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1 Does statutory income arise under the capital gains tax provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the Trustee for the Estate of Person 1 upon transfer of the shares in Company 1 (Company 1) to the beneficiaries?

No. Question Does statutory income arise under the capital gains tax provisions in Part 3-1 of the ITAA 1997 to the Trustee for the Estate of Person 1 upon transfer of the residential property to the beneficiaries? Answer Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX

The Deceased died in March 20XX The Deceased had four Children, Person A, Person B, Person C and Person D Person A, Person B and Person C were jointly appointed as executors under the Deceased's will at clause 3. The assets of the estate at the date of death are as follows: •                     Pre-CGT shares in a private company (The Shares) •                     Property that was the deceased's main residence immediately before death that has been rented out since death; and •                     Cash. The original will divided The Shares into four equal parts; one part to sell and distribute the cash to the testamentary trust, one part to Person A, one part to Person B and one part to Person C. The original will also left the remainder of the estate in four equal parts; one part to the testamentary trust, one part to Person A, one part to Person B and one part to Person C. Approximately two years after the deceased died, the Trustees engaged a lawyer to sign a Deed of Family Arrangement. The Deed of Family Arrangement states the following:

•                     The Public Trustee, on behalf of Person D, has provided notice to the Executors that in its view, Person D has a need for provision from the Estate of the Deceased and indicated an intention to make application for leave to apply out of time for provision from the Estate on behalf of Person D pursuant to its Family Provision Act 1972 . •                     The executors have given notice to each of the Beneficiaries that the Executors intend to appropriate the trust property in or towards satisfaction of their share of the estate of the Deceased in the manner set out in this Deed. The Deed of Family Arrangement also notes that paragraph 30(1)(k) of the Trustees Act 1962 (WA) provides that a trustee may appropriate any part of the property to which any persons is entitled and for that purpose, value the whole or any part of the property in accordance with section 50 of the Act. That appropriation cannot adversely affect any specific gift, and notice is required to be given to all persons who are interested in that appropriation. The agreed appropriation of trust property under the Deed of Family Arrangement is as follows:

•                     The Shares to be divided into 3 equal portions and one portion to be distributed to each of Person A, Person B and Person C. •                     The dwelling to be distributed into three equal undivided shares, one each to Person A, Person B and Person C. •                     A cash payment made to the Testamentary Trust for the benefit of Person D by Person A, Person B and Person C which will equalise the value of the distributions under the will. The Deed of Family Arrangement is subject to and conditional upon the performance of the appropriation of the trust property as listed above. Clause 7 of the Deed of Family Arrangement releases the Executors from all claims, actions, suits, demands, costs, and damages which Person D may have in the future. Assumptions The residential property and The Shares will pass to the beneficiaries as per the Deed of Family Arrangement.

Income Tax Assessment Act 1997 section 118-195 Income Tax Assessment Act 1997 section 118-200 Income Tax Assessment Act 1997 section 128-10 Income Tax Assessment Act 1997 section 128-15 Income Tax Assessment Act 1997 subsection 128-15(2) Income Tax Assessment Act 1997 subsection 128-15(3) Income Tax Assessment Act 1997 subsection 128-15(4) Income Tax Assessment Act 1997 item 4 in the Table in subsection 128-15(4) Income Tax Assessment Act 1997 paragraph 128-20(1)(a) Income Tax Assessment Act 1997 paragraph 128-20(1)(d) Income Tax Assessment Act 1997 section 128-30

Question 1 Does statutory income arise under the capital gains tax provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the Trustee for the Estate upon transfer of The Shares to the beneficiaries? Summary No, as the asset will pass to the beneficiaries under the will at the time they become absolutely entitled as against the trustee. Subsection 128-15(3) of the ITAA 1997 is satisfied and any capital gain or loss the Executor makes when the asset passes to the beneficiaries is disregarded. Detailed reasoning Section 128-10 of the ITAA 1997 states that when you die, a capital gain or loss from a CGT even that results for a CGT asset you owned just before dying is disregarded. All future legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Section 128-15 sets out the rules on what happens if a CGT asset you owned just before dying devolves to your Legal Personal Representative (LPR), for example the executor of a Deceased Estate, or passes to a beneficiary in your estate. Subsection 128-15(2) relevantly states that the LPR is taken to have acquired the asset on the day you died.

Subsection 128-15(3) states that any capital gain or loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded. Subsection 128-15(4) sets out modifications to the cost base and the reduced cost base in the hands of the LPR. Item 4 in the Table in subsection 128-15(4) states that if an asset was acquired by the deceased on or before 20 September 1985, the first element of the asset's cost base is the market value of the asset on the day the deceased died. Section 128-30 of the ITAA 1997 sets out when an asset passes to a beneficiary. Paragraph 128-20(1)(a) states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset under your will, or that will as varied by a court order.

Paragraph 128-20(1)(d) states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of an asset under a deed of arrangement if the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate and 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. Taxation Determination TD 2004/3 Income tax: capital gains: does an asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate? states that an asset will "pass" to the beneficiary for the purpose of section 128-20 when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee. 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

provides the commissioners position on the meaning of absolutely entitled in this context. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. TR 2004/D25 also states that a beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692.

Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics). Application to your circumstances In this case, the deceased died and at that time The Shares devolved to the deceased's LPR being the executor of the Estate. The Executor of The Estate is taken to have acquired the shares on the day the deceased died as per subsection 128-15(2). As subsection 128-15(3) states that any capital gain or loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded, the LPR will not be liable to pay capital gains tax when The Shares pass to the beneficiaries if the asset passes to the beneficiary in one of the ways provided for in section 128-20.

The shares may pass to the beneficiaries under the will for the purpose of subsection 128-20(1)(a) if they become absolutely entitled to the trust asset as against the trustee. In the context of a deceased estate, this happens when the estate has been administered, which occurs when the assets of the estate have been called in and the deceased's debts and liabilities have been paid. If this is the case, the shares will have passed to the beneficiaries under the will and any capital gain or loss attributable to the LPR of the Estate will be disregarded under subsection 128-15(3). Shares in the same company of equal standing are a fungible asset, therefore The Shares are a fungible asset. Paragraph 128-20(1)(d) will not apply in these circumstances as the Deed of Family Arrangement involved a cash payment from outside the estate by three of the beneficiaries to the fourth beneficiary, which means that subparagraph 128020(1)(d)(ii) is not satisfied.

Therefore, the four beneficiaries are taken to have received their interest in The Shares once the estate is in its final stage of administration and the capital gain or loss the LPR makes at the time the asset passes to the beneficiaries is disregarded under subsection 128-15(3). If the shares are transferred to three of the beneficiaries in line with the Deed of Family Arrangement instead of the entitlements under the will, the fourth beneficiary is taken to have disposed of their ownership interest in the shares to the other three beneficiaries when they entered into the Deed of Family Arrangement. Question 2 Does statutory income arise under the capital gains tax provisions in Part 3-1 of the ITAA 1997 to the Trustee for the Estate upon transfer of the residential property to the beneficiaries? Summary Yes, the LPR will make a capital gain or loss on a one quarter share of the dwelling when it transfers to the beneficiaries in line with the Deed of Family Arrangement. Detailed reasoning

Section 128-15 sets out the rules on what happens if a CGT asset you owned just before dying devolves to your Legal Personal Representative (LPR), for example the executor of a Deceased Estate, or passes to a beneficiary in your estate. Subsection 128-15(2) relevantly states that the LPR is taken to have acquired the asset on the day you died. Subsection 128-15(3) states that any capital gain or loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded. Subsection 128-15(4) sets out modifications to the cost base and the reduced cost base in the hands of the LPR. Item 1 in the table in subsection 128-15(4) states that if an asset was acquired on or after 20 September 1985, the first element of the asset's cost base is the cost base of the asset on the day the deceased died. Section 128-30 of the ITAA 1997 sets out when an asset passes to a beneficiary. Paragraph 128-20(1)(a) states that CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset under your will, or that will as varied by a court order.

Paragraph 128-20(1)(d) states that an asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset under a deed of arrangement. The beneficiary must have entered into the deed to settle a claim to participate in the distribution of your estate and any consideration given by the beneficiary for the asset only consisted of variation or waiver of a claim to one or more other CGT assets that formed part of your estate. Under section 118-195, a capital gain or loss made from a CGT event that happens in relation to a dwelling is disregarded if you are an individual and the interest in the dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate, and one of the items in column 2 and one of the items in column 3 of the table in section 118-195 are satisfied. The Table is as follows: Table 1 : Beneficiary or Trustee of Deceased Estate acquiring interest Item One of these items is satisfied And also one of these items 1

The deceased acquired the ownership interest on or after 20 September 1985 and 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. Your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner. 2 The deceased acquired the ownership interest before 20 September 1985. The dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary--that individual Application to your circumstances

In this case, the capital gain or loss the LPR would make when the asset passes to the beneficiaries will not be disregarded in full under subsection 128-15(3) if the dwelling is transferred to the three beneficiaries in line with the Deed of Family Arrangement. This is because three quarter shares of the dwelling were transferred to the three beneficiaries in line with the will and one quarter of the dwelling was not. The capital gain or loss that the LPR makes on the one quarter share of the dwelling, that is shared amongst the three beneficiaries to effectively give the beneficiaries a one third share of the dwelling each, will not be disregarded under subsection 128-15(3) as it did not pass to the beneficiaries in one of the ways provided for in section 128-20. Paragraph 128-20(1)(d) will not apply in these circumstances as the Deed of Family Arrangement involved a cash payment from outside the estate by three of the beneficiaries to the fourth beneficiary, which means that subparagraph 128-20(1)(d)(ii) is not satisfied.

The main residence exemption in section 118-195 will not apply as the property was acquired on or after 20 September 1985 and has been used to produce assessable income since the death of the deceased. The cost base for the dwelling in the hands of the LPR will be the cost base of the asset on the day the deceased died as per item 1 in the table in subsection 128-15(4). The capital gain or loss in the hands of the LPR on the transfer of the dwelling to the three beneficiaries will need to be apportioned between the three quarters that are disregarded and the one quarter that is not.