1 Will any capital gain (or loss) made by the Testator on his death in relation to the shares be disregarded pursuant to section 128-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Will any capital gain that the Executors make when the shares pass to the Trustee in accordance with the proposed distribution be disregarded in accordance with subsection 128-15(3) of the ITAA 1997? Answer Yes. Question 3 Will the cost base of the shares owned by the Trustee be the cost base of the shares on the day that the Testator died? Answer Yes. Question Will Individual B derive a capital gain (or loss) in relation to the proposed distribution? Answer No. This ruling applies for the following period : 1 July 20XX to 30 June 20XX 1 July 20XX to 30 June 20XX 1 July 20XX to 30 June 20XX The scheme commenced on: XX January 20XX
Testator died during an income year Probate was granted over the will during an income year. The will appoints Individuals A, B, C, D and E as executors and trustees (the Executors) to the deceased estate. The Individuals B, C and D are the main beneficiaries and the residuary beneficiaries under the will. In addition, the will makes some specific bequests to others. The assets of the estate of the Testator and Individual A, some of which are jointly held, comprise primarily of interests in entities in the Group. Immediately prior to the Testator's death, the Testator was the majority shareholder in Company A, an entity in the Group. The Testator acquired shares in Company A. At the time of his death, the shares owned by the Testator in Company A comprised of a number of shares across different classes. The will makes the following specific bequest in respect of the shares in Company A. The will bequeath Company A shares to Individual B or an entity as directed by Individual B.
It is proposed that a Class Trust be set up with one class being for the benefit of Individuals B, C and D and their families. The trustee of the Class Trust will be able to exercise discretion within each class. In accordance with the will, the Executors and Individual B propose that the shares be distributed as follows: Individual B will direct the Executors to distribute the shares by transferring them to the Trustee of the Class Trust. Once the Class Trust is established, the Executors will distribute the shares to the Class Trust in accordance with Individual B's direction, and Once the Class Trust has been established and direction made, the Executors will prepare and sign a share transfer in favour of the Class Trust that complies with Company A's Articles of Association. The proposed distribution from the deceased estate will occur in an income year. The proposed distribution is consistent with the wishes of the Testator and the will.
The Executors are in the process of administering the estate and are proposing to distribute the Shares to the Class Trust in accordance with the Proposed Distribution. Accordingly, the Executors and Individual B seek confirmation from the Commissioner regarding the income tax consequences that would arise in connection with the proposed distribution.
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 Section 128-10 Income Tax Assessment Act 1997 Section 128-15 Income Tax Assessment Act 1997 Section 128-20 Income Tax Assessment Act 1997 Section 995-1
Question 1 Summary Any capital gain (or loss) made by the Testator on his death in relation to the shares will be disregarded pursuant to section 128-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning Division 128 of the ITAA 1997 explains the rules that apply when a taxpayer dies and a capital gains tax (CGT) asset owned just before death devolves to the taxpayer's legal personal representative (LPR) or passes to a beneficiary in the estate. Section 128-10 of the ITAA 1997 states that when you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded. Subsection 104-10(1) of the ITAA 1997 states that a CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 states that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
On his death, the Testator stopped being the owner of the shares and the shares devolved to the Executors in their capacity as trustee of the Testator's estate. Accordingly, CGT event A1 occurred for the Testator on his death and the shares transferred to his Executors. However, any capital gain (or loss) on the Testator's death will be disregarded pursuant to section 128-10 of the ITAA 1997. Question 2 Summary
Any capital gain or loss made by the Executors of the deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997 if an asset of the estate passes to a beneficiary in accordance with section 128-20. An asset will 'pass' to a beneficiary if they become the owner of an asset under a will under paragraph 128-20(1)(a). In this case, it is proposed the distribution of shares will be transferred to the Class Trust following Individual B directing the Executors to distribute/transfer shares to the Class Trust pursuant to the will. The transfer of the shares to the Class Trust under the will via direction of Individual B means the property will be taken to have 'passed to a beneficiary' under subsection 128-20(1) when the transfers are affected. Therefore subsection 128-15(3) applies to disregard any capital gain or loss made by the Trustee of the Estate. Detailed reasoning Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset.
