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1 Do the emails provided satisfy the requirements of section 115-228 of the Income Tax Assessment Act1997 (ITAA 1997) in that they are sufficient evidence of the trustee's resolution to make the three charitable beneficiaries specifically entitled to distributions from the estate?

1 No. The emails do not meet section 115-128(1)(c) of the ITAA 1997 in that they do not record in character that the capital gain is referrable to the beneficiaries or that, under the trust deed, any of the beneficiaries are specifically entitled to the capital of the Estate. Question 2 If the answer to the above is 'No', under Clause X of the Will executed on DD MM YY, are the three charitable beneficiaries considered to be absolutely entitled to the capital gain arising from the sale of the Corporation A shares owned by the deceased estate? Answer 2 No. At the time the XX shares were sold and distributions made to the beneficiaries, the estate was not fully administered. As such the beneficiaries cannot be absolutely entitled to the capital gain arising from the sale of the shares. This ruling applies for the following period : Period ended DD MM YY. The scheme commenced on: DD MM YY

Between DD MM and DD MM YY the deceased passed away. They were unmarried and had no children. They were living in their own home at Address A at the time of their passing. Their Will, executed on DD MM YY, nominated their relative Person A as executor and trustee of their estate. The Will directed: •                That a property at Address B, if owned by the deceased at the time of their passing, was bequeathed to their relative Person B. Should they not own that property at the time, any other such property as owned by them at their passing and that is being used by Person B as their principal place of residence at the time of the deceased's passing was to be bequeathed to Person B, •                A sum of $X was left for Person A which was to be increased by the Consumer Price Index annually on the first of July each year from the date of the Will, •                That the trustee then sell or convert into cash the residue of the deceased's real and personal property, pay all debts, funeral and testamentary, and all other expenses associated with the estate, and divide the residuary of the estate into X equal parts to be disposed of as follows;

-               to pay or transfer X parts to their sibling Person C, -               to pay or transfer X parts to Person B, -               to pay or transfer X parts to Person A, -               to pay or transfer A part to Charity A, -               to pay or transfer X part to Charity B, -               to pay or transfer X part to Charity C. On DD MM YY probate for the estate was granted to Person A as executor. The deceased's sibling Person C had predeceased them. There were no instructions in the Will for this possibility. Their X shares in the residue of the estate were divided with X share each to Person A and Person B, and the other X share split between the three charitable beneficiaries. The estate's assets were valued at approximately $X. The largest asset of the estate were shares in the Corporation A. In MM YY the trustee sold these shares for $X, with a capital gain of $X arising from the sale. On DD MM YY the estate's draft tax calculation was approved by the executor and their legal advisor Person D of Law Firm A. On DD MM YY a final copy of this was shared which provided an estimated distribution to each of the three charitable beneficiaries of $X.

On DD MM YY, Person E, lawyer for Person B, sent an email to Person D that proposed streaming of the capital gain made from the sale of the Corporation A shares to the three charitable beneficiaries as they are tax-exempt entities. On DD MM YY Person D forwarded the email to Person A as executor who replied on the day that they agreed with the proposal. On DD MM YY the estate paid the amount of $X to Person B as an interim distribution. On DD MM YY Person B signed an Acknowledgement that detailed the transfer to them from the estate of the property at Address A, and the interim distribution of the amount of $X. On DD MM YY Person D wrote to each of the three charitable beneficiaries advising the estate was in a position to make a substantial interim distribution and it included the estate's estimated tax calculation for the YY financial year. On DD MM YY the Head of Fundraising for Charity A, signed an Acknowledgement and Release in respect of an interim payment to the charity of $X from the estate, and releasing the estate from any suits, claims and demands arising from the distribution.

On DD MM YY the Head of Charity C, signed an Acknowledgement and Release in respect of an interim payment to the charity of $X from the estate, and releasing the estate from any suits, claims and demands arising from the distribution. On DD MM YY the Head of Legal for Charity B, signed an Acknowledgement in respect of an interim payment to the charity of $X from the estate. On DD MM YY the estate paid an amount of $X to Law Firm B on behalf of Person B, as an interim distribution. On DD MM YY the estate paid an amount of $X to Law Firm B on behalf of Person B as the balance of their interim distribution. On DD MM YY the estate paid an amount of $X to Charity B as an interim distribution. On DD MM YY the estate paid an amount of $X to Charity A as an interim distribution. On DD MM YY the estate paid an amount of $X to Charity C as an interim distribution. On DD MM YY the estate paid an amount of $X to Person A as a part interim distribution. On DD MM YY the estate paid an amount of $X to Person A as a part interim distribution. On DD MM YY the estate paid an amount of $X to Person A as a part interim distribution.

