Capital gains tax - deceased estate - tax exempt beneficiary

Does section 104-215 (CGT event K3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply where a beneficiary, that is an exempt entity, receives only the cash proceeds from the sale of assets sold during the administration of the estate rather than the assets owned by the deceased immediately before their death?

No. Section 104-215 of the ITAA 1997 does not apply where the beneficiary, that is an exempt entity, receives only cash from the administration of the deceased estate rather than the assets owned by the deceased immediately before their death.

Under the will the deceased made certain specific bequests and the balance of the real and personal estate was to pass to a named charitable organisation.

Predominantly, the assets of the deceased were listed securities.

After dealing with the specific bequests, the Trustee of the deceased's estate realised all of the remaining assets and converted them to cash during the course of the administration of the estate. The Trustee ascertained and paid, or provided for, all known liabilities of the estate.

The Trustee paid the balance of the estate, to the charitable organisation.

Section 128-10 of the ITAA 1997 provides that when a person dies, a capital gain or capital loss from a CGT event happening to a CGT asset the person owned just before dying is disregarded.

Where an asset passes to a beneficiary that is an exempt entity (ie. an entity whose ordinary income and statutory income is exempt from income tax) the provisions in Division 128 of the ITAA 1997 do not apply In these circumstances, section 104-215 of the ITAA 1997 applies and CGT event K3 may happen.

Subsection 104-215(1) of the ITAA 1997 states (as relevant): 'CGT event K3 happens if you die and a CGT asset you owned just before dying passes to a beneficiary in your estate who (when the asset passes): (a) is an exempt entity; or...'

Section 128-20 of the ITAA 1997 sets out the circumstances when an asset is taken to pass to a beneficiary and states (as relevant): 'A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: (a) under your will, or that will as varied by the court order; or...'

The beneficiaries do not become the beneficial owners of the assets of the deceased until the date the estate is fully administered ( Commissioner of Stamp Duties (Queensland) v. High Duncan Livingstone (1964) 112 CLR 12; [1965] AC 694; [1965] ALR 803; [1964] 3 All ER 692; [1964] 3 WLR 963, Probert v. Commr of State Taxation (SA) (1998) 72 SASR 48; (1998) 98 ATC 5176; (1998) 40 ATR 261, Taxation Ruling IT 2622).

As the assets owned by the deceased just before death had been sold by the Trustee before the date the estate was fully administered, the beneficiaries cannot become the owners of those assets. Therefore, the assets cannot be said to have 'passed' in the way required by section 128-20 of the ITAA 1997. As the assets owned by the deceased just before death did not pass to the tax exempt beneficiaries, CGT event K3 did not happen.