Edited version of private advice

Authorisation Number: 1052083309662

Date of advice: 13 April 2023

Ruling

Subject: CGT - deceased estate

Issue 1

CGT issues for the Estate, Beneficiary A and Beneficiary B

Question 1

Is the Legal Personal Representative (LPR) of the Estate taken to have acquired the Property on the date of the Deceased's death under subsection 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are each of the beneficiaries of the Estate absolutely entitled to an ownership interest in the Property under section 106-50 of the ITAA 1997?

Answer

No.

Question 3

Is the first element of the asset's cost base the market value on the day the Deceased died under subsection 128-15(4) of the ITAA 1997?

Answer

Yes.

Question 4

Did Beneficiary A's XX% ownership interest in the Property acquired under the original terms of the Deceased's will pass to them in accordance with section 128-20(1)(a) of the ITAA 1997?

Answer

Yes.

Question 5

Did Beneficiary A's XX% ownership interest in the Property acquired under the deed of family arrangement pass to them in accordance with section 128-20(1)(d) of the ITAA 1997?

Answer

Yes.

Question 6

Did Beneficiary B's XX% ownership interest in the Property acquired under the original terms of the Deceased's will pass to them in accordance with section 128-20(1)(a) of the ITAA 1997?

Answer

Yes.

Question 7

Did Beneficiary B's XX% ownership interest in the Property acquired under the deed of family arrangement pass to them in accordance with section 128-20(1)(d) of the ITAA 1997?

Answer

No.

Question 8

Is any capital gain or loss made by the LPR on the transfer of the XX% ownership interest in the Property to Beneficiary A disregarded under 128-15(3) of the ITAA 1997?

Answer

Yes.

Question 9

Is any capital gain or loss made by the LPR on the transfer of the XX% ownership interest in the Property to Beneficiary B under the original terms of the will disregarded under 128-15(3) of the ITAA 1997?

Answer

Yes.

Question 10

Is any capital gain or loss made by the LPR on the transfer of the XX% ownership interest in the Property to Beneficiary B under the deed of family arrangement disregarded under 128-15(3) of the ITAA 1997?

Answer

No.

Question 11

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for the LPR to dispose of the ownership interest in the Property and disregard the capital gain or capital loss made on the disposal?

Answer

Yes.

Question 12

Can the LPR treat the payment made by Beneficiary B to each of Beneficiary C and Beneficiary D as being made by the LPR under section 103-10 of the ITAA 1997?

Answer

Yes.

Issue 2

CGT issues for Beneficiary C

Question 13

Did CGT event A1 happen when Beneficiary C disposed of their trust interest in the Estate?

Answer

No.

Question 14

Is Beneficiary C a presently entitled beneficiary of the Estate in respect to the payment they received under the deed of family arrangement?

Answer

No.

Issue 3

CGT issues for Beneficiary D

Question 15

Did CGT event A1 happen when Beneficiary D disposed of their trust interest in the Estate?

Answer

No.

Question 16

Is Beneficiary D a presently entitled beneficiary of the Estate in respect of the payment they received under the deed of family arrangement?

Answer

No.

Issue 4

CGT issues for Beneficiary E

Question 17

Did any CGT event happen when Beneficiary E disclaimed their interest in the property of the Estate?

Answer

No.

This ruling applies for the following period:

Year ended XX/XX/20XX

The scheme commenced on:

XX/XX/20XX

Relevant facts and circumstances

The Deceased passed away on XX/XX/20XX leaving a Will (the Will).

As at the date of death, the Deceased was the sole owner of the Property. The Property had been the main residence of the Deceased from the date of acquisition until the date of death.

The Will appointed executors (the Executors) of the estate (the Estate).

The Executors encountered delays in obtaining Probate due to the complexity of the Estate and the fact that multiple parties were involved. The Estate also encountered delays due to conflict between the Executors which including an application by one of the Executors to remove the second Executor from their role.

Probate was granted to the Executors more than 2 years after the date of death.

Pursuant to the terms of the Will, the Property was to be divided among five beneficiaries.

Following the death of the Deceased, the Property was treated as the main residence of Beneficiary A, Beneficiary B and Beneficiary C.

