Edited version of your written advice

Authorisation Number: 1012705900470

Ruling

Subject: Deceased estate

Questions and answers:

1. Is the deceased estate a fixed trust for the purposes of section 272-5 of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes

2. Can the non-resident beneficiary and the trustee disregard the capital gain that is made as a result of capital gains tax (CGT) event E5 happening to shares listed on the Australian Stock Exchange that are not indirect Australian real property interests?

Yes

3. Can the non-resident beneficiary and the trustee disregard the capital gain that is made as a result of CGT event E5 happening to shares listed on the Australian Stock Exchange that are indirect Australian real property interests?

No

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

The deceased died on date A after 20 September 1985.

The will of the deceased created a life interest in favour of their spouse in respect of the residue of the deceased's estate.

The deceased's spouse died on date B.

Under a clause of the will of the deceased, upon the death of the deceased's spouse, part of the residue of the estate was left to a sibling of the deceased and the other part to the siblings of the deceased's spouse.

The will also provides for some bequests to other named individuals.

At the time of the death of the deceased's spouse, there were x Australian resident remainder beneficiaries and one non-resident remainder beneficiary.

All the assets presently held in the deceased's estate were purchased after the death of the deceased.

The asset presently held in the deceased's estate consists of shares in companies listed on the Australian Stock Exchange (ASX).

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 98.

Income Tax Assessment Act 1936 Section 98(2A).

Income Tax Assessment Act 1936 Section 272-5 of Schedule 2

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-75.

Income Tax Assessment Act 1997 Section 855-15.

Income Tax Assessment Act 1997 Section 855-20.

Income Tax Assessment Act 1997 Section 855-40.

Reasons for decision

Fixed trust

Under subsection 995-1(1) of the ITAA 1997, a 'fixed trust' is defined as:

A trust is a fixed trust if entities have *fixed entitlements to all the income and capital of the trust.

'Fixed entitlement' is explained in subsection 995-1(1) of the ITAA 1997 as:

An entity has a fixed entitlement to a share of the income or capital of a company, partnership or trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in trust as:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital. (some emphasis added)

'Vested and indefeasible' is not defined in taxation legislation, nor is there a precedential ATO view which defines or explains the term.

However, paragraph 13.4 of the Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 describes a 'vested interest' as:

A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time.

Paragraph 13.7 of the EM proceeds to explain that a vested interest is indefeasible where:

…in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

Paragraph 13.8 of the EM further explains that:

Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiary's interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

The trust instrument, for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, consists of the will of the deceased.

It is acknowledged that the will provides the sibling of the deceased and the siblings of the deceased's spouse with a vested interest in the income of the estate of the deceased, upon the death of the deceased's spouse.

Additionally, it is clear that the will provides for some bequests to other named individuals including the aforementioned persons (the residuary beneficiaries).

The other named individuals who have or will receive bequests have no other interests in the estate. These bequests do not affect the determination of whether the trust constituted by the estate is a fixed trust. The interests of the residuary beneficiaries are the only interests that are relevant.

It is apparent that the will can only be applied for the benefit of the aforementioned parties.

The residuary beneficiaries have a vested interest in the income and capital of the estate. They each have a present right to future enjoyment of their equal share of the income and capital.

The interest of the residuary beneficiaries in the income and capital of the estate is indefeasible. There is no condition in the trust instrument, the will, by which any of the residuary beneficiaries could lose their interest in the estate.

The trustee only has discretion regarding administrative matters of the deceased estate. There are no clauses in the will that authorises the trustee to do anything that would cause the beneficiaries' entitlement to be defeased. The timing of when the beneficiaries receive their entitlements does not defeat the interests of the beneficiary.

Since all of the residuary beneficiaries have a vested and indefeasible interest in a share of the income and capital of the estate, they all have a fixed entitlement to a share of the income and capital of the estate, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Therefore, the trust constituted by the estate of the deceased is a fixed trust under section 272-65 of Schedule 2F to the ITAA 1936.

Consequences of CGT event E5

Section 104-75 of the ITAA 1997 provides that CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust of a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

If the trustee makes a capital gain by reason of CGT event E5 when the beneficiary becomes absolutely entitled to an asset of the trust, the beneficiary can be specifically entitled to the capital gain.

In relation to CGT event E5, subsection 104-75(3) of the ITAA 1997 specifies that a trustee makes a capital gain if the market value of the asset (at time of the event) is more than its cost base. Conversely, a trustee makes a capital loss if that market value is less than the asset's reduced cost base

In this case, the beneficiaries became absolutely entitled to the assets of the estate upon the passing of the deceased's spouse. CGT event E5 happened to the assets that were acquired by the trustee of the trust.

Therefore, since the beneficiaries can be specifically entitled, the capital gain is able to be distributed by the trustee to the beneficiaries.

Section 855-10 of the ITAA 1997 specifies a person who is a foreign resident, just before the CGT event occurs, may disregard a capital gain or loss made where the CGT event occurs in relation to a CGT asset that is not 'taxable Australian property'.

Under section 855-40 of the ITAA 1997, a CGT exemption is available where a capital gain or loss is made by a foreign resident on an interest in a fixed trust and that interest is not 'taxable Australian property'.

The application of both section 855-10 and section 855-40 of the ITAA 1997 relies, amongst other things, on whether the CGT asset in question is 'taxable Australian property'.

Section 855-15 of the ITAA 1997 defines 'taxable Australian property'.

'Indirect Australian real property interest' is defined section 855-25 of the ITAA 1997.

If the shares pass the 'non-portfolio test' and the 'principal asset' test, as defined in section 855-25 of the ITAA 1997, the ASX listed shares would be considered 'taxable Australian property'. As a result, the non-resident beneficiary would not be able to apply section 855-10 or section 855-40 of the ITAA 1997 to disregard the capital gain made on the ASX listed shares.

Your case

In your case, the shares concerned are in companies listed on the ASX. As long as the shares are not indirect Australian real property interests, any capital gain arising as a result of CGT event E5 happening to the ASX listed shares will be disregarded by the non-resident beneficiary and the trustee.

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