On DD MM YY Person A signed a Release, in their role of beneficiary of the estate, that acknowledged the interim distribution of the amount of X to them, and released the estate from any suits, claims and demands arising from the distribution.

Income Tax Assessment Act 1936 Division 6 Income Tax Assessment Act 1936 Division 6E Income Tax Assessment Act 1997 section 106-50 Income Tax Assessment Act 1997 Subdivision 115-C Income Tax Assessment Act 1997 section 115-225 Income Tax Assessment Act 1997 section 115-227 Income Tax Assessment Act 1997 section 115-228 Income Tax Assessment Act 1997 section 128-20 Trustee Act 1958 (Vic) Section 31

Question 1 Do the emails provided satisfy the requirements of section 115-228 of the Income Tax Assessment Act 1997 (ITAA 1997) in that they are sufficient evidence of the trustee's resolution to make the three charitable beneficiaries specifically entitled to distributions from the estate? Summary The emails do not meet section 115-128(1)(c) of the ITAA 1997 in that they do not record in character that the capital gain is referrable to the beneficiaries or that, under the trust deed, any of the beneficiaries are specifically entitled to the capital of the estate. Detailed reasoning Specific entitlement Changes made by Tax Laws Amendment (2011 Measures No.5) Act 2011 apply to ensure that if permitted by the trust deed, the trust's capital gains and franked distributions can be effectively streamed to beneficiaries for tax purposes by making those beneficiaries specifically entitled to those amounts. The new law amends the Income Tax Assessment Act 1997 (ITAA 1997), specifically Subdivision 115-C (which contains the rules for trusts with net capital gains) and Subdivision 207B (which includes rules for franked distributions received through a trust).

A beneficiary specifically entitled to a capital gain will generally be assessed on that gain, regardless of whether the benefit they receive or are expected to receive is income or capital of the trust. Therefore, unlike the situation that applied before the amendments, a beneficiary may be assessed based on a specific entitlement to a capital gain of the trust, even though they do not have a present entitlement to income of the trust estate. The key change to Subdivision 115-C of the ITAA 1997 is that beneficiaries no longer need to have an assessable amount included under section 97, 98A or 100 of the ITAA 1936 to be treated as having an (assessable) extra capital gain under section 115-215 of the ITAA 1997. This ensures that a 'capital beneficiary' that is specifically entitled to an amount representing a capital gain of a trust is treated as having an extra capital gain in relation to that amount even if they are not presently entitled to a share of the income of the trust estate.

The concept of specific entitlement "overrides" the operation of the general trust rules in Division 6 of the ITAA 1936 (including the requirement that beneficiaries must be presently entitled to the income of a trust estate in order to be assessed on the trust's net income). Specifically entitled beneficiaries are not assessed under Division 6 in relation to the capital gains of a trust. If capital gains are included in a beneficiary's assessable income under Division 115-C of ITAA 1997, new Division 6E of the ITAA 1936 excludes them from also being included in assessable income under sections 97 or 98 of the ITAA 1936. A similar outcome applies to the trustee who would otherwise be assessable under either sections 99 or 99A of the ITAA 1936. A beneficiary is specifically entitled to a capital gain made by the trustee where: •                the beneficiary receives, or is reasonably expected to receive, an amount equal to the net financial benefit referable to the capital gain (ie the capital gain reduced by any losses consistent with the application of capital losses for tax purposes); and

