Edited version of your written advice

Authorisation Number: 1051409579943

Date of advice: 1 August 2018

Ruling

Subject: Income tax and GST consequences for deceased estate subdivision

Issue 1

Income Tax

Question 1

Is there any amount included in the assessable income of ABC (the Deceased) or the Estate of the Deceased (the Estate) as a result of the death of the Deceased including the occurrence of CGT Event K3?

Answer

No.

Question 2

Did XX Doe and YY Doe (the Executors) obtain a cost base in respect of the pre-CGT Land equal to the market value of the pre-CGT Land as at the date of death of the Deceased (Date of Death)?

Answer

Yes.

Question 3

Did the Executors obtain a cost base in respect of the post-CGT Land equal to the Deceased’s cost base in the post-CGT Land?

Answer

Yes.

Question 4

Will any gain made on the sale of the Land by the Executors be assessable under section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 5

Was the Land a capital asset in the hands of the Deceased, and does it continue to be a capital asset in the hands of the Executors?

Answer

Yes.

Question 6

Will the anticipated sale proceeds realised from the sale of the subdivided lots be included as a capital gain in the net income of the Estate in the income year of sale of the lots?

Answer

Yes.

Question 7

Will any amount of the anticipated sale proceeds realised from the sale of the subdivided lots, that is included in the net income of the Estate, be assessable to the Executors under sections 99A or 99 of the Income Tax Assessment Act 1936 (ITAA 1936), in circumstances where the amount of any capital gain derived from the sale of the subdivided lots is distributed to the beneficiaries of the Estate (Beneficiaries), during the income year in which the subdivided lots are sold?

Answer

No.

Question 8

Will the interest income that is included in the net income of the Estate be assessable to the Beneficiaries?

Answer

Yes.

Question 9

Is each Beneficiary’s share of the net income of the Estate and any other distribution from the Estate exempt from income tax?

Answer

Yes

Question 10

Will subsection 100AA(3) of the ITAA 1936 apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived?

Answer

No.

Question 11

Will subsection 100AB(2) of the ITAA 1936 apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived?

Answer

No.

Question 12

If the answer to Question 11 is yes, will the Commissioner exercise their discretion in subsection 100AB(5) of the ITAA 1936 not to apply subsection 100AB(2) of the ITAA 1936 in respect of the Beneficiaries being presently entitled to the income of the Estate for the income year in which sale of the subdivided lots occurs?

Answer

As the answer to Question 11 is no, it will not be necessary to consider the Commissioner’s discretion under subsection 100AB(5) of the ITAA 1936.

Issue 2

Goods and Services Tax (GST)

Question 13

Are any taxable supplies of the land made on the death of the Deceased?

Answer

No.

Question 14

Was the Deceased carrying on an enterprise prior to and up to the date of their death and are the Executors carrying on an enterprise after the Date of Death, and if so, was the Deceased or were the Executors required at any time during this period to be registered for GST?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

Some time in late 2016 (Date of Death of the Deceased).

Relevant facts and circumstances

The Deceased

1. ABC (the Deceased) passed away in late 2016 (Date of Death), at XY years of age.

2. From 2015 up to Date of Death, the Deceased was in declining health.

Landholdings

3. During their life, the Deceased purchased X parcels of property located in State A:

a) Land A, purchased pre-CGT and which was their main residence until their death;

b) Land B, purchased and held as an investment property and sold some time before Date of Death; and

c) Land known as 1, 2 and 3 Nameless Street (together the Land).

1, 2 and 3 Nameless Street (together the Land)

4. The Land was acquired by the Deceased and their sibling as joint tenants (together, the Joint Owners) prior to 20 September 1985. The Deceased’s 50% share of the Land is described in this document as the pre-CGT Land, and the Deceased’s sibling’s 50% share of the Land is described in this document as the post-CGT Land.

5. In late 2000, a subdivision of the Original Title occurred and was registered (the 2000 Subdivision) and a new Deposited Plan issued with X separate titles issued in the name of the Joint Owners.

6. There have been X disposals of part of the Land (together referred to as the Minor Sales). Y disposal events occurred prior to the death of the Deceased’s sibling in late 201A, and one disposal event occurred between death of the Deceased’s sibling in late 201A and Date of Death.

7. The Deceased’s sibling passed away some time in late 201A and the Deceased became the sole proprietor of the Land some time in late 201A.

8. During the period in which the Deceased owned the Land as a joint tenant with their sibling or as the sole proprietor (the Ownership Period), the Land remained vacant, undeveloped and unused.

9. Other than the 2000 subdivision of the Land, the Minor Sales and the subdivision and development work described below, the Deceased had not undertaken any property development or land subdivision activities.

Subdivision of the Land

10. Since the 1990s, the land surrounding the Land commenced to be subdivided and developed for residential use and, as at the Date of Death, an established residential development surrounded the Land. Residential roadways were already in place.

11. The Land was the subject of at least two rezoning actions by a particular State A Council. The most recent rezoning permitted residential development to a higher density of the Land.

12. At no time during the Ownership Period did the Deceased lodge an application for the rezoning of the Land or make any other such representations for this purpose.

13. In the period leading up to subdivision works, the particular State A Council wrote to the Deceased on several occasions and issued local orders for them to maintain the Land by cutting back overgrown vegetation etc.

14. The Deceased became frustrated with the above orders and they therefore considered both a sale of all the Land to a third party (Option 1) and a subdivision by the disposal of individual lots to multiple third parties (Option 2).

15. The Deceased received offers for Option 1 which occurred around late 1990s. However, the Deceased regarded these offers as insufficient. As such, they proceeded with Option 2.

16. Assisted by their carer in early 2015 the Deceased engaged Firm A for project management services and preparation of a subdivision and Development Application (DA) for the Land. The scope of this engagement was to prepare, lodge and gain approval for a subdivision of YY residential allotments, and to manage the project from the point of inception to the construction and registration of titles for the residential allotments. Firm A also engaged a number of third party service providers to provide various services.

