Private ruling: Deceased estate- capital gains - non-resident beneficiary
Date of advice: 11 April 2017
Published: September 2017
Ruling period: Year ended 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is there capital gains tax payable on the disposal of the principal place of residence? | A1: No. | Q2: Is there capital gains tax payable on the disposal of the shares and managed fund units by the LPR/executor/ trustee? | A2: Yes. CGT event A1 occurred in relation to the shares and managed fund units and the capital gain or loss is accounted for in the trust tax return lodged for the deceased estate. | Q3: Is the calculation of the capital gain or loss for this A1 event, based on the cost base of the shares and managed fund units at the date of death of the deceased? | A3: Yes. | Q4: Can the non-resident beneficiaries and the Trustee disregard the capital gain that is made as a result of a CGT event C2 happening with regards to ending of the beneficiaries' interest in the trust? | A4: Yes | Q5: Is there any withholding tax payable on the above capital gain and if so, what are the rates of tax payable? | A5: No. The tax liability on this capital gain is payable by the trustee in his own right or on behalf of the non-resident beneficiaries, depending on present entitlement. | Q6: Is the trustee required to withhold tax from the income from the managed funds post date of death? | A6: Yes, if the non-resident beneficiaries are presently entitled to the income and depending on the type of the income.

Relevant facts and circumstances: The assets of the deceased estate include: ● Principal residence (post 1985) ● Shares (post 1985) ● Units in managed funds (post 1985). All of the deceased estate assets were liquidated by part way through the relevant income year and the proceeds are to be sent to non-resident beneficiaries. You have provided a copy of the Will and a copy of the Codicil to the Will for the deceased estate. Clause X of the Will states: X. After payment of all my enforceable debts funeral testamentary and administration expenses including any State Probate Federal Estate legacy and other duties, I give the residue of my Estate to my Trustee to pay and distribute: (a) XX% to Z, but if they die before me leaving a spouse and children then those children and spouse shall take equally the share which their parent or spouse would otherwise have taken; (b) XX% to Y, but if they die before them then to Z. Probate for the Will has been granted by the relevant Court. The two non-resident beneficiaries have been identified. Part of the estate has already been distributed to these beneficiaries in the XX/XX proportions stipulated in the Will. An amount has been retained to meet any tax obligations. The deceased did not have a spouse or any children.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 272-5 | Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F | Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F | Income Tax Assessment Act 1997 Subsection 104-10 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 104-215 | Income Tax Assessment Act 1997 Section 128-10 | Income Tax Assessment Act 1997 Section 128-20 | Income Tax Assessment Act 1997 Section 855-10 | Income Tax Assessment Act 1997 Section 855-15 | Income Tax Assessment Act 1997 Section 855-40 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: All the legislative references that follow are to the Income Tax Assessment Act 1997 unless otherwise indicated. | Detailed Reasoning - Disposal of main residence: The executor will be entitled to a full main residence exemption where the: ● deceased acquired the dwelling after 20 September 1985 and it was their main residence just prior to their death; and ● you disposed of the ownership interest within 2 years of the deceased's date of death ( note the Commissioner may extend the two year period). Based on the information you have provided the full main residence exemption will apply and no tax is payable on any capital gain made on the disposal of the main residence of the deceased. | Detailed Reasoning - Division 128 - Effect of death: A deceased estate is treated as a trust consisting of 3 elements: ● the executor (legal personal representative - LPR) as the trustee; ● the assets owned by the individual before that person died are the trust property; and ● the persons named in the Will as the beneficiaries. Depending on the terms of the Will, when a person dies there are two things that may happen to the assets that they own just before they died (see section 128-15): ● The assets may devolve to the legal personal representative; or ● The assets may pass to the beneficiaries of the deceased estate. The Will has legal effect once probate is granted by the Supreme Court in the relevant State of Australia. In the present case, the terms of the Will allow the assets to devolve to the executor of the deceased estate. (After payment of all my enforceable debts funeral testamentary and administration expenses any State Probate Federal Estate legacy and other duties, I give the residue of my Estate to my Trustee to pay and distribute:) As such the executor is taken to have acquired the assets on the day the person died based on subsection 128-15(2). In practical terms, it means there is transfer of ownership of the assets from the deceased individual to the executor (potentially that's CGT event A1 in section 104-10). Any capital gain/loss made from that transfer will be disregarded under section 128-10. An exception to this rule is CGT event K3 in section 104-215. CGT event K3 does not apply in this case because there is no passing of asset to the non-resident beneficiary within the meaning of section 128-20. The assets have passed to the LPR/executor/trustee and he has disposed of these assets. The beneficiaries