Given that Beneficiary A and Beneficiary B had looked after the Deceased until she died, it was decided by the Beneficiaries that it was appropriate for the Property to be given to Beneficiary A and Beneficiary B rather than proceed with the division of assets outlined in the Will.

On XX/XX/20XX, the Beneficiaries executed a deed of family arrangement which stipulated:

•         The Estate will transfer the Property to Beneficiary A and Beneficiary B as tenants in common in equal shares.

•         In consideration for the transfer to Beneficiary A and Beneficiary B, Beneficiary B will pay an amount equal to XX% of the market value of the Property to each of Beneficiary C and Beneficiary D.

•         The Property transfer and the payments to be made by Beneficiary B will happen contemporaneously.

•         Beneficiary E will have no interest in the Property.

•         Beneficiary A and Beneficiary B will be liable for and indemnify the Estate for any duty or tax required to be paid as a consequence of the transfer or in connection to the Property generally.

The Property transfer to Beneficiary A and Beneficiary B occurred more than 4 years after the date of death.

The cash payments from Beneficiary B to Beneficiary C and Beneficiary D will be made shortly and prior to the administration of the estate being completed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Reasons for decision

Issue 1 - CGT issues for the Estate, Beneficiary A and Beneficiary B

Question 1

Subsection 128-15(2) of the ITAA 1997 provides that the LPR is taken to have acquired the Property on the day the deceased died.

Question 2

Section 106-50 of the ITAA 1997 only applies where a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) provides the Commissioner's view on what is meant by absolute entitlement.

The core principle underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion.

Paragraph 23 TR 2004/D25 states if there is more than one beneficiary with interests in a trust asset, it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction.

Paragraph 54 of TR 2004/D25 adds that the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it. The same goes for a single asset that is property.

Further, paragraph 72 of TR 2004/D25 states that a beneficiary of a deceased estate does not have any interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until administration of the estate is complete.

In this case, as there are multiple beneficiaries of the Estate, none of the beneficiaries can be absolutely entitled to an ownership interest in the Property.

Question 3

Subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base of the CGT asset in the hands of the LPR. The first element of the asset's cost base is the market value of the property on the day the deceased died.

Question 4

Division 128 of the 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.

Under subsection 128-20(1) of the ITAA 1997, an asset passes to a beneficiary of a deceased 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.

Beneficiary A acquired a XX% ownership interest in the Property pursuant to the Will, and therefore the requirements of paragraph 128-20(1)(a) of the ITAA 1997 are satisfied.

Question 5

Beneficiary A acquired an additional XX% ownership interest in the Property through the deed of family arrangement. The deed of family arrangement was entered into to settle a claim to participate in the distribution of the deceased estate and the consideration given for the transfer was only the waiver of a claim to a CGT asset within the estate.

Therefore, the requirements of paragraph 128-20(1)(d) of the ITAA 1997 are satisfied and the ownership interest in the Property passed to Beneficiary A as a beneficiary in the Estate.

Question 6

As explained at Question 4, Beneficiary B acquired a XX% ownership interest in the Property under the Will, and therefore the requirements of paragraph 128-20(1)(a) of the ITAA 1997 are satisfied.

Question 7

Beneficiary B acquired an additional XX% ownership interest in the Property through the deed of family arrangement and paid an amount equal to XX% of the market value of the Property to each of Beneficiary C and Beneficiary D.

As mentioned above, subsection 128-20(1) of the ITAA 1997 provides that an asset may pass to a beneficiary in a deceased estate under a deed of arrangement if:

      i.        the beneficiary entered into the deed to settle a claim to participate in the distribution of the 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, it is evident that the consideration given by Beneficiary B for the transfer was beyond the variation or waiver of a claim to a CGT asset within the estate. Accordingly, the requirements of paragraph 128-20(1)(d) of the ITAA 1997 are not satisfied and the ownership interest in the Property did not pass to Beneficiary B as a beneficiary in the deceased estate.

Question 8

The XX% ownership interest in the Estate asset (being the Property) passed to a Beneficiary A for the purposes of Division 128 as explained at Questions 4 and 5.