17. The DA that was granted in late 2015 provided for a plan of VW individual lots (the Current Subdivision).

18. In early 2016, the Deceased terminated Firm A’s engagement due to a dispute.

19. With the assistance of their carer, the Deceased appointed Firm B to continue with the subdivision and development. In the period of early 2016 to the Date of Death, Firm B continued with the development works including the construction works which were subcontracted to Relevant Contractors.

20. At the time of the commencement of the Current Subdivision, the Deceased was ZZ years of age and their health was frail. They engaged Firm A and Firm B who completed all the relevant works and activities. While the Deceased received updates regarding the progress of these works, they were not personally involved. The Deceased was not involved in any approaches to council regarding the DA.

21. As at the Date of Death, the Current Subdivision was approximately 85% to 90% complete. The extent of all physical works performed on the Land was to satisfy the conditions of the DA and no more.

Will, Executors and Beneficiaries

22. Under Clause 3 of The Last Will and Testament of the Deceased (Will):

a) The Executors are authorised to “… sell call in and convert the same into money at such times and in such manner as my trustees shall in and conversion for so long as they shall think fit with power to postpone such sale calling in and conversion for so long as they shall think fit….”; and

b) each Beneficiary is entitled to 50% of the Estate, with no specific entitlement to any capital gain or franked distribution.

23. Under clause 2 of the Will XX Doe and YY Doe were appointed as executors and trustees of the Estate (collectively, the Executors). YY Doe is on the board of ABC Entity and XX Doe is on the board of XYZ Entity.

ABC Entity

24. ABC Entity is a charitable institution registered with the Australian Charities and Not-for-Profits Commissioner (ACNC). Per Australian Business Register (ABR), ABC Entity is endorsed for the following tax concession by the Federal Commissioner of Taxation:

a) GST concession;

b) FBT rebate;

c) income tax exemption.

25. ABC Entity is not entitled to receive tax deductible gifts and is therefore not a deductible gift recipient (DGR).

26. ABC Entity has been endorsed as income tax exempt pursuant to item 1.1 of the table in section 50-5 of the ITAA 1997.

27. ABC Entity has a physical presence in Australia, incurs its expenditure and pursues its objectives principally in Australia.

XYZ Entity

28. XYZ Entity is a company limited by guarantee. XYZ Entity is not endorsed for any tax concessions.

29. XYZ Entity self-assesses as income tax exempt as a public educational institution with a physical presence in Australia pursuant to item 1.4 of the table in section 50-5 of the ITAA 1997.

Administration of the Estate

30. The Executors have spent less than 50 hours of their time overseeing the Current Subdivision and the majority of this time has been spent by XY Doe.

31. As stated above, the Deceased passed away in late 2016. Probate of the Will was granted to the Executors by the Relevant Court of State A in early 2017 (Probate Date). In the period from the Date of Death until the Probate Date, all works were suspended and the contractors left the Land. The reason for this was that the Executors needed to acquaint themselves with the Deceased’s affairs, obtain Probate and engage advisors for advice (including legal and accounting advice and the obtaining of the Valuation Report).

32. In the period from the Date of Death to the Probate Date, the Executors did not perform any activities in respect of the Current Subdivision except to field queries from:

a) Firm B and the Relevant Contractors – to enable the payment of outstanding invoices; and

b) A particular State A Council.

33. After the Probate Date, the Executors re-commissioned Firm B to continue with the works and activities.

34. From the Probate Date to the present, the following has occurred:

a) the Executors were registered as the registered proprietors of the Land;

b) the Executors engaged advisors, consultants and an estate lawyer to assist with the administration of the Estate;

c) the Executors re-engaged Firm B to continue the works required for the Current Subdivision;

d) the Executors made progress payments and paid any amount outstanding in respect of the works performed in respect of the Current Subdivision;

e) Firm B engaged third party contractors to continue the physical land works;

f) Firm B performed work in respect of the Current Subdivision; and

g) The Executors engaged local real estate agents to market and sell the lots relating to the Current Subdivision.

35. As at the date of the private ruling application (Application Date), no sales of any part of the Current Subdivision have occurred.

36. The future liabilities to be incurred in completing the Current Subdivision (including sale) are the land sales expenses including agent’s fees and advertising and marketing costs.

37. As at 31 March 2018, the accounts for the Estate show that a surplus of funds is expected after all assets have been disposed of and all liabilities have been discharged. The accounts for the Estate did not show any liabilities reported as at 30 June 2017 or 31 March 2018.

38. The Executors intend to dispose of Land A on or after 1 July 2018.

Sale of Subdivided Lots

39. The Executors intend that contracts of sale will be signed and will settle in the income year ending 30 June 2019. Sale proceeds less directly referable expenses (such as, where applicable, agent’s commission and fees) will be distributed to the Beneficiaries shortly thereafter and also in the same income year. This is on the basis that all funds received by the Executors will be surplus funds and available for distribution to the Beneficiaries.

Relevant legislative provisions

A New Tax System (Goods And Services Tax) Act 1999 Section 9-5

A New Tax System (Goods And Services Tax) Act 1999 Section 9-10

A New Tax System (Goods And Services Tax) Act 1999 Section 9-20

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1936 Section 100AA

Income Tax Assessment Act 1936 Section 100AB

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 50-1

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 50-52

Income Tax Assessment Act 1997 Section 50-55

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 128-50

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Issue 1

Question 1

Summary

No amount is included in the assessable income of the Deceased or the Estate as a result of the death of the Deceased including the occurrence of CGT Event K3.

Detailed reasoning

CGT Event K3

On the death of the Deceased, and for the purposes of the Capital Gains Tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997 (the CGT provisions), paragraph 128-15(2)(a) of the ITAA 1997 provides that the assets of the Deceased are deemed to have been acquired by the Executors on the date of death, and section 128-10 provides that any capital gain or capital loss from this CGT event on death is disregarded.

Accordingly, while there may be a deemed disposal by the Deceased to the Executor, any gains or losses from such a disposal are disregarded for the purpose of the CGT provisions.

