Edited version of your written advice

Authorisation Number: 1051376054839

Date of advice: 7 June 2018

Ruling

Subject: Capital gains tax – deceased estates

Question 1

Will the Commissioner treat A Pty Ltd, the trustee of the Testamentary Trust (TT), in the same way as a legal personal representative (LPR) for the purposes of Division 128, in particular subsection 128-15(3) in accordance with Law Administration Practice Statement PS LA 2003/12 (PS LA 2003/12)?

Answer

Yes

Question 2

Will the Commissioner confirm that he will apply the ATO practice as set out in PS LA 2003/12 to A Pty Ltd as the trustee of the TT in relation to the transfer of 100B class shares in B Pty Ltd to the B Family Trust and disregard the capital gain that arises when these assets are transferred?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The deceased passed away on X date.

The Will of the deceased was executed on Y date. This document was the deceased’s last Will and disposition.

A copy of the Will was attached to the private ruling.

The deceased held 100B class shares in a private company, A Pty Ltd. In accordance with the Will, the residue of the deceased’s estate was bequeathed to the trustee of the TT.

The trustee of the TT is A Pty Ltd.

The Will contains all the terms and conditions of the TT and effectively forms the trust deed of the TT.

The 100B class shares in B Pty Ltd formed part of the residue of the deceased’s estate and by the operation of the terms contained in the Will, the ownership of these shares passed to the trustee of the TT to hold on trust in accordance with the terms set out in the Will and codicils.

The TT has specific beneficiaries. These beneficiaries are identified in the definition of the term ‘Beneficiary’ in subclause 1.1 titled ‘Definitions’ contained in the Schedule to the Will. This definition provides that the beneficiaries of the TT means:

‘Beneficiary, any of the following:

(a) any child of mine (Primary Beneficiary)

(b) my wife (Primary Beneficiary)

(c) my brother (deceased)

(d) any Child of a person named in (a), (b) or(c) above;

(e) any spouse, including a person born after the date of this Will, of a person referred to in (a), (b), (c) or (d) above;

(f) during a period of two years after the date of my death but not otherwise:

1. any corporation formed in any country any shares in which are held by or for the benefit of a Beneficiary listed in this definition or whose shares are the subject of an option in favour of such a Beneficiary; and

2. the trustees in their capacity as such of any trust established at any time in any country:

i. in which a Beneficiary listed in this definition is a beneficiary; and

ii. the inclusion of which does not infringe the rule against perpetuities.’

A Pty Ltd, as the trustee of the TT proposes to transfer the 100B class shares in B Pty Ltd to the B Family Trust. A Pty Ltd is also the trustee of the B Family Trust. A copy of the B Family Trust deed was provided.

The B Family Trust is a beneficiary of the TT in accordance with the Schedule to Will. This provision includes as a beneficiary any trust established at any time in any country, for a period of two years after the death of the deceased.

The B Family Trust qualifies as a beneficiary under the TT because one or more beneficiaries as defined in the Schedule to the Will are beneficiaries of the B Family Trust. TT is a discretionary trust.

You have confirmed that the 100 B class shares will not be transferred to tax-advantaged entities.

Paragraph 3.1(a) of the Will gives the trustee the power to make a determination over the distribution of the capital of the trust fund for the benefit of any beneficiary and to exclude any beneficiary.

Where an in-specie distribution to another trustee beneficiary occurs, this must happen within the period of 2 years from the date of deceased’s death. The 100B class shares are proposed to be distributed within this time period.

The Guardian’s consent is required for the exercise of the ‘reserved powers’. The reserved powers include the power to apply the capital of trust fund for the benefit of a beneficiary whether before or after the termination date.

The trustee has a general power to transfer any property that forms part of the trust fund under the Will.

A Schedule to the Will applies to the transfer of trust assets to other trusts. The trustee may transfer any property to other trusts approved by the trustee for the benefit of any of the beneficiaries. Once transferred, the property is no longer governed by the terms of the Will.

Any determination to transfer assets made by the trustee must be in writing, and recorded in the minutes of the corporation. If the trustee is a corporation, a decision or resolution must be passed by a meeting of the directors in accordance with the Constitution.