CGT event A1 is the most common CGT event and is described under section 104-10 of the ITAA 1997. CGT event A1 occurs if there is a disposal or part disposal of a CGT asset. Subsection 104-10(2) of the ITAA 1997 defines a disposal as: You dispose of a CGT asset if the change in ownership occurs from you to another entity, whether because of some act or event or by operation of the law. However, a change in ownership does not occur if you stop being the legal owner if the asset but continue being the beneficial owner. A capital gain is made if the capital proceeds from the disposal are more than the cost base of the asset. Conversely, a capital loss arises if the capital proceeds are less than the asset's reduced cost base. Subsection 108-5(1) of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property. Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or passes to a beneficiary in a deceased estate.
Relevantly, LPR is defined in subsection 995-1(1) of the ITAA 1997 to mean an executor or administrator of an estate of an individual who has died. Under section 128-10 of the ITAA 1997, when a person dies, any capital gain or loss from a CGT event that results from a CGT asset the person owned just before dying is disregarded. Subsection 128-15(1) of the ITAA 1997 sets out what happens if a CGT asset you owned just before dying: (a) devolves to your LPR; or (b) passes to a beneficiary in your estate. Subsection 128-15(2) of the ITAA 1997 provides that the LPR, or beneficiary, is taken to have acquired the asset on the day you died. Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3) of the ITAA 1997. Under subsection 128-20(1) of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset: (a) under a will, or that will as varied by a court order, (b) by operation of an intestacy law, or such law as varied by a court order, or
(c) because it is appropriated to the beneficiary by the deceased legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate, or (d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased 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 the estate. In this case, it is proposed the distribution of shares will be transferred to the Class Trust following Individual B directing the Executors to distribute/transfer shares to the Class Trust pursuant to the will. The Class Trust will be a beneficiary of the deceased estate. As a result of the transfer of the shares from the deceased estate to the Class Trust, CGT event A1 occurs due to a disposal of the asset as well as a change in ownership of the asset.
Any capital gain or capital loss the Executors of the deceased estate makes when the asset passes to a beneficiary who is the Class Trust in the deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997. This provides that the trustee is subject to no tax when passing a CGT asset to a beneficiary of the trust. The requirement of paragraph 128-20(1)(a) of the ITAA 1997 have been met as the asset, being the shares, passes to a beneficiary who is the Class Trust, from the deceased estate as a result of the will. The Class Trust will be a beneficiary of the estate of the Testator for the purposes of section 128 -20. As the shares will be transferred to the Class Trust, pursuant to a direction made by Individual B as per the will, the shares will be considered to have passed to the Class Trust as a beneficiary of the deceased estate under paragraph 128-20(1)(a) of the ITAA 1997. Accordingly, any capital gain or capital loss that would otherwise arise will be disregarded under subsection 128-15(3). Question 3 Summary The cost base of the shares owned by the Class Trust will be the cost base of the shares on the day that the Testator died. Detailed reasoning
Section 128-20 of the ITAA 1997 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the LPR or beneficiary, but CGT may apply when the asset is subsequently disposed of. Under subsection 128-15(2) of the ITAA 1997, where a CGT asset of the deceased devolves to the deceased's LPR or passes to a beneficiary, the asset is taken to have been acquired on the day the deceased died. Subsection 128-15(4) of the ITAA 1997 provides a table which sets out the modifications to the first element of the cost base, or reduced cost base, of the CGT asset in the hands of the LPR or beneficiary of a deceased estate. Item 1 of the table states that for a CGT asset the deceased acquired on or after 20 September 1985, the first element of the asset's cost base, or reduced cost base, is the deceased's cost base of the asset on the day they died. In this case, the Testator acquired the shares after 20 September 1985. As a result of the Testator passing, the first element of the shares' cost base in the hands of the Class Trust will be the cost base on the day the Testator died pursuant to item 1of the table in subsection 128-15(4) of the ITAA 1997. Question 4
Summary Individual B will not derive a capital gain (or loss) in relation to the proposed distribution. Detailed reasoning As determined at Question 2, the shares will be transferred to the Class Trust, pursuant to a direction made by Individual B as per the will. As a result, the shares will be considered to have passed to the Class Trust as a beneficiary of the deceased estate under paragraph 128-20(1)(a) of the ITAA 1997. The shares do not pass to Individual B. As a result, there are no CGT events that arise for Individual B and he does not derive a capital gain (or loss).