Similarly, subsection 128-15(3) provides that where a legal personal representative distributes a CGT asset of the Estate in specie to a Beneficiary of the Estate, any capital gains or capital losses made by the legal personal representative from this disposal are also disregarded.

The exception is where a CGT asset is distributed by the legal personal representative to a tax exempt entity, section 104-215 of the ITAA 1997 provides that CGT event K3 may apply.

Subsection 104-215(1) of the ITAA 1997 provides as follows:

104-215(1) CGT event K3 happens if you die and a CGT asset you owned just before dying passes to a beneficiary in your estate who (when the assets passes):

(a) is an exempt entity;

…

Exempt Entity

An ‘exempt entity’ is defined in section 995-1 of the ITAA 1997 to mean:

a) an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have;

…

Under item 1.1 of the table at section 50-5 of the ITAA 1997, a registered charity is an exempt entity where it has satisfied the conditions at sections 50-50 and 50-52.

Section 50-50 states:

(1) An entity covered by item 1.1 is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

(d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia;

and the entity satisfies the conditions in subsection (2).

Note 1: Certain distributions may be disregarded: see section 50-75.

Note 2: The entity must also meet other conditions to be exempt from income tax: see section 50-52.

(2) The entity must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

Section 50-52 states:

(1) An entity covered by item 1.1 is not exempt from income tax unless the entity is endorsed as exempt from income tax under Subdivision 50-B.

(3) This section has effect despite all the other sections of this Subdivision.

ABC Entity satisfies these requirements, as it is a registered as a charity with the ACNC, and is an entity that has a physical presence in Australia, incurs its expenditure and pursues its objectives principally in Australia. Further, ABC Entity is endorsed as income tax exempt by the Commissioner per Subdivision 50-B. As such, ABC Entity is an exempt entity.

Under item 1.4 of the table at section 50-5 of the ITAA 1997, a public education institution is an exempt entity where it has satisfied the conditions at section 50-55.

Section 50-55(1) states:

(1) An entity covered by item 1.3, 1.4, 6.1 or 6.2 is not exempt from income tax unless the entity:

(a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is an institution that meets the description and requirements in item 1 of the table in section 30-15; or

(c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident;

and the entity satisfies the conditions in subsection (2).

Note: Certain distributions may be disregarded: see section 50-75.

(2) The entity must:

(a) comply with all the substantive requirements in its governing rules; and

(b) apply its income and assets solely for the purpose for which the entity is established.

XYZ Entity self-assesses as a tax exempt as a public educational institution with a physical presence in Australia that incurs its expenditure and pursues its objectives principally in Australia.

As both ABC Entity and XYZ Entity are exempt entities, CGT event K3 happens if the Land, being a CGT asset owned by the Deceased just before dying, passes to ABC Entity or XYZ Entity.

Does the Land ‘pass to the beneficiaries’?

The expression ‘passes to a beneficiary in your estate’ used in subsection 104-215(1) of the ITAA 1997 is defined in subsection 128-20(1) of the ITAA 1997. It provides:

(1) A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

(a) under your will, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate.

Subsection 128-20(2) of the ITAA 1997 provides that a CGT asset does not pass to a beneficiary where the beneficiary becomes the owner because the legal personal representative transfers it under a power of sale.

In Taxation Determination TD 2004/3 Income tax: capital gains: does an asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate?, the Commissioner states at paragraph 4:

While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, we consider that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes 'passing' dependent upon the acquisition of legal ownership.

Given that the Executors intend to sell the lots in the Current Subdivision prior to the final administration of the Estate and distribute the capital gains prior to the final administration of the Estate with any residual proceeds distributed thereafter, there should not be a passing of the Land to the Beneficiaries for the purposes of subsection 128-20(1) of the ITAA 1997 and subsection 104- 215(1) of the ITAA 1997 (being CGT K3). This is because:

a) there is no passing of the Land to the Beneficiaries; and

b) at no time during the course of the administration of the Estate are the Beneficiaries absolutely entitled to the Land.

This is because the Executors are authorised under clause 3 of the Will to

… sell call in and convert the same into money at such times and in such manner as my trustees shall in and conversion for so long as they shall think fit with power to postpone such sale calling in and conversion for so long as they shall think fit….

and until this power is discharged, the quantum of the Beneficiaries’ entitlement under the Will cannot be determined with certainty. Accordingly, the Beneficiaries cannot be absolutely entitled (that is, the Beneficiaries have an interest in an Estate asset which is vested in possession and indefeasible) until such time as the administration of the Estate is complete.

Accordingly, the Executors are not obliged to satisfy any demand made by the Beneficiaries or act in accordance with their direction over any particular asset of the Estate until such time as the administration of the Estate is complete (this is, when the Beneficiary’s absolute entitlement in the Estate’s assets crystallizes).

Conclusion

In accordance with section 128-10 of the ITAA 1997, any capital gain or loss made on the death of the Deceased is disregarded.

In addition, any capital gains or losses made by the legal personal representative from the distribution of a CGT asset of the Estate in specie to a Beneficiary of the Estate are also disregarded under subsection 128-15(3) of the ITAA 1997. As no CGT asset owned by the Deceased just before dying passes to ABC Entity and XYZ Entity, the exempt entity beneficiaries of the estate of the Deceased, CGT event K3 does not occur.

As such, no amount is included in the assessable income of the Deceased or the Estate as a result of the death of the Deceased including the occurrence of CGT Event K3.

Question 2

Summary

The Executors obtained a cost base in respect of the pre-CGT Land equal to the market value of the pre-CGT Land as at the Date of Death.

Detailed reasoning

Item 4 of the table at subsection 128-15(4) of the ITAA 1997 states that the first element of the cost base of an asset acquired prior to 20 September 1985 is the market value of the asset on the Date of the Death.

The pre-CGT Land (being 50% of the Land acquired by the Deceased as a joint tenant prior to 20 September 1985) was subdivided in 2000.

