Capital gains tax: deceased estate: asset passing under deed of arrangement

Has an asset of a deceased estate passed to a beneficiary in that estate under paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The asset passed to the beneficiary under paragraph 128-20(1)(d) of the ITAA 1997 as: • the beneficiary entered into a deed of arrangement to settle a claim to participate in the distribution of the deceased estate; and • any consideration they gave for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

The taxpayer is the legal personal representative of a deceased estate. The deceased person died in 2000.

The deceased owned an interest in property in Australia that was acquired after 20 September 1985.

The deceased made two wills and a dispute arose over which of the wills was the deceased's last will. Legal proceedings were commenced by some of the potential beneficiaries to determine their entitlements. This dispute was resolved by all of the beneficiaries entering into a deed of arrangement in 2002.

Under the deed of arrangement an interest in the property was to be transferred by the legal personal representative to one of the potential beneficiaries. On entering into the deed, the beneficiary agreed to abandon their rights to make any further claim on the estate.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss a legal personal representative makes if an asset 'passes' to a beneficiary in a deceased estate is disregarded.

Paragraph 128-20(1)(d) of the ITAA 1997 provides that a CGT asset passes to a beneficiary in an estate if the beneficiary becomes the owner of the asset under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of an 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 an estate.

In this case, a dispute arose regarding the validity of the deceased's will and certain potential beneficiaries commenced legal action claiming an entitlement to the assets of the estate. In order to resolve this dispute and to achieve a fair and reasonable distribution of the estate, all of the potential beneficiaries entered into a deed of arrangement which provided that the legal personal representative would transfer an interest in the property to a specified beneficiary.

In terms of paragraph 128-20(1)(d) of the ITAA 1997: • the specified beneficiary entered into the deed to settle a claim to participate in the distribution of the estate of a deceased person; and • the only consideration they gave was the waiver of their right to any further claim on the estate.

It is therefore considered that the interest in the property has passed to that beneficiary under paragraph 128-20(1)(d) of the ITAA 1997.

Any capital gain or capital loss the legal personal representative makes when the asset passes to the beneficiary is therefore disregarded under subsection 128-15(3) of the ITAA 1997.