were never absolutely entitled to these assets, therefore they never passed to the beneficiaries. Cost base of the assets in the hands of the LPR/executor/trustee as provided for in section 128-15 The facts indicate that the relevant assets are post-CGT which means the deceased individual acquired those assets on or after 20/9/1985. As such the following rules apply: ● Item 1 in the table of subsection 128-15(4) - for the shares in listed companies and units in managed funds (the cost base of the assets on the day the deceased died i.e. the deceased's cost base) ● Item 3 in the table of subsection 128-15(4) - for the house used as main residence of the individual before he died and the house wasn't used for the purpose of producing assessable income (the market value of the dwelling on the day the deceased died). Disposal of assets by the LPR/executor/trustee - CGT event A1 in section 104-10 When the LPR/executor/trustee disposes of these assets there will be a CGT event A1 in the year that the asset is disposed of and this may lead to a capital gain or loss that will form part of the trust income for that year. | Detailed Reasoning - Division 6 - Trust income: Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the basic income tax treatment of the net income of the trust estate. Generally: ● Division 6 has the result of assessing beneficiaries on a share of the net income of the trust estate based on their present entitlement to a share of the income of the trust estate; and ● Division 6 has the result of assessing the trustee directly on any residual net income; and ● As a collection mechanism, Division 6 has the result of assessing the trustee in respect of some beneficiaries, such as non-residents or those under a legal disability. Broadly if no beneficiary is presently entitled, the trustee will be assessed with the trust net income. The trustee is generally taxed at the highest marginal tax rate that applies to individuals. However for some types of trusts such as deceased estates, the trustee is taxed at either individual or modified individual rates. The Commissioner's view on present entitlement in a deceased estate is set out in IT 2622. You need to apply these rules to the different types of income to see whether the beneficiaries are presently entitled to the income or it is assessable to the trustee or the amounts should be apportioned. | Detailed Reasoning - Division 855 - Capital gains and foreign residents: The rules in Division 855 ensure that interests in an entity remain subject to Australia's CGT laws if the entity's underlying value is principally derived from Australian real property. The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a fixed trust, by foreign residents of CGT assets that are not taxable Australian property. Section 855-40 is not applicable to the CGT A1 event that occurs when the trustee disposes of the CGT assets held in the trust. The non-resident beneficiaries never had ownership of these assets. They were never absolutely entitled to these assets. They did have a vested and indefeasible interest in the capital and income of the trust, but this does not mean they were absolutely entitled to the assets of the trust (TR 2004/D25). Section 855-40 is relevant when the interest of non-resident beneficiaries in a fixed trust ends. This happens when the trustee makes a payment in satisfaction of that interest, when the trustee pays out the total entitlement of each beneficiary. Because Division 128 applies to the trust estate in this case, none of the trust events in sections 104-80, 104-85 and 104-90 can apply (CGT events E6, E7 and E8). Where none of the trust events happen, CGT event C2 in section 104-25 will apply. Barring the exemption in section 855-40, the non-resident beneficiary maybe up for a significant capital gain from CGT event C2 because they would have a zero cost base for their interest in the trust. As such the whole amount of distribution from the trust estate will be their capital gain, but it will be disregarded. The beneficiaries' interest in the trust estate is a CGT asset for the purposes of section 108-5 (see paragraph b). As explained above when that asset ends, CGT event C2 will apply. The rules in Division 855 only become relevant in this case to the CGT event C2, because the residual beneficiaries are foreign residents. It does not apply to the capital gain derived on the disposal of the CGT assets by the trustee. Therefore the non-resident beneficiaries and the Trustee can disregard the capital gain that is made as a result of the CGT event C2 happening with regards to ending the beneficiaries' interest in the trust. | Detailed Reasoning - Income of the managed fund post date of death: You have to determine if and what amount of income the non-resident beneficiaries are presently entitled to in each of the years as per IT 2622. If the non-residents are presently entitled to some or all of the income derived in the trust, the non-residents tax liability will be dependent on the type of income that is distributed from the trust. Interest income will be subject to non-resident withholding tax at a rate of 10% and this will be a final tax on these amounts. This is to be remitted by the trustee. Details of this process are outlined on the ATO website. Fully franked dividends are not subject to withholding tax. Partially franked or unfranked dividends are subject to non-resident withholding tax at a rate of 15%. This is to be remitted by the trustee. The ATO website gives details of the process of how these amounts are to be remitted. Any capital gains tax distributions to the non-resident beneficiaries will be assessable to the trustee on behalf of the non-resident beneficiaries under subsection 98(3) of the ITAA 1936, with non-resident tax rates applicable.