Subsection 112-25 of the ITAA 1997 states:

(1) This section sets out what happens if:

(a) a CGT asset (the original asset) is split into 2 or more assets (the new assets); or

(b) a CGT asset (also the original asset) changes in whole or in part into an asset (also a new asset) of a different nature;

and you are the beneficial owner of the original asset and each new asset.

Example: You subdivide a block of land into 3 separate blocks. Each of those blocks is a new asset.

(2) The splitting or change is not a * CGT event.

(3) You work out the * cost base and * reduced cost base of each new asset as follows:

Method statement

Step 1. Work out each element of the * cost base and * reduced cost base of the original asset at the time of the event referred to in subsection (1).

Step 2. Apportion in a reasonable way each element to each new asset. The result is each corresponding element of the new asset's * cost base and * reduced cost base.

…

The split assets, or in this case, the lots generated from the 2000 Subdivision are taken to have been acquired at the time of the original asset (being the pre-CGT Land).

The Commissioner’s view on the acquisition date of split assets from an original asset is set out in paragraph 2 of Taxation Determination TD 97/2 Income tax: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), is a disposal of a block of the subdivided land treated by Part IIIA of the Income Tax Assessment Act 1936 as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?:

We consider that the effect of registering separate new titles under the subdivision is, for Part IIIA purposes, to divide the original land parcel into two or more assets (viz., the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired.

As such, the date of acquisition of the subdivided pre-CGT Land is taken to be the date when the original parcel was initially acquired. In other words, the pre-CGT Land retains its pre-CGT status.

Item 4 of the table at subsection 128-15(4) will therefore apply such that the Executors obtained a cost base in respect of the pre-CGT Land equal to the market value of the pre-CGT Land as at the Date of Death of the Deceased.

Question 3

Summary

The Executors obtained a cost base in respect of the post-CGT Land equal to the Deceased’s cost base in the post-CGT Land.

Detailed reasoning

Item 1 of the table at subsection 128-15(4) of the ITAA 1997 states that the cost base of an asset acquired by the deceased after 20 September 1985 will be the cost base of the asset on the date of the death of the deceased.

On the death of the Deceased’s sibling in late 2011, the Deceased, who was the then surviving joint owner, became the sole proprietor of the Land. Subsection 128-50(2) provides:

(2) The survivor is taken to have acquired (on the day the individual died) the individual’s interest in the asset. If there are 2 or more survivors, they are taken to have acquired the interest in equal shares.

As the Deceased’s sibling acquired their interest in the Land prior to 20 September 1985, the cost base rule in subsection 128-50(4) of the ITAA 1997 will apply to determine the cost base that the Deceased obtained as at the date of death of the Deceased’s sibling (sometime in late 2011). It provides:

(4) If the individual who died acquired their or her interest in the asset before 20 September 1985, the first element of the cost base and reduced cost base of the interest each survivor is taken to have acquired is:

As such, the Deceased obtained a cost base in the post-CGT land equal to the market value of the post-CGT Land as at the date of death of the Deceased’s sibling (sometime in late 2011).

Therefore, the Executors obtained a cost base in respect of the post-CGT Land equal to the Deceased’s cost base in the post-CGT Land that he obtained at the date of the death of the Deceased’s sibling (sometime in late 2011), including any other amounts included in the cost base after that date.

Question 4

Summary

Any gain made on the sale of the Land by the Executors will not be assessable under section 15-15 of the ITAA 1997.

Detailed reasoning

Section 15-15 of the ITAA 1997 states:

Profit-making undertaking or plan

(1) Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

(2) This section does not apply to a profit that:

(a) is assessable as *ordinary income under section 6-5; or

(b) arises in respect of the sale of property acquired on or after 20 September 1985.

Note: If you sell property you acquired before 20 September 1985 for profit-making by sale, your assessable income includes the profit: see section 25A of the Income Tax Assessment Act 1936.

Section 15-15 replaced the former section 25A of the ITAA 1936, which provided:

The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by the taxpayer for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) considers whether a transaction is made with a profit-making purpose such that the profit would be assessable as income. In TR 92/3, the Commissioner states:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

…

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

a) the nature of the entity undertaking the operation or transaction;

b) the nature and scale of other activities undertaken by the taxpayer;

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d) the nature, scale and complexity of the operation or transaction;

e) the manner in which the operation or transaction was entered into or carried out;

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

h) the timing of the transaction or the various steps in the transaction.

Example 1 of TR 92/3 provides the following:

72. Ms Donovan, a public servant, purchased 10,000 shares in a listed public company at a price of $1 each and sold them 18 months later for $2 each. During that period, the company paid one small dividend. Donovan was not carrying on a business of trading in shares. A significant purpose of Donovan in acquiring the shares was to make a profit from an increase in the value of the shares.

73. The profit made on the sale of the shares is not income. The transaction was merely an investment, not a business operation or commercial transaction.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number considers at paragraphs 262 to 270 whether isolated property transactions, including those involving the subdivision and sale of land, are considered to be a profit making undertaking or scheme, as opposed to the mere realisation of a capital asset.

Paragraphs 264 to 266 of MT 2006/1 state:

264. The cases of Statham & Anor v. Federal Commissioner of Taxation (Statham) and Casimaty v. FC of T (Casimaty) provide some guidance on when activities to subdivide land amount to a business or a profit-making undertaking or scheme. In these cases, farm land was subdivided and sold. Minimal development work was undertaken to meet council requirements and to improve the presentation of certain allotments. On the particular facts of these cases the courts held that the sales were a mere realisation of a capital asset.

265. From the Statham and Casimaty cases a list of factors can be ascertained that provide assistance in determining whether activities are a business or an adventure or concern in the nature of trade (a profit-making undertaking or scheme being the Australian equivalent, see paragraphs 233 to 242 of this Ruling). If several of these factors are present it may be an indication that a business or an adventure or concern in the nature of trade is being carried on. These factors are as follows:

● there is a change of purpose for which the land is held;

● additional land is acquired to be added to the original parcel of land;

● the parcel of land is brought into account as a business asset;

● there is a coherent plan for the subdivision of the land;

● there is a business organisation - for example a manager, office and letterhead;

● borrowed funds financed the acquisition or subdivision;

● interest on money borrowed to defray subdivisional costs was claimed as a business expense;

● there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

● buildings have been erected on the land.

266. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative rather it will be a combination of factors that will lead to a conclusion as to the character of the activities.

Example 34 of MT 2006/1 provides the following:

Example 34

294. A number of years ago Elsie and Karin purchased some acreage on which to keep their horses, which they rode on weekends. Karin now accepts a job overseas and they decide to sell the land.

295. They put the land on the market with little success. The local real estate agent then advises that it would be easier to sell the land if it was subdivided into smaller lots. They arrange for a development application to be lodged with the local council and obtain approval to subdivide the land into nine lots. Elsie and Karin arrange for the land to be surveyed. The land has a road running along its boundary and has some existing services such as electricity. Only minimal activity is required to subdivide the land.

296. Elsie and Karin are not entitled to an ABN. The sale is not considered to be an enterprise and is the mere realisation of a capital asset.

Application to facts

On the question of whether either the Deceased was, or the Executors are, carrying on a business of land subdivision, the following factors are relevant:

a) in respect of the Deceased:

i. there is no evidence that the Deceased and their sibling had an intention or purpose to venture the Land in a business of land subdivision. The Land was acquired prior to 20 September 1985. There was little activity occurring on the Land other than the subdivision that occurred in 2000. This indicated that the Current Subdivision is not evidence of a change of purpose but merely realisation of a capital asset in an enterprising way;

ii. Neither the Deceased nor their sibling had undertaken land subdivision projects or other property development projects. The Deceased’s other investment in land, Land B, was for long term holding and not acquired with a purpose of resale and accordingly there is no history or pattern of acquiring and selling land for a profit;

iii. the Deceased had investigated a sale of the Land as one parcel before deciding to proceed with the Current Subdivision;

iv. the motivation for selling the Land was the constant orders from Council to clear the Land of overgrown vegetation;

v. at the time the Deceased decided to undertake the Current Subdivision, he was ZZ years of age and in relatively frail health. Their health deteriorated leading to their death in late 2016;

vi. the Deceased’s involvement in the Current Subdivision was minimal. Other than engaging Firm A and Firm B, the Deceased was not involved in:

a. engaging any other third party contractor;

b. the planning application process;

c. the subdivisional works;

vii. they did not borrow funds to finance the Current Subdivision;

viii. there is no evidence of a systematic course of conduct or a repetition of transactions which are some of the other indicators of the carrying on of a business. In respect of sales, the intention was to endeavour to sell all VW lots in one stage;

b) in respect of the Executors:

i. the Executors were appointed because of their association with the Beneficiaries rather than for any expertise in land subdivision they may have;

ii. the Executors have continued with the final steps of the Current Subdivision having inherited a project which was 85%-90% complete at the Date of Death;

iii. their involvement has been minimal and has largely been confined to dealing with the project manager at Firm B, and attending to the making of progress payments and receiving progress reports etc;

iv. they have engaged local real estate agents to market and sell the lots and they will not be heavily involved in the sale;

v. the Executors’ main duty is to administer the Estate and this, given the stage at which the Current Subdivision was at as at the Date of Death, required them to complete the Current Subdivision as part of their primary duty to administer the Estate.

As to the level of development of the land, since the 1990s, the land surrounding the Land commenced to be subdivided and developed for residential use and, as at the Date of Death, an established residential development surrounded the Land. Residential roadways were already in place. The extent of all physical works performed on the Land by the Deceased and the Executors were to satisfy the conditions of the DA and no more.

Based on the above facts, it is the Commissioner’s view that these activities do not amount to an isolated commercial transaction with a view to profit-making.

As such, any gain made on the sale of the Land by the Executors will not be assessable under section 15-15 of the ITAA 1997.

Question 5

Summary

The Land was a capital asset in the hands of the Deceased, and continues to be a capital asset in the hands of the Executors.

Detailed reasoning

TR 92/3 relies on the following statement of the Lord Justice Clerk (the Right Honourable J.H.A. Macdonald) in Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159 at 165-166 at paragraph 27:

'It is quite a well settled principle, in dealings with questions of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?'

TR 92/3 further relies on the views of the Court in Commissioner of Taxation (Cth) v Whitfords Beach Pty Ltd (1982) 150 CLR 355 (Whifords Beach). In Whitfords Beach, the Court considered whether the purpose for which land was held by a company changed to take on a profit-making purpose, such that profits made by the company on the disposal of the land were income rather than the mere realisation of a capital asset.

Gibbs CJ made the following statement at pages 369 to 371:

In the present case I gravely doubt whether the profits resulting from the development, subdivision and sale of the land would have been taxable if it had not been for the events that occurred on 20 December 1967. Had those events not occurred, the situation of the taxpayer would have been analogous to that of the company in Scottish Australian Mining Co Ltd v FCT, supra. However, on 20 December 1967, the taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. Counsel for the taxpayer submitted that it was not permissible to blur the distinction between the company and its shareholders. That of course is true, but in deciding whether what was done was an operation of business, it is relevant to consider the purpose with which the taxpayer acted, and, since the taxpayer is a company, the purposes of those who control it are its purposes. […] The purpose of those controlling the taxpayer was to engage in a business venture with a view to profit. Moreover, although the taxpayer was not formed for the purpose of selling land, after December 1967 it became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares. It is in the light of these circumstances that the extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. For these reasons, although the case is not without its difficulties, I have concluded that the profits were income within ordinary concepts and taxable accordingly.

Murphy J further stated at page 386:

The land development scheme falls easily within the conception of a profit-making undertaking or scheme. The development involved not only subdivision, but planning and building of roads and other services, as well as other activities involved in modern land development schemes, and it was undertaken for profit-making. This is not a borderline case. It is altogether different from, for example, simple realisation of a large allotment by subdivision into several smaller blocks. The profit therefore comes within s 26(a) as profit from a profit-making undertaking or scheme.