Therefore, any capital gain or capital loss made by the LPR can be disregarded under subsection 128-15(3) of the ITAA 1997.

Question 9

The XX% ownership interest in the Estate asset (being the Property) passed to a Beneficiary B for the purposes of Division 128.

Therefore, any capital gain or capital loss made by the LPR can be disregarded under subsection 128-15(3) of the ITAA 1997.

Question 10

Under subsection 128-15(3) of the ITAA 1997, any capital gain or capital loss that the legal personal representative makes if an asset passes to a beneficiary is disregarded.

However, as explained at Question 7, the XX% ownership interest in the Estate asset (being the Property) did not pass to Beneficiary B for the purposes of Division 128. Therefore, any capital gain or capital loss made by the LPR cannot be disregarded under subsection 128-15(3) of the ITAA 1997.

Question 11

Section 118-195 of the ITAA provides that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if you are an individual and:

1.    the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate;

2.    the deceased acquired the ownership interest on or after 20 September 1985;

3.    the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income; and

4.    your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.

In this case, the LPR's ownership interest in the Property ended more than 2 years after the deceased's death.

Having considered the Estate's circumstances and the relevant factors, the Commissioner will allow an extension of time for the LPR to dispose of the XX% ownership interest in the Property to Beneficiary B and disregard the capital gain or capital loss made on the disposal.

Question 12

Section 103-10 of the ITAA 1997 states that the CGT provisions apply to you as if you had received money or other property if it has been applied for your benefit or as you direct.

Consequently, in applying section 103-10 to the LPR, it is considered appropriate that the payment from Beneficiary B to each of Beneficiary C and Beneficiary D be taken to have been paid to them as directed by the LPR in finalising the administration of the estate.

Issue 2 - CGT issues for Beneficiary C

Question 13

As mentioned above, a beneficiary of a deceased estate does not have an interest in any asset of the estate until administration of the estate is complete (paragraph 72 of TR 2004/D25). Given that the administration of the estate was not complete prior to the terms of the Deed being effected, Beneficiary C could not be considered to have owned an interest in an asset of the Estate. It follows that Beneficiary C could not have disposed of an interest in an asset of the Estate, being the Property, and therefore no CGT event occurred in relation to Beneficiary C.

Question 14

In this case, Beneficiary C is to receive a payment from Beneficiary B in respect of giving up their prospective interest in the Property under the Will.

As mentioned above, in applying section 103-10 to the LPR, it is considered appropriate that the payment to be made by Beneficiary B to Beneficiary C be taken to have been paid to Beneficiary C as directed by the LPR in finalising the administration of the estate.

As such, the amount will not represent income of the trust estate for the purposes of section 95 of the ITAA 1936 and there will be no amount assessable under section 97 or 98 or the ITAA 1936.

Therefore, Beneficiary C will not be presently entitled to this amount as a beneficiary of the estate

Issue 3 - CGT issues for Beneficiary D

Question 15

For the reasons outlined in the answer to Question 13, Beneficiary D did not own an interest in the Estate as the Estate was not fully administered at the time the Deed was effected, and therefore she could not dispose of an interest (and no CGT event occurred).

Question 16

In this case, Beneficiary D is to receive a payment from Beneficiary B in respect of giving up their prospective interest in the Property under the Will.

As mentioned above, in applying section 103-10 to the LPR, it is considered appropriate that the payment to be made by Beneficiary B to Beneficiary D be taken to have been paid to Beneficiary D as directed by the LPR in finalising the administration of the estate.

As such, the amount will not represent income of the trust estate for the purposes of section 95 of the ITAA 1936 and there will be no amount assessable under section 97 or 98 of the ITAA 1936.

Therefore, Beneficiary D will not be presently entitled to this amount as a beneficiary of the estate.

Issue 4 - CGT issues for Beneficiary E

Question 17

As mentioned above, a beneficiary of a deceased estate does not have an interest in any asset of the estate until administration of the estate is complete.

Further, paragraphs 29 and 30 of TR 2006/14 explain that no CGT event happens if a beneficiary with a trust interest disclaims their interest.

In this case, Beneficiary E agreed to waive his interest in the property of the estate while it was being administered. Therefore, no CGT event happened to Beneficiary E.

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