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Ruling

Subject: Capital Gains Consequences of Deceased Estate

Question:

1. Is a trust established under the Will a "Resident trust" and a "Resident Trust for CGT Purposes"?

Answer:

Yes.

Question:

2. Is CGT Event K3 triggered when CGT assets are transferred from the executors of the deceased estate to the beneficiary controlled testamentary trust established in accordance with the operation of the deceased's Will.

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on: 1 July 2010

Relevant facts:

A copy of the Will has been supplied, and all references to clauses, relate to this Will.

All references to the "Executor" or "You" refer to the Executor for the Deceased.

The deceased passed away in the 2011 Financial Year.

Probate was granted soon after this date.

The assets involved are intended to pass from the estate, to the Beneficiary Controlled Testamentary Trust (BCTT) in the future.

X is the Primary Beneficiary (PB), a non-resident of Australia for taxation purposes.

The PB left Australia in 2010 to take up a contract overseas.

The PB has a VISA, which expires in a future year they are able to keep working in overseas whilst there is a current VISA. Their work contract does not have a specified end date. The PB does not have any children or a spouse.

Other beneficiary's include:

· The children or remoter descendents of the primary beneficiary (currently none).

· Any persons who is a descendant of a grandparent of either the primary beneficiary of the trust or a spouse of the primary beneficiary (all currently residents).

· The spouse and children of any of the persons specified in the preceding paragraph (all residents).

A resident trust will be established, with the trustee a resident company of Australia.

· X will be the sole shareholder of the company,

· X and a relative of X will be directors of the company,

· A relative of X will be the public officer and secretary of the company, and

· They intend to both substantially and actively participate in the strategic decisions for the company to ensure the central management and control remains in Australia only.

The estate assets are passive investments being cash and shares. Therefore the business of the trust will be investment activities.

Testamentary trusts will be established under the Will in accordance with Clause X.

The executor does have the discretion to distribute all or part of the assets directly to a beneficiary (including the primary beneficiary) or other trust. Currently the executor has not exercised this discretion.

Whilst the primary beneficiary must consent to the exercise of this discretion, the primary beneficiary cannot control whether the executor uses this discretion to pass the assets directly to a beneficiary or other person rather than into the BCTT.

Once the balance of the estate is ascertained and the executors have made their decision regarding how the assets are to be spilt between the two trusts, the assets do not pass to the primary beneficiaries but rather pass to the trustee of one of two trusts controlled by each primary beneficiary due to the operation of Clause Y.

The point at which the assets pass to the BCTT will be sometime after the executors make the decision as to which assets are to pass.

The trustee is not going to permanently exclude all the beneficiaries other than the primary beneficiary from the trust funds before 30 June 2013.

The trusts to be established under the Will are discretionary trusts.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 338.

Income Tax Assessment Act 1997 Subsection 95(2).

Income Tax Assessment Act 1997 Section 128-10.

Income Tax Assessment Act 1997 Section 104-215.

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

Reasons for decision

Trust creation

As per Income Tax (IT) 2622 in a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate depends on:

(a)  The stage reached in the administration of the deceased estate.

(b)  The terms of the deceased's will or codicil, trust law and principles enunciated and orders made by the Courts.

(c) Whether any discretionary payments have been made to the beneficiary by the executor or trustee.

The leading Australian case on present entitlement under a trust arising during the course of administration of an estate is the decision of the High Court of Australia in F.C. of T. v. Whiting (1943) 68 CLR 199; 7 ATD 179. The Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered.

In your case, two testamentary discretionary trusts were created as a result of the will for the deceased estate.

Residency

As per section 338 of the Income Tax Assessment Act (ITAA) 1936 a trust is an Australian trust at a point in time if:

(a)  at any time in the period of 12 months immediately before the test time:

      (i)  any trustee of the trust was an Australian resident; or

      (ii)  the central management and control of the trust was in Australia; or

(b) the trust is a corporate unit trust, or a public trading trust, in relation to the year of income of the trust in which the test time occurs.

Subsection 95(2)of the Income Tax Assessment Act (ITAA) 1997 states that a trust estate shall be taken to be a resident trust estate in relation to a year of income if:

                     (a)  a trustee of the trust estate was a resident at any time during the year of income; or

                     (b)  the central management and control of the trust estate was in Australia at any time during the year of income.

In your case, the trustee of the testamentary trust for the primary beneficiary, is an Australian company for the relevant income year, as such the trust is a resident trust of Australia for the year ended 30 June 2012.

Absolute entitlement

As per Taxation Ruling (TR) 2004/D25 persons who cannot be absolutely entitled because they do not have an interest in the trust's assets:

· an object of a discretionary trust prior to any exercise of the trustee's discretion in their favour, and

· a beneficiary of a deceased estate prior to the completion of its administration.

Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible.

In your case, you are the Executor for a deceased estate that has resulted in two testamentary trusts. It has been stipulated that the trust for the PB is a discretionary trust. As such, until such time that the trustee makes a discretion in the PB's favour, they are not absolutely entitled to any of the trusts assets.

CGT consequences

Section 128-10 of the ITAA 1997 provides that when a person dies, a capital gain or capital loss from a capital gains tax (CGT) event happening to a CGT asset the person owned just before dying is disregarded. However, section 104-215 of the ITAA 1997 (CGT event K3) sets out an exception to this rule if the CGT asset passes to a beneficiary in your estate who is:

1. an exempt entity; or

2. the trustee of a complying superannuation entity; or

3. a foreign resident.

Subsection 104-215(2) of the ITAA 1997 states that if the asset passes to a beneficiary who is a foreign resident, CGT event K3 happens only if:

1. you were an Australian resident just before dying, and

2. the asset (in the hands of the beneficiary) is not taxable Australian property.

In your case, there has not yet been any distributions to the PB, the PB is also not yet absolutely entitled to any of the estates assets via a trust or otherwise. Therefore, CGT event K3 has not happened.

Accordingly, no capital gain or capital loss currently needs to be included in the deceased final return.

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