As discussed in Question 4 above, the subdivision of the Land was commenced by the Deceased and continued on for the mere realisation of a capital asset, with the Land held as a capital asset by the Deceased and the Executors for this purpose. In particular:

a) there is no evidence that the Deceased and their sibling had an intention or purpose to venture the Land in a business of land subdivision. The Land was acquired prior to 20 September 1985. There was little activity occurring on the Land other than the subdivision that occurred in 2000. This indicated that the Current Subdivision is not evidence of a change of purpose but merely realisation of a capital asset in an enterprising way;

b) the Deceased had investigated a sale of the Land as one parcel before deciding to proceed with the Current Subdivision;

c) the Executors have continued with the final steps of the Current Subdivision having inherited a project which was 85%-90% complete at the Date of Death; and

d) as to the level of development of the land, since the 1990s, the land surrounding the Land commenced to be subdivided and developed for residential use and, as at the Date of Death, an established residential development surrounded the Land. Residential roadways were already in place. The extent of all physical works performed on the Land by the Deceased and the Executors were to satisfy the conditions of the DA and no more.

As such, the Land was a capital asset in the hands of the Deceased, and continued to be a capital asset in the hands of the Executors.

Question 6

Summary

The anticipated sale proceeds realised from the sale of the subdivided lots will be included as a capital gain in the net income of the Estate in the income year of sale of the lots.

Detailed reasoning

As stated in the reasoning for Question 1, on the death of the Deceased, and for the purposes of the CGT provisions, paragraph 128-15(2)(a) of the ITAA 1997 provides that the assets of the Deceased will be deemed to have been acquired by the Executors on the date of death.

As a result of this deemed acquisition, the pre-CGT Land will lose its pre-CGT status in the hands of the Executors.

As the pre-CGT Land is not being passed on to the Beneficiaries by the Executors, but is instead being sold to third parties, subsection 128-15(3) will not apply to disregard any gain or loss made by the Executors on the disposal of the land.

As discussed in Question 2, the Executors obtained a cost base in respect of the pre-CGT Land equal to the market value of the pre-CGT Land as at the Date of Death.

Similarly, as the post-CGT Land is not being passed on to Beneficiaries by the Executors, but is instead being sold to third parties, subsection 128-15(3) will not apply to disregard any gain or loss made by the Executors on the disposal of the land.

As per Question 3, the Executors obtained a cost base in respect of the post-CGT Land equal to the Deceased’s cost base in the post-CGT Land.

As such, any anticipated sale proceeds realised from the sale of the subdivided lots above the cost bases in the pre-CGT Land and post-CGT Land will be included as a capital gain in the net income of the Estate in the income year of sale of the lots.

Question 7

Summary

No amount of the anticipated sale proceeds realised from the sale of the subdivided lots, that is included in the net income of the Estate, will be assessable to the Executors under sections 99A or 99 of ITAA 1936, in circumstances where the amount of any capital gain derived from the sale of the subdivided lots is distributed to the Beneficiaries during the income year in which the subdivided lots are sold.

Detailed reasoning

The Estate is treated as a trust for the purposes of the ITAA 1997 and the ITAA 1936, and the income of the Estate is subject to the provisions contained in Division 6 of Part III of the ITAA 1936.

Section 99A of the ITAA 1936 provides that where there is part or all of the net income of a resident trust estate to which no beneficiary is presently entitled; the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament.

However, if the Commissioner is of the opinion, that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income, then the trustee shall be assessed under section 99 and is liable to pay tax on that part of the net income of the trust estate as if it were the income of an individual who was a resident and were not subject to any deduction.

Section 97 of the ITAA 1936 provides that where a beneficiary of a trust estate is presently entitled to a share of the net income of the trust estate, that share will be included in the assessable income of the beneficiary. Subsection 97(1) of the ITAA 1936 provides:

(1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident;

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia;

The Commissioner’s views as to when a beneficiary of a deceased estate can be presently entitled to the income of the estate are contained in Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates. At paragraph 7 of the ruling, the Commissioner states:

7. In a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate for the purposes of Division 6 of Part III of the Act depends on:

(a) The stage reached in the administration of the deceased estate.

(b) The terms of the deceased’s will or codicil, trust law and principles enunciated and orders made by the Courts.

(c) Whether any discretionary payments have been made to the beneficiary by the executor or trustee.

At paragraph 9:

9. Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries. During the initial stage of the administration (as described in paragraph 6 above) no beneficiary is presently entitled to the income derived.

However, the position during the administration may be such that funds surplus to the amount required to meet the liabilities of the Estate may be distributed to the Beneficiaries prior to the completion of the administration.

The Commissioner’s view on this is set out at paragraph 14:

14. During the intermediary stage of administration of a deceased estate (as described in paragraph 6 above), the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor’s discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

If the administration of an estate is completed part way through an income year, the Commissioner’s administrative practice is to assess the beneficiaries of the estate on their relevant share of the estate’s income pursuant to section 97 of the ITAA 1936. This is set out at paragraph 17:

17. Where the administration of a deceased estate is completed during the course of an income year, the longstanding practice of this office is to raise assessments on the basis that beneficiaries who are not under any legal disability should bear tax, under section 97 of the Act, on their shares of the net income of the estate for that year to which they are presently entitled. If a beneficiary is under a legal disability the relevant share of the net income of the estate would be assessed in the manner required by section 98 of the Act.

Where during the income year and prior to the completion of the administration, the income of the estate has been paid to the beneficiaries, the Commissioner’s approach set out in paragraph 23 of IT 2622 applies:

23. One exception to this alternative course of apportionment is that, if an executor or administrator does in fact pay part of the income of the estate to a beneficiary before the estate is fully administered (i.e. during the first of the periods mentioned in paragraph 21 above), the beneficiary would be assessed on the basis that he or she was presently entitled to that income. This also accords with paragraph 14 above.

