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Edited version of private ruling

Authorisation Number: 1011485298872

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Ruling

Subject: Capital gains tax - deceased estate - foreign beneficiary

Question 1

Will CGT event K3 occur in relation to the shares bequeathed to a foreign beneficiary when the shares are less than 10% of the total shareholding in the relevant companies?

Answer: Yes.

Question 2

Will CGT event K3 occur in relation to the share in the units bequeathed to a foreign beneficiary?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a number of properties and shares after 20 September 1985.

Under the terms of your will you intend to leave each of your children an equal share in the assets.

A number of your children are Australian residents, while another is a foreign resident.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-215(1)

Income Tax Assessment Act 1997 Subsection 104-215(2)

Income Tax Assessment Act 1997 Subsection 104-215(3)

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Reason for decision

The capital gains tax (CGT) provisions will apply to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985. There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, or when a person dies, an asset they owned passes to their legal personal representative or to a beneficiary.

However, if a foreign resident is a beneficiary of a deceased's post CGT asset, any capital gain or capital loss is taken into account in preparing the deceased person's date of death return if:

Taxable Australian property

Taxable Australian property includes:

CGT event K3

CGT event K3 happens if a CGT asset owned by a person who was an Australian resident for tax purposes just before they died, passes to a beneficiary in their estate who is, when the asset passes, a non resident of Australia for taxation purposes, and the asset is not taxable Australian property in the hands of the non-resident beneficiary.

Where CGT event K3 happens, a foreign beneficiary disregards any capital gain or capital loss made on post CGT assets. The trustee of the deceased estate will be required to calculate any capital gain or capital loss made on post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died.

Application to your case

You own a number of properties located in Australia and shares acquired after 20 September 1985 that you intend bequeathing in equal shares to your children. A number of your children are Australian residents, while another is a foreign resident.

If the foreign beneficiary does not hold more than 10% of the total shareholding of the companies in which the shares are held when the shares pass to them, the shares will be viewed as non taxable Australian property. Therefore, the foreign beneficiary will be able to disregard any capital gain or capital loss made on the shares. The trustee of your estate will have to calculate any capital gain or capital loss made on the shares, and include the capital gain or capital loss in your date of death return.

As the properties are located in Australia, they are considered to be taxable Australian property. The foreign beneficiary will be liable for their share of any CGT that results from the disposal of the properties. The general CGT rules, and exemptions, are applicable to the share in the properties inherited by the foreign resident, and the other beneficiaries. Any capital gain or capital loss made in relation to the foreign resident's share in the properties will not be included in your date of death return, but will be included in the beneficiaries income tax returns in the income year in which they arose.

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