Capital gains tax: testamentary gift of property to a deductible gift recipient

Are capital gains or losses that are made from CGT event K3 happening when shares owned by a deceased taxpayer pass from the taxpayer's executor to a beneficiary disregarded under subsection 118-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997), if the beneficiary is a deductible gift recipient?

Yes. The capital gains or losses are disregarded because the testamentary gift of property would have been deductible to the deceased under section 30-15 of the ITAA 1997 had it been made by the deceased before they died.

The taxpayer died during the year ended 30 June 2000. They bequeathed a portfolio of shares to an entity in Australia whose ordinary and statutory income was, at the time the shares passed to it, exempt from income tax under Division 50 of the ITAA 1997.

At that time, the entity was also a deductible gift recipient because it was an institution described in column 1 of item 1 of the table in section 30-15 of the ITAA 1997 and was endorsed under Subdivision 30-BA of the ITAA 1997. The category of deductible gift recipient to which the entity belongs has no extra conditions affecting the types of deductible gifts it can receive.

The portfolio of shares was property valued by the Commissioner at more than $5,000.

CGT event K3 in section 104-215 of the ITAA 1997 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that is, when the asset passes, an exempt entity. Under subsection 104-215(3), CGT event K3 is taken to happen just before the deceased's death.

An exempt entity is one whose ordinary and statutory income is exempt from income tax because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997).

Therefore, CGT event K3 happened in this case as the shares passed to a beneficiary who, at that time, was an exempt entity.

However, under subsection 118-60(1) of the ITAA 1997, a capital gain or loss made from a testamentary gift of property is disregarded if the gift would have been deductible under section 30-15 of the ITAA 1997 had it not been a testamentary gift.

Subsection 30-15(1) of the ITAA 1997 provides that entities can deduct a gift in the situations set out in the table in section 30-15. The table sets out who the recipient of the gift can be, the type of gift you can make, how much you can deduct and any special conditions that apply.

Item 1 of the table sets out one of the situations in which a gift can be deducted. Under that item a gift of property must: • be made to a deductible gift recipient that is in Australia • satisfy any gift conditions affecting the types of deductible gifts the recipient can receive, and • be property that is covered by one of the listed gift types.

The gift types include property valued by the Commissioner at more than $5,000.

Therefore, the deceased would have been entitled to a deduction under section 30-15 of the ITAA 1997 for the gift of shares had it been made during their lifetime because: • the gift was made to a deductible gift recipient that was in Australia • for that deductible gift recipient there were no gift conditions affecting the types of deductible gifts it could receive that needed to be satisfied, and • the shares are property valued by the Commissioner at greater than $5,000.

Accordingly, any capital gains or losses made from CGT event K3 happening are disregarded under subsection 118-60(1) of the ITAA 1997. Note: The Treasurer has announced in the 2004 Budget the removal of the requirement that testamentary gifts of property to a deductible gift recipient must be valued at greater than $5,000. The measure is to apply from the income year following the date of Royal Assent of the amending legislation.