Application to facts

On the basis that the Executors have discharged all existing liabilities of the Estate and that the last remaining step in the Current Subdivision is to arrange for the sale of the lots, then the majority of the sale proceeds derived from the sales will be surplus funds (except to the extent that the real estate agent’s commission and other sale costs are deducted from such proceeds at the time of settlement of the land sale contracts) will be available for distribution to the Beneficiaries who will be entitled to call for payment of them.

Where these surplus funds from the sale proceeds from the sale of the lots are paid out to the Beneficiaries as and when they are identified by the Executors, the Beneficiaries will be presently entitled to the amounts before the completion of the administration of the estate in accordance with IT 2622.

As the Beneficiaries will be presently entitled to the surplus sale proceeds, and will not be under a legal disability, the sale proceeds will be assessable to the Beneficiaries under subsection 97(1) of the ITAA 1997 as part of the share of the net income of the trust estate to which the Beneficiaries are presently entitled.

As such, no amount of the anticipated sale proceeds realised from the sale of the subdivided lots, that is included in the net income of the Estate, will be assessable to the Executors under sections 99A or 99 of ITAA 1936, in circumstances where the amount of any capital gain derived from the sale of the subdivided lots is distributed to the Beneficiaries during the income year in which the subdivided lots are sold.

Question 8

Summary

The interest income that is included in the net income of the Estate will be assessable to the Beneficiaries.

Detailed reasoning

Under the terms of the Last Will, the income of the Estate will be general trust law income and will not include the proceeds of sale of the Land. The only trust law income derived by the Estate is interest from Estate funds held in an interest bearing account.

As the Estate will have derived other income in the form of bank interest from bank deposits, the Estate will have trust income capable of being distributed.

Accordingly, as the Beneficiaries are entitled to all of the trust income, and are not under a legal disability, pursuant to subsection 97(1) of the ITAA 1936, they will include in their assessable income their share of the net income of the Estate.

As the interest income is included in the net income of the estate, that interest income will be assessable to the Beneficiaries.

Question 9

Summary

Each Beneficiary’s share of the net income of the Estate and any other distribution from the Estate is exempt from income tax.

Detailed reasoning

ABC Entity is an exempt entity under item 1.1 of the table at section 50-5 of the ITAA 1997 as a registered charity. XYZ Entity is an exempt entity under item 1.4 of the table at section 50-5 of the ITAA 1997 as a public education institution.

As the Beneficiaries are exempt entities, section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. As such, while the net income of the Estate is assessable to the Beneficiaries, each Beneficiary’s share of the net income is exempt from income tax.

Question 10

Summary

Subsection 100AA(3) of the ITAA 1936 will not apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived.

Detailed reasoning

As the Beneficiaries are exempt entities, the anti-avoidance rules regarding trust distributions made to exempt entities need to be considered. These are contained in sections 100AA and 100AB of the ITAA 1936.

The relevant parts of section 100A of the ITAA 1936 are as follows:

Failure to pay or notify present entitlement of exempt entity

(1) Subsection (3) applies if:

(a) an exempt entity is presently entitled to an amount of the income of a trust estate; and

(b) the exempt entity is not an exempt Australian government agency (within the meaning of the Income Tax Assessment Act 1997 ); and

(c) at the end of 2 months after the end of the relevant income year, the trustee has failed to notify the exempt entity in writing of the present entitlement.

(2) For the purposes of this section, treat the trustee as giving the exempt entity notice in writing of the present entitlement at a time to the extent that the trustee pays the exempt entity the amount of the present entitlement at that time.

(3) For the purposes of this Act, treat the exempt entity as not being presently entitled, and having never been presently entitled, to the amount mentioned in paragraph (1)(a) of the income of the trust estate, to the extent that the trustee failed to notify the exempt entity of that amount as mentioned in paragraph (1)(c).

As discussed in Question 7, applying the Commissioner’s view in IT 2622, the Beneficiaries will not be presently entitled to the income of the deceased estate during the administration of the estate, with no present entitlement arising to the income held within the estate until administration is complete. However, where the Executors have identified amounts of funds surplus to the amount required to meet the liabilities of the Estate, and those amounts are paid out to Beneficiaries ahead of the completion of the administration of the Estate, the Beneficiaries will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf.

For the surplus amounts that are paid out to beneficiaries, present entitlement, payment and deemed notification of the payment per subsection 100AA(2) will arise or take place simultaneously, such that section 100AA will not apply in relation to these amounts.

For any other amounts of income to which the Beneficiaries become presently entitled upon completion of the administration of the Estate, where those amounts are paid out before the end of the income year in which the amounts are derived, paragraph 100AA(1)(c) will not be satisfied, such that section 100AA will not apply in relation to these amounts.

As such, subsection 100AA(3) of the ITAA 1936 will not apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived.

Question 11

Summary

Subsection 100AB(2) of the ITAA 1936 will not apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived.

Detailed reasoning

As discussed in Question 10, as the Beneficiaries are tax exempt entities, the anti-avoidance rule regarding trust distributions made to exempt entities in section 100AB of the ITAA 1936 needs to be considered.

Section 100AB relevantly states:

Adjusted Division 6 percentage exceeding benchmark percentage: present entitlement of exempt entity

(1) Subsection (2) applies if:

(a) an exempt entity is presently entitled to an amount of the income of a trust estate; and

(b) the exempt entity is not an exempt Australian government agency (within the meaning of the Income Tax Assessment Act 1997 ); and

(c) the exempt entity's adjusted Division 6 percentage of the income of the trust estate exceeds the benchmark percentage determined under subsection (3).

(2) Subject to subsection 100AA(3), for the purposes of this Act, treat the exempt entity as not being presently entitled, and having never been presently entitled, to the amount of the income of the trust estate mentioned in paragraph (1)(a) of this section, to the extent that ensures that the exempt entity's adjusted Division 6 percentage of the income of the trust estate equals the benchmark percentage determined under subsection (3) of this section.

