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This edited version has been archived due to the length of time since original publication.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: 1051311195520

Date of advice: 21 November 2017

Ruling

Subject: Income tax - Capital gains tax - CGT events - general

Question 1

Did the statutory trustees acquire the Property as a result of CGT Event A1 when they were appointed by the court?

Answer

Yes

Question 2

Did the Statutory Trustees acquire the Property as a result of CGT Event E1 when they were appointed by the court?

Answer

No

Question 3

Did the Statutory Trustees acquire the Property as a result of CGT Event E2 when they were appointed by the court?

Answer

No

Question 4

Did a CGT event other than A1, E1 or E2 occur when the trustees for sale were appointed by the court?

Answer

No

Question 5

Is the cost base of the Property equal to its net sale proceeds?

Answer

No

This ruling applies for the following period:

The scheme commences on:

1 July 2015

Relevant facts and circumstances

X was a resident of Country A. X died on ##/##/20##. At that time X owned several properties that they had acquired prior to 20 September 1985. In accordance with the terms of the will, these assets were transferred to X’s children on the ##/##/20##.

X’s spouse died on ##/##/19##. X was a beneficiary of the estate. On ##/##/20##, a property passed from X’s spouse’s estate to the Executors of the estate. Ownership of this property has not passed to the beneficiaries of the estate.

A dispute arose between the beneficiaries of the estate. On ##/##/20## the Relevant Court of NSW ordered that:

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 104-55,

Income Tax Assessment Act 1997 section 104-60,

Income Tax Assessment Act 1997, section 108-7

Income Tax Assessment Act 1997 subsection 110-25(2),

Income Tax Assessment Act 1997 subsection 112-20(1),

Conveyancing Act 1919 (NSW) section 36A and

Conveyancing Act 1919 (NSW) section 66G.

Summary

CGT Event A1 happens as a result of the change of ownership from the Executors to the Trustees pursuant to the court order. The first element of the cost base of the property in the hands of the Trustees will be the market value of the property at the time of making the court order.

Detailed reasoning

Real Properties

Subsection 104-10(1) of the ITAA 97 provides that CGT event A1 happens if you dispose of a CGT asset.

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. A change of ownership will not occur if you stop being the legal owner of an asset but continue to be its beneficial owner.

Where the disposal of a CGT asset does not occur under a contract, CGT event A1 happens when the change of ownership occurs.

The effect of the court order was to vest the whole of the Executors’ interests in the property in the Trustees. Pursuant to paragraph 66(7)(b) of the Conveyancing Act 1919 (NSW), land is deemed to be ‘converted’ upon the appointment of trustees for sale, unless the court otherwise directs.

In equity, conversion is the notional change of land into money (or money into land). Its effect is to turn realty into personalty (or personalty into realty). On the making of the court order, the Executors’ interests were converted to a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests. As such, the Executors retained no beneficial interest in the Property.

In these circumstances it is considered that upon the making of the Court order, a change of ownership occurred from the Executors to the Trustees, resulting in CGT event A1 happening.

Consequences for Trustees of Court order

The first element of a CGT asset’s cost base is the total of money paid or required to be paid, and the market value of property given or required to be given, in respect of acquiring that asset (at the time of acquisition), pursuant to subsection 110-25 of the ITAA97. If no money or property is given by the Trustee, the market value substitution rule in subsection 112-20(1) of the ITAA97 operates to deem the first element of cost base to be the market value of the property at the time it was acquired.

The Trustees acquired the Property on the date of the Court Order, in accordance with subsection 104-10(3) of the ITAA97.

Although the Executors received property as a result of CGT event A1 happening, the Trustees gave no property because the CGT event happened by operation of law. Accordingly, the first element of the cost base of the property in the hands of the Trustees is its market value on the date it vested in the Trustees (subsections 110-25(2) and 112-20(1) of the ITAA97).

Capital Gain from sale by Trustee

The Trustees will make a capital gain if the sale proceeds exceed their cost base for the property and a capital loss if those proceeds are less than the reduced cost base of the property. A capital gain will be included in the net income of the trust. The Trustees will be able to apply the CGT discount if they owned the asset for more than 12 months.

Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with the net income of a trust that has a capital gain. Amongst other things, the rules treat that part of the net income attributable to the trust’s net capital gain as a capital gain made by a beneficiary.

If, as here, the beneficiary is a non-resident, section 115-220 of the ITAA97 will apply to assess the beneficiary’s share of the capital gain to the trustee.

Section 115-115 of the ITAA 1997 denies a discount for a capital gain to the extent that it accrued while a beneficiary was a foreign resident. Where a beneficiary is a foreign resident for all of relevant testing period, the discount percentage is reduced to 0.

The non-resident beneficiaries will also be assessable under section 98A but will get a credit for the tax paid by the trustee.

Other CGT events

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55 of the ITAA97). In this case, it is considered that the trust is created by an order of the Court, rather than the actions of the Executors. As a result, CGT event E1 does not happen.

CGT event E2 happens if a CGT asset is transferred to an existing trust (section 104-60 of the ITAA97). The Trust, created by the order of a court, was not a pre-existing trust and the transfer of the assets to the Trustees will not result in CGT event E2 happening.

There are no other CGT events that are relevant to the appointment of trustees for the sale.

ATO view documents

ATO Interpretative Decision 2009/129

Other references (non ATO view)

Gain for executors from Court Order

The Executors of X’s estate will make a capital gain from CGT event A1 happening when the property vested in the Trustees of the statutory trust for sale if the capital proceeds for the property at that time are greater than their cost base for the property.

Capital proceeds are defined in section 116-20 of the ITAA 1997 as the total of the money that you have received or are entitled to receive in respect of the event happening and the market value of any property that you received or are entitled to receive. If you received no capital proceeds, the market value substitution rule in subsection 116-30(1) treats you as having received the market value of the property. In this case, the Executors received no capital proceeds and so will be treated as having received market value proceeds.

Section 128-15 ITAA 1997 provides that the cost base of the property in hands of the Executors is based on X’s cost base on the day X died.

X acquired the property when their spouse died on ##/##/19##. As the spouse acquired the property prior to 20 September 1985, the first element of the cost base for X was the market value of the property at the time the spouse died.

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