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Edited version of your written advice
Authorisation Number: 1012973482007
Date of advice: 23 February 2016
Ruling
Subject: Deceased Estate
Question 1
Does the gift of the residue of the deceased's estate to a deductible gift recipient (DGR) under a clause of the deceased's will establish a separate fund?
Answer
No.
Question 2
Will any capital gain or loss that results from any CGT asset passing to the DGR under a clause of the deceased's will be disregarded under section 118-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The DGR is a registered charity with access to FBT exemption, income tax exemption and CGT concessions.
The DGR is endorsed as a deductible gift recipient under item 1 of the table in section 30-15 of the ITAA 1997.
The will of the deceased gives the residue of the estate to the DGR to hold in perpetuity in a charitable sub trust of the DGR. The net income of the Charitable Trust is to be applied for the general charitable purposes of the DGR.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 30-15
Income Tax Assessment Act 1997 Division 50
Income Tax Assessment Act 1997 section 50-52
Income Tax Assessment Act 1997 section 104-215
Income Tax Assessment Act 1997 section 118-60
Income Tax Assessment Act 1997 subsection 995-1
Reasons for decision
Question 1
Where the terms of a deceased estate provides for a donation of the residue of the estate to a deductible gift recipient endorsed under section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997), an issue of whether a separate trust is created has to be determined.
The Commissioner has issued his views in Taxation Determination TD 2004/23.Paragraphs 2 to 5 of TD 2004/23 outline when there is a separate fund created:
2. An obligation on the trustee to comply with requests from a donor may arise from the trust deed itself. This can occur where the trust deed contains clauses, the effect of which is that the trustee is required to hold and apply a gift and any resulting income:
• in accordance with requests from the donor;
• on the basis or conditions outlined by the donor; or
• subject to arrangements with the donor.
3. Alternatively, an obligation on the trustee may arise from a course of action taken by the trustee. An obligation may arise from undertakings or assurances given by the trustee. For example, assurances in promotional material or through other arrangements with the donor may state that the trustee will always comply with the donor's requests provided they come within the purpose of the fund. In some cases the donor's requests or recommendations are made through an advisory committee and the trustee gives a similar assurance or other undertaking that it will always follow the recommendations of the committee.
4. Some arrangements between the trustee and a donor are such that the trustee is not permitted to distribute the amount of the gift or resulting investment income without first obtaining and considering a recommendation from the donor or the donor's advisory committee, and the trustee is required to inform the donor if it intends to depart from the donor's recommendations. This can operate as an effective power of restraint or direction by the donor as the trustee needs the consent or acknowledgement of the donor before it can implement decisions on the application of the gift and resulting income. Such a feature is consistent with an obligation or assurance from the trustee to comply with the donor's ongoing requests.
5. Where the trustee of a public fund accepts a gift subject to such obligations or assurances, we consider that there is a relevant legal distinction between that gift and other gifts made to the fund without those features. There is a legally binding relationship, with ongoing rights and obligations, between the trustee and the donor that does not apply to persons who make contributions without those features. In these cases, a separate fund is created.
Paragraph 11and 12 of TD 2004/23 outline when there is not a separate fund created. It states:
11. In contrast, a separate fund is not created if the donor merely expresses a preference to be considered when the trustee is making grants - Re Australian Elizabethan Theatre Trust; Lord v. Commonwealth Bank of Australia and Others (1991) 30 FCR 491; (1991) 102 ALR 681. For example, a separate fund is not created where the trust deed or other material merely allows:
• a donor to, from time to time, express a preference for the gift and/or investment income to be applied to particular eligible charities or a particular type of eligible charity, for example, public benevolent institutions assisting the homeless;
• a donor to express a preference via a committee provided that the trustee does not have an obligation (or an effective obligation - see paragraph 4) to comply with the request or recommendation of the advisory committee or the donor;
• the trustee to maintain a named management account to record the gift from the donor, the investment income and grants made;
• the trustee to provide regular reports to the donor advising how the amounts of the gift and investment income have been used; and/or
• the trustee to accept a donation as an agent for on-forwarding to a nominated eligible charity.
12. To ensure that a separate fund is not created, it must be clear from all the circumstances and having regard to the trust deed, receipts, marketing information and any other material that the trustee is not under an obligation to apply moneys in accordance with donors' wishes and does not make a promise or give an assurance to comply with donors' requests. This must be the genuine arrangement between the trustee and the donor and it is not acceptable for contrary 'understandings' to be entered into, even if orally.
Example 2 at paragraphs 15 to 17 of TD 2004/23 has relevance. It states;
15. The trust deed and promotional material of Z Community Foundation includes statements indicating that the trustee may accept a gift from a donor who expresses a preference for particular eligible charities, or a particular type of eligible charity, to benefit from their gift. The trust deed and promotional material also states that the trustee may take the donor's preference into account when making decisions, but the trustee is not under an obligation to comply with the donor's request.
16. The trustee maintains a named management account to record the gift from the donor and the resulting investment income and distributions. However, the trustee's bank account arrangements are not based upon a differentiation between the source of public gifts, including those where the donor expresses a preference. Ultimately, all gifts are pooled for investment purposes.
17. In this case, the management account is not considered to be a separate fund and its existence does not prevent Z Community Foundation from being a public fund entitled to be endorsed as a deductible gift recipient.
Clauses of the deceased's will allow for the DGR to apply the net income of the Charitable Trust for the general charitable purposes of the DGR. There is no express obligation placed upon the trustee of the DGR to apply the funds in a particular manner. The clauses are considered to be merely wishes or preferences outlined in the will.
The deductible gift recipient in this case is endorsed under item 1 of section 30-15 of the
ITAA 1997. It is considered that example 2 in TD 2004/23, as outlined above, applies to the circumstances of the DGR. Accordingly, it is considered that there is no separate fund created as a result of the gift of the residue of the deceased's estate to the DGR under clauses of the deceased's will.
Question 2
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 is, when the asset passes, an exempt entity. Under subsection 104-215(3), CGT event K3 is taken to happen just before the deceased's death.
An exempt entity is defined in subsection 995-1(1) of the ITAA 1997 as one whose ordinary and statutory income is exempt from income tax because of Division 50 of the ITAA 1997.
Therefore, CGT event K3 happened in this case as the property will pass to a beneficiary who, at that time, 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. Testamentary gifts are gifts made under a deceased person's will.
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 whom the recipient of the gift can be, the type of gift you can make, how much you can deduct 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 that is in Australia
• satisfy any gift conditions affecting the types of deductible gifts the recipient can receive, and
• be property that is covered by one of the listed gift types.
You have indicated that the residue of the deceased's will, may include property acquired on or after 20 September 1985.
As the beneficiary is a DGR in Australia, the deceased would have been entitled to a deduction under section 30-15 of the ITAA 1997 for the gift had it been made during, their lifetime.
Accordingly, any capital gains or losses made from CGT event K3, or any other CGT event happening, are disregarded under subsection 118-60(1) of the ITAA 1997.
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