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Edited version of your written advice
Authorisation Number: 1051265654205
Date of advice: 8 August 2017
Ruling
Subject: Capital gains tax and a deceased estate
Questions and Answers
1. Is the deceased estate a fixed trust?
Yes.
2. Can the non-resident beneficiary and non-resident charities disregard the capital gain that is made as a result of a CGT event happening where the assets are not Australian taxable property?
Yes.
This ruling applies for the following period(s)
Year ended 30 June 2017
The scheme commences on
1 July 2016
Relevant facts and circumstances
The deceased died a number of years ago.
Probate was granted by the Court in the X income year.
The deceased’s spouse was the sole life tenant receiving 100% of the trusts income during their life time.
The life tenant passed away in the X income year.
All the capital and income of the trust now vest in the several beneficiaries who are non-residents for Australian tax purposes and reside overseas.
The assets of the estate consist entirely of managed investment funds which were acquired by the trustee after the death of the testator.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 272-5
Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F
Income Tax Assessment Act 1936 Section 272-65 of Schedule 2F
Income Tax Assessment Act 1997 Subsection 104-10
Income Tax Assessment Act 1997 Section 104-75
Income Tax Assessment Act 1997 Section 104-215
Income Tax Assessment Act 1997 Section 128-10
Income Tax Assessment Act 1997 Section 128-20
Income Tax Assessment Act 1997 Section 855-10
Income Tax Assessment Act 1997 Section 855-15
Income Tax Assessment Act 1997 Section 855-40
Income Tax Assessment Act 1997 Subsection 995-1(1)
Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997
Reasons for decision
The trust instrument, for the purpose of subsection 272-5(1) of Schedule 2F of the ITAA 1936, consists of the Will of the deceased.
A fixed trust is defined in subsection 995-1(1) of the ITAA 1997, providing that a trust is fixed trust if entities have fixed entitlements to all of the income and capital of the trust.
The term “fixed entitlement’ is then defined in subsection 272-5(1) of Schedule 2F of the ITAA 1936. Providing that a fixed entitlement in a trust is where a beneficiary has a vested and indefeasible interest in the income or capital of the trust.
To determine if the beneficiaries have a fixed entitlement, it must be determined if they have a “vested and indefeasible interest”. This term is not defined in tax legislation. The ordinary meaning can therefore be applied. Paragraphs 13.3 to 13.9 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 reflect what this meaning may be. A “vested interest” means an individual has a present right to something, and “vested indefeasible interest” means that right cannot be lost.
The Will provides a vested interest for the beneficiaries to receive the assets of the Will.
Clause XX of the Will does not cause a beneficiaries’ entitlement to be defeased.
Since, all parties bequeathed within the Will have a vested and indefeasible interest in a share of the deceased estate, they all have fixed entitlements, in accordance with subsection 272-5(1) of Schedule 2F of the ITAA 1936.
Therefore, the trust founded by the estate of the deceased is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936.
CGT exemption in section 855-40 of the ITAA 1997
Section 855-40 of the ITAA 1997 provides a CGT exemption for foreign residents making a capital gain in respect of their interest in a fixed trust (including a managed fund).
Subsection 855-40(2) of the ITAA 1997 provides that a capital gain you make in respect of your interest in a fixed trust is disregarded if:
● you are a foreign resident when you make the gain: paragraph 855-40(2)(a) of the ITAA 1997; and
● the gain is attributable to a CGT event happening to a CGT asset of a trust (the CGT event trust) that is the fixed trust: subparagraph 855-40(2)(b)(i) of the ITAA 1997; and
● the asset is not taxable Australian property for the CGT event trust at the time of the CGT event: subparagraph 855-40(2)(c)(i) of the ITAA 1997.
In the present case, all requirements of subsection 855-40(2) of the ITAA 1997 have been met. Therefore the capital gain of all the beneficiaries can be disregarded as their interest in the Australian resident trust falls outside the definition of taxable Australian property in section 855-15 of the ITAA 1997.
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