(3) Determine the benchmark percentage by working out the following fraction (expressed as a percentage):

(4) A trust estate's adjusted net income for a year of income is its net income for that year of income, with the following adjustments:

(a) firstly, in determining that net income, disregard any capital gain or franked distribution to the extent to which a beneficiary of the trust estate or the trustee is specifically entitled to that gain or distribution;

(b) next, in determining the net capital gain (if any) of the trust for the year of income, disregard steps 3 and 4 of the method statement in subsection 102-5(1) (CGT discount and small business concessions);

(c) next, reduce that net income by amounts (if any) that do not represent net accretions of value to the trust estate in that year of income (other than amounts included in that net income under Part IVA).

(5) Subsection (2) does not apply in relation to a trust estate in relation to a year of income if the Commissioner is of the opinion that it would be unreasonable that the subsection should apply in relation to that trust estate in relation to that year of income.

(6) In forming an opinion for the purposes of subsection (5), the Commissioner must consider the following matters:

(a) the circumstances that led to the exempt entity's adjusted Division 6 percentage exceeding the benchmark percentage determined under subsection (3);

(b) the extent to which the exempt entity's adjusted Division 6 percentage exceeds that benchmark percentage;

(c) the extent to which the exempt entity actually received distributions from the trust estate in respect of the year of income;

(d) the extent to which other beneficiaries of the trust estate were entitled to receive distributions of, or otherwise benefit from, amounts representing the adjusted net income of the trust estate;

(e) any other matters that the Commissioner considers relevant.

Clause 3 of the Will provides that each Beneficiary is entitled to 50% of the Estate, with no specific entitlement to any capital gain or franked distribution. Whether there is any difference between the net income of the trust estate and the adjusted net income of the trust estate, the Beneficiaries will be entitled to the same percentage. As such, in accordance with subsection 100AB(3), each Beneficiary’s benchmark percentage will be 50%.

As this benchmark percentage of 50% will not be exceeded by each Beneficiary’s adjusted Division 6 percentage of the income of the trust estate of 50%, paragraph 100AB(1)(c) will not be satisfied.

Therefore, subsection 100AB(2) of the ITAA 1936 will not apply to treat the Beneficiaries as not being presently entitled to the income of the trust estate, where the Executors pay both the interest income and the capital gains arising from the sale of the lots by the earlier of the end of the final administration of the Estate, or before the end of the income year in which the income and gain is derived.

Question 12

Summary

As the answer to Question 11 is no, it will not be necessary to consider the Commissioner’s discretion in subsection 100AB(5) of the ITAA 1936 not to apply subsection 100AB(2) of the ITAA 1936 in respect of the Beneficiaries being presently entitled to the income of the Estate for the income year in which sale of the subdivided lots occurs.

Detailed reasoning

As discussed in Question 11, as the Beneficiaries are exempt entities, the anti-avoidance rule regarding trust distributions made to exempt entities in section 100AB of the ITAA 1936 needs to be considered.

Section 100AB provides that where an exempt entity's adjusted Division 6 percentage of the income of the trust estate exceeds the entity’s benchmark percentage, the entity is treated as not being presently entitled to the amount of the entity’s adjusted Division 6 percentage of the income of the trust estate that exceeds the entity’s benchmark percentage, unless the Commissioner is of the opinion that it would be unreasonable that the subsection should apply in relation to that trust estate in relation to that year of income.

As the answer to Question 11 is no, it will not be necessary to consider the Commissioner’s discretion in subsection 100AB(5) of the ITAA 1936.

Issue 2

Question 13

Summary

No taxable supplies of the land were made on the death of the Deceased.

Detailed reasoning

Section 9-5 of A New Tax System (Goods And Services Tax) Act 1999 (GST Act) states:

Taxable supplies

You make a taxable supply if:

(a) you make the supply for * consideration; and

(b) the supply is made in the course or furtherance of an * enterprise that you * carry on; and

(c) the supply is * connected with the indirect tax zone; and

(d) you are * registered, or * required to be registered.

However, the supply is not a * taxable supply to the extent that it is * GST-free or * input taxed.

Subsection 9-10(1) of the GST Act states:

Meaning of supply

(1) A supply is any form of supply whatsoever.

As ownership of the assets of the Deceased transfers to the Executors on the death of the Deceased, the assets have been supplied to the Executors.

However, the Deceased did not supply their assets to the Executors of the Estate for consideration, and the supply was not made in the course or furtherance of an enterprise. As such, section 9-5 of the GST Act is not satisfied.

Therefore, no taxable supplies of the land were made on the death of the Deceased.

Question 14

Summary

The Deceased was not carrying on an enterprise prior to and up to the Date of Death and the Executors are not carrying on an enterprise after the Date of Death.

Detailed reasoning

Section 9-20 of the GST Act sets out the meaning of ‘enterprise’. Subsection 9-20(1) provides:

(1) An enterprise is an activity, or series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

…

Whether the Deceased’s activities and the Executors’ activities in completing the Current Subdivision and selling the lots amount to an enterprise will depend on whether such activities satisfy either of the descriptions in paragraph (a) or (b) of the subsection 9-20(1) of the GST Act.

In determining this question, the Commissioner has provided guidance in MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1). The reasoning for Question 4 refers to MT 2006/1 which considers whether isolated property transactions, including those involving the subdivision and sale of land, are considered to be a profit making undertaking or scheme, as opposed to the mere realisation of a capital asset.

The reasoning for Question 4 also considered the factors in TR 92/3 on whether an isolated transaction amounts to a business operation or commercial transaction.

As discussed in Question 4, the activities of the Deceased in commencing the subdivision of the Land, and the activities of the Executors in completing the subdivision of the Land and selling the lots, are a mere realisation of a capital asset, and are not a profit making undertaking or scheme.

As such, the activities of the Deceased and the Executors are not done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

Based on the reasoning set out in Question 4, it is the Commissioner’s view that the Deceased was not carrying on an enterprise prior to and up to the date of their death, and the Executors are not carrying on an enterprise after the Date of Death.

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