You advise that A Pty Ltd will only transfer the 100B class shares to the B Family Trust once the above has been complied with, and after the Commissioner has confirmed that he will apply the views expressed in PS LA 2003/12.

Assumption

A Pty Ltd as trustee for the TT proposes to transfer the 100B class shares in B Pty Ltd to the B Family Trust within two years of the death of the deceased, subject to the Commissioner providing his confirmation that he will apply the views expressed in PS LA 2003/12 to this proposed transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-215(1)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-10

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 subsection 995-1(1)

Reasons for decision

Division 128

Division 128 deals with the Capital Gains Tax (CGT) consequences when the owner of a CGT asset dies.

Generally, any capital gain or capital loss that results from a CGT event happening to an asset owned by a person just before their death is disregarded (section 128-10).

There is an exception to this rule if the CGT asset passes to a beneficiary in the taxpayer’s estate who is: and exempt entity, the trustee of a complying superannuation entity, or a foreign resident (section 104-215).

The effect of Division 128 is to defer tax on any capital appreciation in the asset until the asset is finally disposed of by the LPR or the beneficiary.

Section 128-15 sets out the CGT consequences for a CGT asset owned by a deceased person just before dying that:

(a) devolves to an LPR; or

(b) passes to a beneficiary of that person's estate.

Subsection 128-15(2) provides that the LPR, or beneficiary, is taken to have acquired the asset on the day you died, and subsection128-15(3) provides that any capital gain or loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded.

The term LPR is defined in subsection 995-1(1) of the ITAA 1997 and relevantly includes, 'an executor or administrator of an estate of an individual who has died…'

Section 128-20 of the ITAA 1997 defines when a 'CGT asset passes to a beneficiary' in a person's estate. This will relevantly happen if the person becomes the owner under the deceased's will (paragraph 128-20(1)(a)).

Subsection 128-20(2) of the ITAA 1997 provides that a CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LPR transfers it under a power of sale.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the LPR makes if the asset 'passes to a beneficiary in your estate' (as defined in section 128-20) is disregarded.

In the present case, the Trustee of the TT is not a LPR for the purposes of subsection 128-15(3). Accordingly, guidance must be sought from PS LA 2003/12.

Effect of PS LA 2003/12

Practice Statement PS LA 2003/12 confirms:

'…the Commissioner long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).'

And further:

‘….the ATO’s practice is to not to recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will’.

Application to A Pty Ltd

You advise that 100B class shares in B Pty Ltd formed the residue of the deceased’s estate, and by operation of the terms contained in the Will of the deceased, the ownership of these shares passed to the trustee of the TT to hold on trust in accordance with the terms set out in the Will. Accordingly, section 128-20 is satisfied.

Subsection 128-15(3) applies to relieve any capital gain or loss that arises when the shares pass to a beneficiary. Specifically, PSLA 2003/12 confirms that the trustee of a testamentary trust (in this case A Pty Ltd), will be treated for the purposes of subsection 128-15(3) as a LPR at the time when an in specie distribution of the shares in B Pty Ltd to the B Family Trust occurs.

As per the facts, the B Family Trust qualifies as a beneficiary in accordance with subparagraph 1.1(f)(2) of the schedule to the Will. This provision includes as a beneficiary any trust established at any time in any country, for a period of two years after the date of death of the deceased.

Conclusion

Any capital gain or loss made on the transfer of the 100B class shares from A Pty Ltd as trustee TT to the B Family Trust will be disregarded.

Question 2

Will the Commissioner confirm that he will apply the ATO practice as set out in PS LA 2003/12 to A Pty Ltd as the trustee of the TT in relation to the transfer of 100B class shares in B Pty Ltd to the B Family Trust and disregard the capital gain that arises when these assets are transferred?

Summary

The Commissioner confirms that PS LA 2003/12 has application in relation to the transfer of 100B class shares by A Pty Ltd as trustee for the TT to the B Family Trust.

Detailed reasoning

For the reasons explained in the analysis contained in Question 1, The Commissioner confirms that PS LA 2003/12 has application in relation to the transfer of 100B class shares by A Pty Ltd as trustee for the TT to the B Family Trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).