ATO Interpretative Decision

ATO ID 2003/176 (Withdrawn)

Income Tax

• This ATO ID is withdrawn and is replaced by TD 2004/3
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

For the purposes of subsection 128-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997), did a remainder beneficiary become the owner of an asset on the death of a life tenant?

Decision

Yes. For the purposes of subsection 128-20(1) of the ITAA 1997, the remainder beneficiary became the owner of the asset when the life tenant died. It was at this time that the remainder beneficiary became absolutely entitled to the asset as against the trustee.

Facts

An Australian resident individual acquired shares in an Australian public company after 19 September 1985. The individual owned fewer than 10% of the shares in that company at any time during the five years before they died.

The individual died and by their will created a trust over the shares which gave a life interest to one person and a remainder interest to another person.

The life tenant died. At the time of death of the life tenant the remainder beneficiary was not a resident of Australia for tax purposes.

Reasons for Decision

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 or to a beneficiary in a deceased estate.

Section 128-20 of the ITAA 1997 provides that a CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary 'becomes the owner' of the asset under the will of the deceased person or in one of the other ways outlined in that provision.

For the purposes of this provision, a beneficiary becomes the owner of an asset when they become absolutely entitled to the asset as against the trustee of the estate, if that time precedes transfer or transmission of the asset to the beneficiary (and whether or not transfer or transmission later happens).

In the context of a trust involving a life tenant and remainder beneficiary, Taxation Determination TD 93/35 indicates that a remainder beneficiary may become absolutely entitled to an asset on the death of a life tenant. It states:

Prior to the death of the life tenant (and given that the administration of the estate is complete, at least in respect of that asset), the asset is held by a trustee of a trust which is not "the estate of a deceased person". On the death of the life tenant, the remainderman will become absolutely entitled to the asset.

Whether or not a remainder beneficiary becomes absolutely entitled to an asset at the time of death of a life tenant (or, if more than one, at the time of death of the last surviving life tenant) will depend on the terms of the particular trust deed.

The effect of the trust in this case was that the remainder beneficiary became absolutely entitled to the shares on the death of the life tenant. Accordingly the asset passed at that time.

Note: CGT event K3 in section 104-215 of the ITAA 1997 may happen if an asset that did not have the necessary connection with Australia and which was owned by a person just before they died passes to a non-resident beneficiary.

Note: CGT event E5 in section 104-75 of the ITAA 1997 does not happen when a beneficiary becomes absolutely entitled to an asset to which Division 128 of the ITAA 1997 applies.

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 104-75
   section 104-215
   Division 128
   section 128-20
   subsection 128-20(1)

Related Public Rulings (including Determinations)
Taxation Determination TD93/35

Keywords
Deceased estates
Life tenants
Remainderman
CGT asset with the necessary connection with Australia
CGT events

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  28 March 2003

ISSN: 1445-2782