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Ruling
Subject: Deceased estate
Questions:
1. Does the term 'legal personal representative', as used in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) include the testamentary trustee?
Answer: Yes.
2. Is the testamentary trustee under the will considered to be a 'beneficiary' for the purposes of Division 128 and section 104-215 of the ITAA 1997?
Answer: No.
3. Are the individuals and entities identified as 'beneficiaries' of the trust in the will, considered to be 'beneficiaries' for the purposes of Division 128 and section 104-215 of the ITAA 1997?
Answer: Yes.
4. Does the residuary estate under the will 'pass' to the beneficiaries of the trust within the meaning of the term in subsection 128-20(1) of the ITAA 1997?
Answer: No.
5. Do the beneficiaries of the trust 'become the owners' of the residuary estate within the meaning of the term in subsection 128-20(1) of the ITAA 1997?
Answer: No.
6. Does the transfer of the residuary estate to the testamentary trustee give rise to capital gains tax (CGT) event K3, or some other CGT event?
Answer: No.
7. Is any capital gain or loss that may arise as a result of the transfer of the residuary estate disregarded?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commenced on
1 July 2010
Relevant facts
The deceased) was born overseas but was domicile in Australia before his/her death.
The deceased passed away in the 2009-10 financial year.
Probate of the deceased's will and codicils was granted to the executors in the 2009-10 financial year.
At the time of his/her death, the deceased had accumulated assets in Australia, including real estate, shares in Australian and overseas companies, Australian dollars held in Australian institutions and foreign currency held in overseas institutions.
The will is intended to affect the deceased's property wherever it is located in the world.
The will appointed two executors.
Under the will:
· A testamentary trust was established to distribute the income and assets of the residuary estate to relatives of the deceased and non-individual recipients.
· The individual beneficiaries are entitled to a fixed amount of the income of the trust each year until their death.
· The non-individual beneficiaries are also entitled to a fixed amount of the income of the trust each year, while they continue to operate, until vesting day.
· The trust will vest the earlier of 80 years from the death of the deceased or 20 years for the death of the last surviving individual beneficiary.
· On vesting day, the capital of the trust will be distributed between the non-individual beneficiaries that continue to exist at that time.
· The testamentary trustee and the beneficiaries of the trust are 'foreign residents' for the purposes of Australian income tax laws
· The assets of the testamentary trust are not 'taxable Australian property' for the purposes of Australian income tax laws.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 104-215
Income Tax Assessment Act 1997 - Division 128
Income Tax Assessment Act 1997 - Section 128-20
Income Tax Assessment Act 1997 - Division 128
Reasons for decision
Division 128 of the ITAA 1997
Division 128 of the ITAA 1997 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate. Under section 128-10 of the ITAA 1997, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded when you die.
Law Administration Practice Statement PSLA 2003/12 states (at paragraph 2) that it is a long standing practice of the Tax Office to treat the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA. Therefore, the term 'legal personal representative', as used in Division 128 ITAA 1997, does include the testamentary trustee.
Therefore, any capital gain or capital loss resulting from the transfer of CGT assets of the deceased's residuary estate to the testamentary trustee is disregarded.
Section 104-215 of the ITAA 1997 sets out an exception to the rule in Division 128 of the ITAA 1997 if the CGT asset passes to a beneficiary in your estate who is a concessionally taxed entity, such as a foreign resident.
The testamentary trustee is not generally considered to be a beneficiary of the trust. A beneficiary is the entity that benefits from the trust. In this case, the individuals and entities identified in paragraph 6 of the will are the beneficiaries of the trust for the purposes of Division 128 and section 104-215 of the ITAA 1997.
The idea of a CGT asset 'passing' from one entity to another is central to Division 128 and section 104-215 of the ITAA 1997. Section 128-20 of the ITAA 1997 provides that an asset passes to the beneficiary of a deceased estate if the beneficiary becomes the owner of the asset in one of the following ways:
· the legal personal representative distributes the asset to the beneficiary in accordance with a will, intestacy law, or a will or intestacy law modified by a court order
· the legal personal representative transfers the asset to the beneficiary to satisfy a monetary legacy or some other interest or share in the estate, or
· the beneficiary enters into a deed of arrangement with the legal personal representative to settle a claim to participate in the distribution of the estate, and gives no consideration other than a variation or waiver of a claim to one or more other CGT assets in the estate.
An asset can pass to a beneficiary even if they have not acquired the legal title or taken possession of it. Taxation Determination TD 2004/3 provides that the relevant test is whether the beneficiary has become 'absolutely entitled' to the asset as against the trustee. Therefore, even though the transfer of title or possession will indicate that the asset has passed, it is not a prerequisite for it passing.
Draft Taxation Ruling TR 2004/D25 considers the meaning of the words 'absolutely entitled' in relation to a CGT asset as against the trustee of a trust. TR 2004/D25 states (at paragraph 10) that the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.
If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.
In this case, the assets of the trust are not available for distribution until after the death of the last surviving individual beneficiary. Even then, there may be more than one beneficiary entitled to the assets of the trust and the interest of each non-individual beneficiary is defeasible; as each is required to still be in operation at vesting day to be entitled to a share of the trust assets. The assets of the trust will only pass to the non-individual beneficiaries of the trust on vesting day; the earlier of 80 years from the death of the deceased or 20 years for the death of the last surviving individual beneficiary. At this time, the non-individual beneficiaries that continue to exist will become the owners of the assets. Therefore, the residuary estate of the trust does not pass to the beneficiaries of the trust, nor do they become the owners of the residuary estate, within the meaning of the term in subsection 128-20(1) of the ITAA 1997, until vesting day.
CGT event K3
CGT event K3 is triggered 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) (section 104-215 of the ITAA 1997).
As the assets of the trust are not taxable Australian property (in the hands of the non-resident beneficiary), when the shares are subsequently sold, the non-resident will not be subject to further capital gains tax in Australia on their portion of the shares.
Under subsection 104-215(3), CGT event K3 is taken to happen just before the deceased's death.
Where CGT event K3 is triggered, the trustee of the deceased estate will be required to calculate any capital gain or capital loss made on the post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died. Subsection 104-215(5) of the ITAA 1997 does provide an exception for assets acquired before 20 September 1985, where any capital gain or capital loss is disregarded.
As discussed above, the residuary estate does not pass to the beneficiaries of the trust until vesting day. Therefore, CGT event K3 will be triggered at vesting day; the earlier of 80 years from the death of the deceased or 20 years for the death of the last surviving individual beneficiary. This will be outside the deceased's amendment period.
As a result, any capital gain or capital loss resulting from the transfer of CGT assets of the deceased's residuary estate will be disregarded.
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