Edited version of private advice

Authorisation Number: 1051793007252

Date of advice: 19 January 2021

Ruling

Subject: Capital gains tax - asset passing to a beneficiary

Question 1

Did any CGT event occur when Person B reached 18 years of age?

Answer

No.

Question 2

Did any asset 'pass' to a beneficiary for the purposes of section 128-15 and 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997) when Person B reached 18 years of age?

Answer

No.

Question 3

Will Person A and Person B become the owner of the assets 'by operation of an intestacy law' for the purposes of section 128-20 of the ITAA 1997?

Answer

Yes.

Question 4

Will any capital gain or loss from the transfer of ownership of the property to person A and Person B as beneficiaries be disregarded under section 128-15 of the ITAA 1997?

Answer

Yes

Question 5

Will the beneficiaries cost bases be determined in accordance with the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Years ending 30 June 20XX and 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in 19XX. The deceased died intestate.

The deceased's spouse (Person A) was made administrator of his estate.

In accordance with the relevant intestacy provisions for that State, the estate was to be split two ways among person A and Person B. Person B was a minor at the time of the deceased's death.

The estate included real properties originally owned by the deceased which were then registered in the name of Person A as administrator.

In the 20XX and 20XX income years, some time after Person B had turned 18, the remaining properties were transferred to Person A and Person B as beneficiaries in satisfaction of their interests and suitable transfers were effected.

After the transfers, Person A is sole proprietor in relation to X properties and Person B was sole proprietor of Y properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 128

Reasons for Decision

Questions 1 and 2

CGT event A1 occurs when you dispose of a CGT asset and a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law (section 104-10 of the ITAA 1997.

Triggering CGT event A1 does not necessarily require a change in legal as well as beneficial ownership, however a change in beneficial ownership does not occur unless the purported acquirer of the CGT asset has full dominion over it that a court of equity would enforce. This is akin to the rights to specific performance a purchaser of land obtains upon paying the settlement sum. It is not sufficient for a change in beneficial ownership that the purported acquirer of the CGT asset has some form of proprietary interest, or equitable or beneficial interest in the asset falling short of beneficial ownership, and the purported seller has retained rights to deal with the asset, including powers of disposition over it (Decision impact statement - Sandini Pty Ltd atf the Karratha Rigging Unit Trust & Ors v Ellison & Ors v Commissioner of Taxation of the Commonwealth of Australia & Ors).

Division 128 of the ITAA 1997 deals with the CGT consequences that arise from a deceased estate. Under section 128-10 of the ITAA 1997, when a person dies, any capital gain or capital loss that results from a CGT asset the person owned just before dying devolving to their legal personal representative (LPR) is disregarded.

Further, any capital gain or loss made by the trustee of a deceased estate (or LPR) is disregarded if an asset of the estate 'passes' to a beneficiary in accordance with section 128-20 of the ITAA 1997. The trustee of testamentary trust (being a trust created under a will or by the operation of statute, such as intestacy laws) is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997 (PS LA 2003/12Capital gains tax treatment of the trustee of a testamentary trust). This ensures no taxing point is realised in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

An asset will 'pass' to a beneficiary if they become the owner of the asset by operation of intestacy law (paragraph 128-20(1)(b) of the ITAA 1997).

An asset can 'pass' to a beneficiary within the meaning of section 128-20 of the ITAA 1997 if the beneficiary becomes absolutely entitled to the asset (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?).

TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. The most straightforward application of this core principle is one where a single beneficiary has all the interests in the trust asset. However, TR 2004/D5 states that if there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

•         the assets are fungible (noting that land or real property is not considered to be a fungible asset);

•         the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

•         there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

In this case, the deceased died intestate and in accordance with the then intestacy law, the estate was to be split two ways among Person A and Person B. There was no agreement between Person A and Person B until 20XX and 20XX as to the distribution of the remaining assets.

CGT event A1 would not be triggered upon Person B reaching 18 years of age, as the equitable interests held by the beneficiaries fell short of beneficial ownership as noted in Sandini. Further, upon Person B reaching 18 years of age, the remaining assets of the estate were not fungible nor was there a specific understanding between the beneficiaries that Person A or Person B were entitled to any specific assets. Accordingly, as the beneficiaries could not be absolutely entitled to any of the assets, they will not have 'passed' within the meaning of section 128-20 of the ITAA 1997.

Questions 3, 4 and 5

In the 20XX and 20XX income years, legal transfers were effected to satisfy Person A and Person B's interests in the estate. These transfers resulted in a change in legal and beneficial ownership and triggered CGT event A1.

However, as discussed above, Division 128 of the ITAA 1997 has CGT consequences for assets held in a deceased estate. Any capital gain or loss made by a LPR is disregarded under section 128-15 of the ITAA 1997 if an asset of the estate 'passes' to a beneficiary in accordance with section 128-20 of the ITAA 1997. An asset will 'pass' to a beneficiary if they become the owner of the asset by operation of intestacy law (paragraph 128-20(1)(b) of the ITAA 1997). The term 'intestacy law' is not defined in the ITAA 1997 so takes on its ordinary meaning.

In this case the deceased died intestate, and the process for intestacy is regulated under the relevant intestacy provisions in that State which allows for the administrator to appropriate any part of the property in or towards satisfaction of a legacy with appropriate consents of the receiving beneficiary. The transfer of the assets to Person A and Person B were in satisfaction of their interests in the deceased's estate and are taken to have 'passed' under section 128-20 of the ITAA 1997 when the transfers were effected.

Accordingly, section 128-15 applies to disregard any capital gain or loss made and the cost bases attributed to the assets in the hands of the beneficiaries will be determined in accordance with the table in subsection 128-15(4) of the ITAA 1997.

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