•                no later than two months after year end, the beneficiary's entitlement is recorded (in its character as a capital gain) in the accounts or records of the trust, such as the trust deed or a resolution. Subdivision 115-C of the ITAA 1997 The operative provisions being sections 115-225, 115-227 and 115-228 of the ITAA 1997 apply to the amount of each capital gain of the trust. It is section 115-228 of the ITAA 1997 that authorises streaming of capital gains. It has to occur 'in accordance with the terms of the trust'. Subsection 115-228(2) of the ITAA 1997 deems the following actions to be 'in accordance with the terms of the trust': •                The exercise of a power conferred by the terms of the trust, or •                The terms of the trust deed (if any), and the terms applicable to the trust because of the operation of legislation, the common law or the rules of equity. Recorded in character Of crucial importance is how the recording of the character of a capital gain is to be achieved. The relevant Explanatory Memorandum states:

2.62 The amount (or fraction) of the net economic benefit that the beneficiary has received or can reasonably be expected to receive must also be recorded in its character as referable to the capital gain or franked distribution in the accounts or records of the trust. [Schedule 2, item 11, paragraph 115-228(1)(c) and item 24, paragraph 207-58(1)(c)] 2.63 The accounts or records of the trust would include the trust deed itself, statements of resolution or distribution statements, including schedules or notes attached to, or intended to be read with them. However, a record merely for tax purposes is not sufficient. Additionally, it states: 2.65 Where a beneficiary is entitled to unspecified amounts (shares) - such as the 'balance' of trust income, 'all of the trust income', 'half of the trust income' or '$100 of trust income' - this is not sufficient to create a specific entitlement. This is because the entitlements have not been recorded in their character as referrable to a capital gain or franked distribution. •                This is true even if the beneficiary's entitlement contains amounts referable to capital gains or franked distributions.

•                Further, it is true even if the beneficiary's entire entitlement is referable to capital gains and/or franked distributions. Application to your circumstances You have provided copies of email correspondence in which it is proposed that the estate stream the capital gain arising from the sale of the Corporation A shares to the three charitable beneficiaries, who as tax-exempt entities, will not pay tax on the gain. This would mean the estate would not pay tax on the gain and would result in an increased distribution to each beneficiary. The email correspondence includes one from the trustee of the estate to their legal advisor, sent on DD MM YY, in which they notes the strategy "makes sense" and it would be good to explore the possibility of an interim distribution. You also provided 'Acknowledgements' signed by each beneficiary that acknowledges the interim distribution they received as been correct and in some instances, releases the estate from any potential legal liability.

Read in its plainest form, the email simply expresses the wish to make an interim distribution first and consider streaming later on. None of the documents provided, singularly or in tandem, provide that the amounts set aside for the three charitable beneficiaries were capital. The Will did not expressly make the three charitable beneficiaries entitled to any one specific asset of the estate. A beneficiary who is presently entitled to some or all of the total trust income (that is, 'blended' income from several sources) may expect to receive some or all of the benefits referable to any trust capital gain or franked distribution included in that income - particularly if the trust income only includes capital gains and franked distributions. But this does not create a relevant specific entitlement. Merely expressing that a beneficiary is entitled to some or all of the total trust income of the estate is not a record of the character of the entitlement, it does not express an amount as being referrable to the capital gain, which is the second condition of specific entitlement.

In your application you referenced a previous private ruling (1052189436155) as evidence that the Commissioner accepted the streaming of a capital gain as effective and acknowledged that no amount was assessable to the trustee in that instance. In that prior ruling the distribution of the estate was under dispute, a dispute ultimately settled by a Deed of Settlement. This Deed of Settlement, which varied the terms of the Will, specifically empowered the trustee of the estate to stream the capital gain associated with the sale of certain investments to the beneficiaries, in set proportions as defined in the deed. The trustee then executed a Resolution which detailed the enabling powers of the deed and outlined the streaming of the capital gains to the beneficiaries.

The email correspondence and signed Acknowledgements provided do not contain this level of detailed information as to what powers, if any, the trustee of the estate has under the Will to make any beneficiary specifically entitled. They do not record what the character of any distribution is to be and they do not confirm the resolution of the trustee. Further, it is the Commissioner's view that the trustee had no power under the Will to make such a resolution. A trustee of a deceased estate can only stream capital gains where they have the power to do so as expressed or implied in the Will of the deceased. In this instance the Will of the deceased called for the residue of the estate, any remaining real property, the shares, other investments, to be converted into cash, and once all relevant estate expenses were paid, to be divided into X equal shares and distributed according to the deceased's wishes.

