Will a capital gain event occur when the Individual Beneficiaries transfer shares out of the Joint Account into individual accounts?
Yes. Capital gains tax event A1 will occur. This ruling applies for the following period: Income year ending 30 June 20XX. The scheme commenced on: 1July 20XX.
The Deceased passed away after 20 September 1985. The Deceased owned a significant number of shares just prior to them passing away. Under the Deceased's Will: • Person A to be appointed as the executor and trustee of the Deceased Estate (the Trustee); and • The Deceased's shares were to be divided equally between Person A, Person B and Person C ( The Individual Beneficiaries ). On several dates the Trustee and the Individual Beneficiaries signed transfer forms to transfer the shares from the Deceased Estate into a joint account held in all their names as beneficiaries ( the Joint Account ). Additional shares were received by the Individual Beneficiaries in relation to a demerger of one of the companies in which they held shares, with the additional shares being transferred into the Joint Account. Holding statements and dividend statements were issued in the names of the Individual Beneficiaries in relation to the shares held in the Joint Account. The shares continue to be held in the Joint Account until the present time, which will be transferred out of the Joint
Account on an equal basis into separate accounts for each of the Individual Beneficiaries during the ruling period.
Income Tax Assessment Act 1997 Section 102-20 Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 108-5 Income Tax Assessment Act 1997 Division 128 Income Tax Assessment Act 1997 Subsection 128-15(2) Income Tax Assessment Act 1997 Subsection 128-15(3) Income Tax Assessment Act 1997 Subsection 128-20(1)
Capital gains tax and inherited assets The capital gains tax (CGT) provisions apply to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985. Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) provides legislation on the application of the CGT provisions when a person passes away and a CGT asset they owned just prior to them dying devolves to their legal personal representative (LPR), or passes to a beneficiary of the deceased estate. Subsection 128-15(3) ITAA 1997 provides special rules for LPR of a deceased estate, and states that any capital gain or capital loss the LPR makes if the asset passes to a beneficiary of the deceased estate is disregarded. A LPR includes an executor or administrator of an estate of an individual who has died. The trustee of a testamentary trust is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997. A CGT asset passes to a beneficiary when the beneficiary becomes the owner of the asset when one of the conditions contained in subsection 128-20(1) of the ITAA 1997 is met, such as: • under a will; or
• because it is appropriated to the beneficiary by the legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the deceased estate. If you acquire an asset owned by a deceased person as their LPR or beneficiary, you are taken to have acquired the asset on the day the person died under subsection 128-15(2) of the ITAA 1997. Once the asset has passed from the deceased estate, Division 128 of the ITAA 1997 ceases to apply and the general CGT provisions will apply when any CGT event occurs in relation to the asset while it is being held by the beneficiary, who will be liable for any taxation implications arising from any capital gain or capital loss as a result of the CGT event. The most common CGT event is CGT event A1 which occurs when there is a change in legal ownership of a CGT asset under section 104-10 of the ITAA 1997. Joint ownership of CGT assets For CGT purposes, jointly held CGT assets are generally viewed as being held equally by the parties with each of them having an equal interest in each CGT asset unless there is evidence to support that the ownerships interests are not held equally. In Johnson v FC of T
2007 ATC 2161 ( Johnson's case ), the Administrative Appeals Tribunal (AAT) held that having a one-half interest in a parcel of shares did not equate to having exclusive ownership of one half of the total number of shares. The taxpayer submitted that, notwithstanding that the shares were registered in joint names, he and his brother always understood that they each held 50% of the shares; the transfer into individual names merely gave effect to the underlying reality and did not amount to a disposal. The mother also gave evidence that it was her intention that each son would take half the number of shares. Senior Member McCabe made the following comments in the Johnson's case :
15.... Dividing the parcel in two for the purposes of a transfer to each joint owner effectively requires those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they are acquiring. It is as if the CGT assets contained in each share have to be unpacked and redistributed so that the taxpayer ends up holding half the number of shares in his or her own right- and those shares do not contain any CGT assets belonging to the other (former) joint owner. 16. This rearrangement and reallocation of the ownership of CGT assets constitutes a disposition of the CGT asset and is therefore a CGT event: s 104-10. Subject to the legislation, tax is levied on the capital proceeds from a CGT event less the cost base of the asset. The capital proceeds are the sum of the money received in respect of the transaction (no money changed hands in this case) and the market value of any other property received (in this case, the market value of the interest acquired in the shares): s 116-20. The judge in Johnson's case used the following reasoning:
