ATO Interpretative Decision

ATO ID 2003/107 (Withdrawn)

income tax

• This ATOID is withdrawn. The view expressed in this ATO ID is now contained in Taxation Ruling TR 2006/14.'
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a taxpayer required to commence legal proceedings in order to have a valid claim to participate in the distribution of the assets of a deceased estate for the purposes of subparagraph 128-20(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. A taxpayer is not required to commence legal proceedings to establish, for the purposes of subparagraph 128-20(1)(d)(i) of the ITAA 1997, that they have a valid claim to participate in the distribution of the assets of a deceased estate.

Facts

The deceased died after 19 September 1985. Under the deceased's will the income of the estate was to be held on trust and paid to the deceased's children for life (life tenants). The capital of the trust was to be accumulated for the deceased's grandchildren (remainder beneficiaries).

The life tenants were dissatisfied with the terms of the deceased's will. The life tenants and remainder beneficiaries entered into a deed of arrangement to alter the distribution of the assets as provided for in the deceased's will.

The deceased's legal personal representative transferred the assets of the estate in accordance with the deed of arrangement.

Reasons for Decision

Section 128-20 of the ITAA 1997 sets out the circumstances in which an asset passes to a beneficiary for the purposes of Division 128 of the ITAA 1997.

Subsection 128-20(1) of the ITAA 1997 provides that:

'A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: ...

d)

under a deed of arrangement if:

i)

'the beneficiary entered into the deed to settle a claim to participate in the distribution of your 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 your estate.'

The word 'claim' is not defined in the ITAA 1997 and therefore it takes its ordinary meaning.

The Shorter Oxford English Dictionary defines a claim as:

1.

' A demand for something as due; an assertion of a right to something.

2.

Right of claiming; right or title.'

It is considered that where a potential beneficiary asserts their right to the assets of the deceased estate by communicating this to the legal personal representative, a valid claim will be established. There is no requirement that legal proceedings be commenced in relation to the dispute.

Paragraph 160J(b) of the Income Tax Assessment Act 1936 (ITAA 1936) is the equivalent to paragraph 128-20(1)(d) of the ITAA 1997.

Paragraph 160J(b) of the ITAA 1936 was introduced by the Taxation Laws Amendment Act (No 2) 1992. The Explanatory Memorandum to the Bill that became the Taxation Laws Amendment Act (No 2) 1992 contained the following explanation:

'In some cases a dispute may arise between claimants to the assets of a deceased estate. The dispute may lead to litigation which eventually results in an order of the court to vary the will. Alternatively, the parties to the dispute may reach a compromise agreement, which binds the parties to an agreement setting out their respective entitlements to assets. This agreement is reached without recourse to litigation and results in the execution of a deed of settlement; alternatively known as a deed of family arrangement or a deed of compromise.'

This indicates that paragraph 160J(b) of the ITAA 1936 was intended to apply in a situation where no legal proceedings in relation to a dispute have been commenced. Although paragraph 128-20(1)(d) of the ITAA 1997 uses a slightly different form of words to paragraph 160J(b) of the ITAA 1936, the ideas in both sections are not taken to be different, merely because of the different form of words were used (subsection 1-3(2) of the ITAA 1997). Therefore a similar interpretation should be given to paragraph 128-20(1)(d) of the ITAA 1997.

In this case, the life tenants, have asserted their rights to the assets of the deceased estate by communicating their dissatisfaction with the terms of the will to the deceased's legal personal representative. The life tenants and remainder beneficiaries then entered into a deed of arrangement to alter the distribution of the assets under the will. It is considered that in these circumstances, the life tenants have established a valid claim to participate in the assets of the deceased estate within the meaning of subparagraph 128-20(1)(d)(i) of the ITAA 1997.

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   paragraph 160J(b)

Related ATO Interpretative Decisions
ATO ID 2003/108
ATO ID 2003/39

Other References:
Explanatory Memorandum to Taxation Laws Amendment Act (No 2) 1992

Keywords
Capital gains
Wills
CGT deceased estates

Business Line:  Losses & CGT Centre of Expertise

Date of publication:  15 March 2003

ISSN: 1445-2782