1012782267594 | Legal database

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Edited version of your written advice

Authorisation Number: 1012782267594

Ruling

Subject: CGT - deceased estate - disposal of shares

Question 1

Will any capital gain from the sale of the assets be disregarded?

Answer

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The deceased died in June 20XX.

Probate was granted in December 20XX.

The Executors began to sell assets of the estate and realise cash proceeds for distribution to beneficiaries of the Estate.

The beneficiaries of the proceeds from the assets were tax advantaged entities.

When the executors were made aware of the CGT implications of the sale of the assets as opposed to the transfer of assets to a tax advantaged entity, they ceased any further asset sales.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 subsection 30-15(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 section 104-215(3)

Income Tax Assessment Act 1997 section 118-60(1)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 subsection 128-15(1)

Income Tax Assessment Act 1997 subsection 128-15(2)

Income Tax Assessment Act 1997 subsection 128-15(3)

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 Division 50

Reasons for decision

Deceased estate

The capital gains tax (CGT) provisions that deal with the effect of death are located in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

When a person dies, the assets that make up their estate can:

• pass directly to a beneficiary (or beneficiaries), or

• pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).

A legal personal representative can be either:

• the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will)

• an administrator appointed to wind up the estate if the person does not leave a will.

Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

If a legal personal representative disposes of an asset under a power of sale, the resulting capital gain will not be disregarded under Division 128 of the ITAA 1997.

CGT event A1

CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

CGT Event K3 - Asset passing to tax-advantaged entity

When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the ITAA 1997).

CGT event K3 in section 104-215 of the ITAA 1997 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that, when the asset passes, is an exempt entity. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death.

An exempt entity is one whose ordinary and statutory income is exempt from income tax because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997).

CGT event K3 will happen when the deceased's property passes from the deceased estate to the beneficiary, who is an exempt entity.

However, under subsection 118-60(1) of the ITAA 1997, a capital gain or loss made from a testamentary gift of property is disregarded if the gift would have been deductible under section 30-15 of the ITAA 1997 had it not been a testamentary gift.

Subsection 30-15(1) of the ITAA 1997 provides that entities can deduct a gift in the situations set out in the table in section 30-15. The table sets out who the recipient of the gift can be, the type of gift that can be made, how much can be deducted and any special conditions that apply.

Item 1 of the table sets out one of the situations in which a gift can be deducted. Under that item a gift of property must:

• be made to a deductible gift recipient (DGR) that is in Australia

• satisfy any gift conditions affecting the type of deductible gifts the recipient can receive, and

• be property that is covered by one of the listed gift types.

The gift types include property valued by the Commissioner at more than $5,000.

Application to your circumstances

In your case, assets of the estate passed to the Executors as legal personal representatives as at the date of the deceased's death.

The Executors disposed of some of the assets within the estate, which triggered CGT event A1. Even though the beneficiaries of the Estate who will receive the proceeds of the sale of those assets are tax advantaged entities, there is no discretion available in the legislation to disregard the capital gain made from the disposal. Had the assets been transferred to the tax advantaged entities (beneficiaries) and not disposed of to other entities, CGT event K3 would have been the more relevant event.

The assets were disposed of under a power of sale; they did not pass to a beneficiary of the Estate. Accordingly, the exemption contained in section 128-15 of the ITAA 1997 will not apply and any capital gain made from the disposal of the shares will not be disregarded.

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