Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 2.18 - Effect of death
Overview
This part covers the rewritten CGT provisions in Division 128 that apply when an individual dies.
Part A summarises these provisions.
Part B explains the changes to the 1936 Act.
Part C identifies provisions that have not been rewritten.
A. Summary of the new law
It contains rules that modify the application of the CGT provisions when an individual dies. [section 128-1]
Exemptions
A capital gain or capital loss made from a CGT asset owned on death is generally disregarded if it arises because of:
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- the death [section 128-10] ; or
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- the passing of the asset from the deceased's legal personal representative to a beneficiary.
[subsection 128-15(3)]
A CGT asset passes to a beneficiary of an estate if the beneficiary acquires it:
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- under the deceased's will;
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- by operation of an intestacy law; or
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- under a deed of arrangement that was made to settle a claim by the beneficiary to participate in the estate.
[section 128-20]
Cost base if asset was a post-CGT asset of the deceased
If the asset was acquired by the deceased on or after 20 September 1985, the assets cost base or reduced cost base in the hands of the legal personal representative or beneficiary is essentially based on its cost base or reduced cost base on the date of death. [subsection 128-15(4)]
Cost base modification if asset was deceased's main residence just before death
If the asset was a dwelling that was the deceased's main residence just before death and was not then being used to produce assessable income, the cost base or reduced cost base is based on its market value on the date of death. [subsection 128-15(4)]
Cost base if asset was a pre-CGT asset of the deceased
If the asset was acquired by the deceased before 20 September 1985, the assets cost base or reduced cost base in the hands of the legal personal representative or the beneficiary is based on its market value on the date of death. [subsection 128-15(4)]
Cost base modification if asset was trading stock of deceased
If the asset was trading stock of the deceased, the cost base or reduced cost is based on the amount worked out under section 70-105. Generally, this is its market value at the time of death. [subsection 128-15(4)]
Cost base modification if K3 happens
If the beneficiary is a:
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- complying superannuation fund;
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- complying approved deposit fund; or
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- pooled superannuation trust
the cost base or reduced cost base of the asset is its market value on the date of death. [section 128-25]
Special rules apply if the beneficiary is:
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- an exempt entity (Division 57 of Schedule 2D of the 1936 Act) ;or
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- a non-resident. [Subdivision 136B]
A sole surviving joint tenant is taken to have acquired the interest of the deceased joint tenant on the date of death. If there are 2 or more surviving joint tenants, they are taken to acquire the deceased's interest in equal shares. [section 128-50]
The cost base and reduced cost base rules for the interest acquired by the survivors are calculated in the same way as for a legal personal representative or beneficiary. That is, they depend on whether the deceased acquired the relevant asset before or after 20 September 1995. [section 128-50]
B. Discussion of changes
Section 128-15 Effect on the legal personal representative or beneficiary
This section exempts a capital gain or loss that arises when an asset passes from a legal personal representative to a beneficiary of a deceased person. It also contains rules that establish the cost base and reduced cost base of the asset in the hands of the legal personal representative or beneficiary.
State expressly that the exemption only applies to assets owned at the date of death.
This clarifies that the exemption does not apply to assets which were acquired by the legal personal representative during administration of the estate and is consistent with the Commissioner's interpretation of the law.
Base the cost base or reduced cost base of an asset that was trading stock of the deceased, in the hands of the legal personal representative or beneficiary on its market value on the date of death.
Under the 1936 Act , the market value of trading stock held by a deceased person is included in assessable income for the period up to the date of death. However, for CGT purposes, the estate acquires the asset with a cost base equal to the deceaseds cost base or indexed cost base. This rule does not operate appropriately in relation to trading stock because any increase in the value of the stock can be assessable as income of the deceased and again as a capital gain when ultimately disposed of by the estate or beneficiary.
The new provision removes this anomaly. However, in unusual cases, the market value of the asset at death may be less than the deceased's cost base but increase in value after death. In such a case, tax may be payable on the resulting gain.
Section 128-20 Meaning of asset passing
This section explains when an asset passes to a beneficiary.
Specify that an asset passes to a beneficiary if the legal personal representative appropriates the asset to satisfy the beneficiary's entitlement under a will or an intestacy law.
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 concessional change is consistent with administrative practice.
Specify that an asset does not pass to a beneficiary if the beneficiary becomes the owner of the asset by exercise of a power of sale by the legal personal representative.
The rewritten law makes it clear that an asset does not pass via the estate to a person who purchases it from the estate, just because that person is also a beneficiary of the estate. This is consistent with the Commissioner's interpretation of the law.
Section 128-25 The beneficiary is a trustee of a superannuation fund etc.
This section contains the modified cost base and reduced cost base rules that apply if CGT event K3 (asset passing to tax-advantaged entity) happens.
Clarify that the CGT cost base modifications for deceased estates do not apply where an asset passes to an exempt entity or a non-resident entity.
There are rules in other provisions that specify that:
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- a non-resident entity that has acquired an Australian asset and later becomes a resident is to account for the asset as if it acquired the asset at its then market value [Subdivision 136-B] ; and
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- an exempt entity that ceases to be exempt similarly carries assets forward at market value (Division 57 of Schedule 2D of the 1936 Act).
The rewrite removes any potential conflict between the deceased estate rules and those other rules.
C. Provisions of the old law that have not been rewritten
Some redundant provisions not included in the rewritten law are summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| paragraph 160J(a) | Asset passing to a legal personal representative | Not necessary |
| subsection 160ZN(2) | Two or more trustees | Not necessary |