ATO Interpretative Decision

ATO ID 2004/458

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does CGT event K3 in section 104-215 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if assets, owned by a deceased person at the date of their death, pass to a trust established under their will which is an exempt entity and, under the terms of the trust, the assets are to be held in the trust in perpetuity with the trust income to be applied for public charitable purposes?

Decision

Yes. CGT event K3 happens if assets owned by a deceased person at the date of their death pass to a beneficiary in their estate that is an exempt entity when the assets pass. In the circumstances of this case, the testamentary trust is a beneficiary of the estate.

Facts

The deceased died in the 2004 income year.

Under the deceased's will, the residue of their estate is to be held by their executors and trustees on trust (in perpetuity) to apply the income from the trust for public charitable purposes.

The testamentary trust has been endorsed by the Tax Office under Subdivision 50-B of the ITAA 1997 as an exempt entity, effective upon its commencement, on the basis that it is a registered charity.

The executor has asked whether CGT event K3 happens when the administration of the estate is completed and the residue passes to the testamentary trust.

Reasons for Decision

When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the ITAA 1997).

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (subsection 104-215(1) of the ITAA 1997). The time of the event is just before the deceased died which means that any resulting capital gain or loss is accounted for in the final income tax return lodged on behalf of the deceased (referred to as the 'date of death' return - subsection 104-215(3) of the ITAA 1997).

For these purposes, an exempt entity is an entity whose ordinary and statutory income is exempt because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997). A trust that is a registered charity will only be exempt if it is endorsed as such by the Tax Office: section 50-52 of the ITAA 1997.

An asset passes to a beneficiary in an estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the ITAA 1997.

In the circumstances, it is considered that the charitable trust set up under the deceased's will is a beneficiary in the deceased's estate. The trust is a 'purpose' trust in that the assets will be held by the trust in perpetuity and the income of the trust will be used for public charitable purposes. That is, there are no other persons to whom the assets of the trust will eventually pass. Therefore, the testamentary trust is the beneficiary.

The trust will commence at the completion of the administration of the estate. As the trust is an exempt entity from its commencement, CGT event K3 happens when the assets pass to it. The time of the event is just before the deceased died.

Note 1: Law Administration Practice Statement PS LA 2003/12 sets out the Commissioner's practice 'when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under the deceased's will'. PS LA 2003/12 has no application in this case because the trust created under the will of the deceased is itself the ultimate beneficiary. In any event, PS LA 2003/12 contains the proviso that the practice is subject to the normal operation of CGT event K3.

Note 2: Any capital gain or loss made as a result of CGT event K3 happening may be disregarded if the testamentary trust is a deductible gift recipient: section 118-60 of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   Division 50
   Subdivision 50-B
   section 50-52
   section 104-215
   subsection 104-215(1)
   subsection 104-215(3)
   section 118-60
   section 128-10
   subsection 128-20(1)
   subsection 995-1(1)

Other References:
Law Administration Practice Statement PS LA 2003/12

Keywords
Capital gains
Capital gains tax
Capital losses
CGT assets
CGT deceased estates
CGT events K1-K6 - other events
Charitable trusts
Deductible gift recipients

Siebel/TDMS Reference Number:  4070489

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  4 June 2004

ISSN: 1445-2782