Section 108-7 provides that individuals holding a CGT asset as joint tenants are treated as if they were tenants in common who each owned a separate CGT asset comprising an equal interest in the asset. Meaning in this case that each share was compromised of two assets, one held by each other. Dividing the parcel in two for the purposes of a transfer to each joint owner effectively required those owners to relinquish ownership of the CGT assets in the shares in the other parcel in return for clear title to the shares in the parcel they were acquiring. The result is that the rearrangement and reallocation of the CGT assets constituted a disposal of CGT assets under section 104-10 (CGT event A1) and tax is levied on the capital proceeds i.e. the market value of the interest acquired in the shares less the cost base. This being consistent with the Commissioner's view in Taxation Determination TD 92/148. The AAT noted that section 176 of the Corporations Act 2001
provides that a register is taken to be an accurate record of the information entered in the absence of any evidence to the contrary. Hence, the register showed that the taxpayer and his brother held the shares jointly, and not as individual owners of an equal number of shares, despite their evidence to the contrary. However, since the original transfer occurred 15 years ago and the taxpayer conceded that he did not turn his mind to the question of whether they acquired the shares jointly or severally at the time, it was more likely that the brothers thought of themselves as joint owners of a parcel of shares and the register reflected this reality. Therefore, the rearrangement and reallocation of ownership in respect of a parcel of shares constituted a disposal of a CGT asset under CGT event A1. The Commissioner's view of CGT implications for joint owners subdividing land and each taking 100% ownership in one block is considered in Taxation Determination TD 92/148 Income tax: capital gains: is there a disposal and an acquisition where joint owners of a block of land subdivide that land into two smaller blocks with each owning one block?
which outlines that if the joint owners take individual blocks, it involves disposals and acquisitions of ownership interests in the blocks The Commissioner's view and the decision held in the Johnson's case as provided above support that the reallocation of the ownership interests in a jointly held asset into the asset being solely held by one of the joint owners as being viewed as a CGT event A1 for the owner transferring their ownership interest to the other joint owner. Application to your situation The Deceased's Will provided for all their shares to be divided equally between the Individual Beneficiaries, being Persons A, B and C. Person A in their role as Trustee, and the Individual Beneficiaries, all signed forms to transfer the shares out of the Deceased Estate into the Joint Account. For CGT purposes it is viewed that the shares passed from the Deceased Estate in accordance with subsection 128-20(1) of the ITAA 1997 as a result of the transfer.
Division 128 of the ITAA 1997 no longer applied once the shares passed from the Deceased Estate, with each Individual Beneficiary being liable for any taxation implications occurring when any future CGT event occurs in relation to their ownership interests in the shares. The CGT provisions look at what has occurred. In this case while the Deceased's Will had provided for the shares to be equally divided between the Individual Beneficiaries, the shares were transferred into a Joint Account. We are not able to conclude from the facts of this situation that the Individual Beneficiaries each held any of the shares solely given the shares had been transferred into the Joint Account held in all three names, with holding statements being issued in the names of all the Individual Beneficiaries. Nothing has been provided on which we could reasonably conclude that the shares were held in any other way than jointly. Therefore, based on the information provided it is viewed that the Individual Beneficiaries jointly held the shares in the Joint Account, and not as individual owners of an equal holding of shares.
Accordingly, for CGT purposes each of the Individual Beneficiaries are viewed as having a 1/3 rd interest in each share held in the Joint Account. The shares will be transferred out of the Joint Account into a separate account held by each of the Individual Beneficiaries. This will involve each of the Individual Beneficiaries transferring their respective interests in some of the shares to the other beneficiaries so that they each end up holding shares solely in their names. Applying the principles of TD 92/148 to this situation, the transfer of their respective interests so that each of them hold shares solely in their names will involve the disposal and acquisition of interests in the shares by the Individual Beneficiaries. Therefore, CGT event A1 will happen for each of them when the transfers occur as each of the Individual Beneficiaries are disposing of their respective interest in the shares to another beneficiary. Each of the Individual Beneficiaries will be liable for any taxing implications arising as a result of the CGT event happening to their interests in the shares.