1012750341572 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012750341572

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Will there be any capital gains tax liability in relation to the capital portion of the distribution made to the deceased estate due to the liquidation of a company in which the deceased acquired shares prior to 20 September 1985?

Answer

Question 2

Will the unfranked dividends received by the deceased estate from the liquidator of a company in which the deceased held shares be considered assessable income?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died on dd/mm/yyyy.

The deceased bequeathed the residue of their estate to a tax exempt entity.

The residue of the deceased's estate included shares in X Pty Ltd.

The deceased acquired the shares in X Pty Ltd prior to 20 September 1985.

Shortly after the deceased's death, X Pty Ltd was placed into liquidation, and the assets of the company sold.

The liquidator for X Pty Ltd made a final distribution of the proceeds from the former company to the legal personal representative of the estate.

The final distribution was made up of the following amounts:

Return of Capital - $ XX

Pre-CGT Capital Reserve - $ XX

Unfranked dividend - $ XX

The final distribution payment was made by the liquidator in late 20XX.

It is anticipated that the deceased estate will be fully administered and finalised within the 20YY financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 paragraph 104-25(1)(a)

Income Tax Assessment Act 1997 subsection 116-30(2)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 100AA

Reasons for decision

The cost base rules for assets in the hands of the legal personal representative or beneficiary of a deceased estate are set out in a table at subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997). Item 4 of subsection 128-15(4) states the first element of the cost base of an asset acquired by the deceased before 20 September 1985 will be the market value of the asset at the date of death.

In your case, the first element of the cost base of the shares in X Pty Ltd in the hands of the legal personal representative would be the market value of the shares at the date of the deceased's death.

The liquidation of X Pty Ltd and the cancellation of its shares would constitute a Capital Gains Tax (CGT) C2 event under paragraph 104-25(1)(a) of the ITAA 1997. The capital proceeds will be the amount received from the liquidator which will be deemed to be its market value in accordance with subsection 116-30(2) of the ITAA 1997 and the cost base will be as at the date of death of the deceased. The net effect will be no capital gain or loss on the cancellation of the shares.

Taxation Ruling IT 2622 discusses present entitlement during the stages of administration of deceased estates. Paragraph 17 of IT 2622 states where the administration of a deceased estate is completed during the course of an income year, the beneficiaries who are not under any legal disability are liable to bear tax on their shares of the net income of the estate for that year to which they are presently entitled under section 97 of the ITAA 1936.

Where no beneficiary is presently entitled to all or part of the net income of the estate the trustee is assessed under section 99 of the ITAA 1936. The trustee will also be assessed, under section 98 of ITAA 1936, where a beneficiary is presently entitled to the net income of the estate but the beneficiary is not a resident of Australia.

In your case, the unfranked dividends received from the liquidator of X Pty Ltd would be considered assessable income of the deceased estate. This income was received within the relevant financial year and it is anticipated that the deceased estate will also be fully administered and finalised within this year.

The tax exempt entity, as beneficiary of the residue of the deceased's estate, would therefore be liable to bear tax on their share of the net income of the estate as they would be presently entitled to the income of the trust under section 97 of the ITAA 1936.

Under section 100AA of the ITAA 1936, if an exempt entity is presently entitled to an amount of the income of a trust estate and the exempt entity is not an exempt government agency and at the end of two months after the end of the relevant income year, the trustee has failed to notify the exempt entity in writing of the present entitlement, then the trust will be assessed on that income.

In your case, you will need to notify the tax exempt entity in writing of their present entitlement to the amount of income from the trust within the end of two months from the end of the relevant financial year, that is by dd/mm/yyyy, or the trustee will be assessed on that income.

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