Edited version of private ruling

Authorisation Number: 1011535552632

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Ruling

Subject: Capital gains tax (CGT)- deceased estate

Will you, as trustee, be assessed for tax on net capital gains that form part of the net income of the trust earned after the death of the life tenant?

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a trustee of the deceased estate of a person who died after 1985. Administration of the estate is complete. The estate now comprises only cash and shares, most of which were owned at the date of death.

The Will was written in the 1960s, and provided for

· all shares to be held on trust: with the income to the deceased's spouse for their lifetime, and the shares to be realised at the death of the spouse and paid to a university for research

· the residue to the spouse for their own use and benefit.

You were given authority to acquire new investments when funds became available, and have done so since the date of death.

All proceeds from the sale of shares have been kept within the estate and identified as 'capital'. The will was made before the introduction of CGT and made no provision for dealing with capital gains. You consider that the beneficiary is not presently entitled to any capital gains, and have not distributed any gains to them.

The life tenant passed away. In accordance with the terms of the Will, the shares have been sold and the proceeds have been held in cash deposits.

You will distribute the proceeds to the remainderman, the university.

The university is an Australian resident tax-exempt entity.

Reasons for Decision

Assessability of income of a deceased estate

The net income of the trust estate is defined in subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The net income of the trust may be assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

Taxation Ruling IT 2622 deals with present entitlement during the administration of a deceased estate. It states that beneficiaries will enjoy present entitlement to the income of the estate when the administration of the estate is complete or upon the executor exercising the discretion to pay some of the income to the beneficiaries.

In the case of testamentary trusts, present entitlement to income is determined by the wording of the Will, or the discretion of the trustee, as appropriate.

Taxation Determination TD 2004/3 states that a beneficiary who is absolutely entitled to the asset as against the trustee of an estate has a vested, indefeasible and absolute interest in the asset. An absolutely entitled beneficiary can direct how the trustee will deal with the asset. If the asset is disposed of by the trustee at the direction of the absolutely entitled beneficiary, the capital gain does not form part of the net income of the trust. Rather any capital gain will be made by the beneficiary.

Death of the measuring life

Taxation Ruling TR 2006/14 deals with the CGT consequences of creating and dealing in life and remainder interests.

Paragraphs 38 to 50 discuss the consequences of the death of the person by whose life a life interest is measured. In summary:

· the remainder owner may become absolutely entitled to the trust asset

· if the remainder owner becomes absolutely entitled, CGT event E5 happens

· there is an exception to CGT event E5 if the trust is one to which Division 128 applies.

Where an asset is acquired by a trustee of the estate, the beneficiary does not have any entitlement to the asset as long as the life tenant continues to have an interest in the asset. But after the death of a life tenant, the beneficiary becomes absolutely entitled to the assets the estate. At that point the trustee is deemed to have disposed of the assets to the remainderman.

In your case you, as trustee, were responsible for selling the trust's shareholdings before distributing the cash to the university as the remainderman beneficiary. The life tenant passed away. In accordance with the terms of the Will, the shares have bees sold and the proceeds have been held in cash deposits.

Upon the death of the life interest owner, the remainder owner became absolutely entitled to the assets. This is because the university had an indefeasible interest in the assets. There was no other beneficiary that could call for the assets to be transferred to them.

CGT event E5 under section 104-75 of the ITAA 1997 happened on the death of the life tenant and you as trustee were deemed to have disposed of the shares on the death of the life tenant.

Any income of the estate at that point including any capital gain arising on that deemed disposal by the trustee is assessable in the hands of the beneficiary under section 97 of the ITAA 1936.

In your case, you as the trustee have disposed of the shares owned by the estate. Therefore there has been an actual disposal by you and not just a deemed disposal. You will pass on the capital and any gain from that disposal to the beneficiary who has become absolutely entitled to the residue of the estate after the death of the life tenant.

In doing so, any capital gain made on the disposal of the shares by you is not assessable to you as the trustee.

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