ATO Interpretative Decision

ATO ID 2003/470

Income Tax

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

Issue

Does a CGT event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on the surrender of a taxpayer's life interest in a trust created by the will of a deceased person?

Decision

Yes. The CGT event C2 in section 104-25 of the ITAA 1997 will happen on the surrender of the taxpayer's life interest.

Facts

An individual died after 20 September 1985. The individual's will provided that the residue of their estate was to be held on trust for the taxpayer for life with the remainder for the deceased's children in equal shares.

The administration of the estate was completed several years ago and the taxpayer has received income from the trust since that time.

The taxpayer wishes to surrender their life interest in the trust by entering into a deed of surrender. The taxpayer will not receive any consideration for the surrender of their life interest.

Reasons for Decision

The taxpayer acquired an asset, their life interest in the trust, at the time when the testamentary trust was created. In this case, the taxpayer's life interest was created as a result of CGT event D1 happening (section 104-35 of the ITAA 1997). In accordance with paragraph 112-20(1)(a) of the ITAA 1997, the market value substitution rule will not apply to determine the cost base of the taxpayer's life interest. It is considered that the cost base of the taxpayer's life interest will be limited to any incidental costs incurred on acquisition and disposal.

CGT event C2 in section 104-25 of the ITAA 1997 happens if a taxpayer's ownership of an intangible CGT asset (for example, an interest in a trust) ends by the asset being abandoned, surrendered or forfeited. The time of the event is when the taxpayer enters into the contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2) of the ITAA 1997). CGT event C2 will happen when the taxpayer enters into the deed of surrender.

CGT event E6 in section 104-80 of the ITAA 1997 does not happen in this case as the trustee has not disposed of a CGT asset to the beneficiary in satisfaction of their right to receive income from the trust.

A taxpayer will make a capital gain from CGT event C2 if the capital proceeds from the ending of the asset are more than its cost base. A taxpayer will make a capital loss if those capital proceeds are less than the asset's reduced cost base: subsection 104-25(3) of the ITAA 1997.

In this situation, the taxpayer will not receive any capital proceeds as a result of the surrender of their life interest. Subsection 116-30(1) of the ITAA 1997 provides that if the taxpayer receives no capital proceeds from a CGT event, they are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event. In addition, subsection 116-30(3A) of the ITAA 1997 provides that the market value is worked out as if the event had not occurred and was never proposed to occur. The market value of the life interest the taxpayer intends to surrender will depend upon a number of factors including their life expectancy.

Accordingly, the taxpayer will make a capital gain on surrender of their life interest if the market value of the life interest exceeds its cost base.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 104-25
   subsection 104-25(3)
   section 104-35
   section 112-20
   paragraph 112-20(1)(a)
   section 116-30
   subsection 116-30(1)
   subsection 116-30(3A)

Related Public Rulings (including Determinations)
Taxation Determination TD 93/35

Related ATO Interpretative Decisions
ATO ID 2003/39
ATO ID 2003/107

Keywords
Capital gains tax
CGT capital proceeds modification market value substitution rule
CGT cost base
CGT deceased estates
CGT events C1-C3 - end of a CGT asset
Life tenants

Business Line:  Losses & CGT Centre of Expertise

Date of publication:  20 June 2003

ISSN: 1445-2782