It did not expressly state that the three charitable beneficiaries had an entitlement to the assets. Nor was the power to stream implied by the Will as it did not provide the trustee with the power to distribute income or capital at their discretion. Without the power to do so under the Will, there is no clear basis for specific streaming of the capital gain to the three charitable beneficiaries. You contended in your application that beyond any power granted by the Will, the proposed streaming of the capital gain arising from the disposal of the Corporation A shares is supported by the power of appropriation granted under section 31 of the Trustee Act 1958 (Vic). While the three charitable beneficiaries were all advised of the estate's ability to make an interim distribution, this advice was provided after the sale of the asset, thereby preventing the beneficiaries from providing any consent. The Acknowledgments subsequently provided are not written consent to appropriate any part of the estate. They simply acknowledge the distributed amount is correct per their understanding and release the estate from any legal liability.

Further to this, the power to appropriate under section 31 allows for the distribution of assets ' in species' , without selling them, and providing it is fair and in the beneficiaries best interests. In this instance the asset was sold and the proceeds distributed. Question 2 If the answer to the above is 'No', under Clause X of the Will executed on DD MM YY, are the three charitable beneficiaries considered to be absolutely entitled to the capital gain arising from the sale of the Corporation A shares owned by the deceased estate? Summary At the time the Corporation A shares were sold and distributions made to the beneficiaries, the estate was not fully administered. As such the beneficiaries cannot be absolutely entitled to the capital gain arising from the sale of the shares. Detailed Reasoning Section 106-50 of the ITAA 1997 provides that a beneficiary that is absolutely entitled to a CGT asset as against the trustee, will be treated as the new owner of the asset if a CGT event happens to the asset. In such a case the beneficiary and not the trustee would be required to account for any capital gain or capital loss made on the disposal of the asset in their taxable income.

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) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. The TR steps out several criteria for absolute entitlement. In the first instance the TR addresses that a beneficiary of a deceased estate cannot be absolutely entitled to an asset of the estate until such time as the estate has been fully administered (paragraphs 13 and 72). This is because until such time as the estate is fully administered, a beneficiary will not have an interest in the estate's assets. The TR also addresses that where there are multiple beneficiaries to an estate, then no one beneficiary is generally able to establish a vested and indefeasible interest in any one particular asset of an estate. The only instance in which such a beneficiary could be considered absolutely entitled is where the assets of the estate are fungible

Fungibility of an asset, in instances where more than one beneficiary has an interest in the assets of an estate, is discussed in paragraphs 23 through 25 of TR 2004/D25. Assets are fungible if each asset matches the same description such that one asset can be replaced with another, or if they are of the same type. Land is rarely fungible because each parcel is unique (paragraph 94 of TR 2004/D25). Real estate is traded based on the actual sale price, not the sale price per unit. Application to your circumstances You referenced FCT v Oswal [2012] FCA 1507 as confirming that absolute entitlement requires a vested and indefeasible right to an asset, you advanced that the three charitable beneficiaries acquired a fixed and indefeasible right to their respective shares of the residuary of the estate once the trustee had paid or provided for all of the estate's liabilities. The case of Oswal does not focus on the amount of the liabilities but rather confirms that where a trustee is indemnified in respect of the trust's assets, a beneficiary cannot be absolutely entitled.

Absolute entitlement cannot be established where, under the terms of the Will, more than one beneficiary has an interest in any one asset. Clause X of the Will of the deceased directs that the residue of the estate be liquidated and divided into X equal parts to be shared across X different beneficiaries. No one beneficiary had a vested and indefeasible entitlement to any one asset in the residue of the estate. Where there are multiple beneficiaries, absolute entitlement can only be established where the assets of the estate are fungible. However, not all the assets of the residue of the estate were of an asset class that means they can be easily replaced with another. Part of the residue of the estate included real property and property is rarely fungible as each is unique in its own right.

As a final point, TR 2004/D25 notes at paragraph 13 that a beneficiary of a deceased estate cannot be absolutely entitled prior to the completion of the estate (as explained in paragraph 72). At the time of the CGT event, that is the sale of the Corporation A Shares, the estate was not fully administered and so no beneficiary of the estate can be deemed to be absolutely entitled to the asset that was the Corporation A, and therefore liable for any associated capital gain arising from their disposal.