, then various State Statutes will normally contain a power of appropriation. In this case, the state of State A does not include a statutory power of appropriation. The will also does not contain a power of appropriation. The common law recognises a general power of appropriation. In Yule v Irwin No 2 [2016] SASC 178 at paragraph 162, Justice Nicholson stated that the power residing in an executor or executors to appropriate assets in satisfaction or part satisfaction of the residuary beneficiaries' entitlement to a share of residue derives from any express powers given in the will and the common law. Further at paragraph 166, Justice Nicholson states that an executor has extensive powers at common law to appropriate assets towards the entitlement of a beneficiary. The power of appropriation can be employed in lieu of a distribution to a beneficiary of an equivalent sum of money to which they might otherwise be entitled in accordance with the terms of the will whether by way of a specific legacy or by way of a share in residue. At paragraph 168 the decision analyses the 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. At paragraph 174 the decision states that any appropriation must be made fairly and, as such, the executors must reach a view about the valuation of the assets of the estate at a time near to the date of the appropriation. In Williams on Wills , it is explained thus. Valuation for appropriation . Appropriation must be fairly made at a valuation taken at the date of the appropriation, and an executor or trustee who makes an appropriation which is not fair according to such valuation of the appropriated property is guilty of a breach of trust.... Not only must the appropriated property be valued, but, where the person to whom property is appropriated is not entitled to a specific sum of money, the other property of the estate must be valued at the same time to ensure he is receiving a proper share and receiving no more than he is entitled to. Any appropriation of an asset towards the entitlement of a beneficiary is made at the value of the appropriated asset as at the date of appropriation rather than as at the date of the deceased's death. You will be taken to have a power of appropriation that allows you to transfer trust property of the deceased. In this instance, the assumption is that value of the property the beneficiary's receive will be in accordance with the value of the interests under the original Will. They are not being passed to the beneficiaries under a power of sale. Therefore, the assets will be taken to pass to beneficiaries for the purpose of section 128-15 of the ITAA 1997 and any resultant capital gain or loss made by the legal personal representative is disregarded. | Detailed Reasoning - Cost base: The cost base considerations for the beneficiaries are found in section 128-15 of the ITAA 1997. Specifically, reference is made to the table found in subsection 128-15(4) ITAA 1997: Modifications to cost base and reduced cost base | Detailed Reasoning - Item: For this kind of CGT asset : The first element of the asset's cost base is: The first element of the asset's reduced cost base is: 1 One you acquired on or after 20 September 1985, except one covered by item 2, 3, 3A or 3B the cost base of the asset on the day you died the reduced cost base of the asset on the day you died 2 One that was trading stock in your hands just before you died the amount worked out under section 70- 105 the amount worked out undersection 70- 105 3 A dwelling that was your main residence just before you died if: (a) the dwelling was not then being used for the purpose of producing assessable income; and (b) you were not then an excluded foreign resident the market value of the dwelling on the day you died the market value of the * dwelling on the day you died 3A If you were a foreign resident just before you died--an asset that was not taxable Australian property just before you died, except one covered by item 2 the market value of the asset on the day you died the market value of the asset on the day you died 3B One that * passes to a trustee of a special disability trust the market value of the asset on the day you died the market value of the asset on the day you died 4 One you acquired before 20 September 1985 the market value of the asset on the day you died the market value of the asset on the day you died The property is an asset that was acquired by the deceased before 20 September 1985 and was being used as the deceased's main residence just before they died. Therefore, the first element of the cost base for the beneficiary will be the market value of the asset on the day the deceased died. In this case, each beneficiary is obtaining a partial share of the property. The market value of the property would be apportioned across the various interests in a reasonable way. Subsection 120-15(5) of the ITAA 1997 states that a beneficiary can include in the cost base or reduced cost base of the asset any expenditure that the legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it. Similar to the apportionment of the first element of the cost base, the relevant expenditure incurred by the legal personal representative can be apportioned between the beneficiaries on a reasonable basis.

This ruling applies for the following period periods :