Edited version of private advice

Authorisation Number: 1051813321437

Date of advice: 24 March 2021

Ruling

Subject: CGT - deceased estate

Question

Is there a capital gains tax event when Child B Trust transfers its shares to Child B in their personal capacity?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away in 20XX.

Probate was granted in 20XX.

The Deceased was survived by their children - Child A, Child B and Child C.

The Deceased owned shares in a company which provided them with exclusive occupancy rights to a property (The Property).The Deceased purchased the shares as joint tenants with their spouse in 19XX. They and their spouse used The Property as their main residence until 199X.

Following this, The Property was used by The Deceased's parent as their main residence from 199X until 201X.

As a result of a relationship breakdown, The Deceased became the sole owner of the shares.

In 20XX, Child B moved into The Property and made it their main residence.

In 20XX, Child C moved into The Property.It was their main residence until 20XX.

In accordance with the terms of The Deceased's Will, separate testamentary discretionary trusts were created for Child A, Child B and Child C. The trusts created were:

a)    Child A Testamentary Trust (Child A Trust)

b)    Child B Testamentary Trust (Child B Trust)

c)    Child C Testamentary Trust (Child C Trust)

In 20XX, in accordance with The Will, shares were transferred to the following testamentary trusts: XX% to Child B Trust and XX% to Child C Trust.

In 20XX, the following share transfers took place:

Child B Trust transferred its XX% interest in shares to Child B in their capacity as an individual beneficiary and transferred its XX% interest in the property to Child B in their capacity as an individual and received consideration of $XXX,000.

After transfer, Child B became the sole owner of the shares in their capacity as an individual.

Child C Trust has made a capital gain on the disposal of its XX% interest to Child B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 subsection 104-85(1)

Income Tax Assessment Act 1997 subsection 128-15(3)

Income Tax Assessment Act 1997 Division 128

Reasons for Decision

Summary

Capital gains tax (CGT) event E7 does not happen when Child B Trust transfers the shares to Child B.This is because Child B Trust is a trust of a kind referred to in Division 128 of the ITAA 1997.

Detailed reasoning

Both CGT event A1 and CGT event E7 may apply if the transfer of legal ownership of the shares to Child B is a disposal for CGT purposes. CGT event A1 is a general provision about disposals. CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. CGT event E7 is more specific to this situation.

Under section 104-85 of the ITAA 1997, CGT event E7 happens if a trustee of a trust disposes of a trust asset to a beneficiary in satisfaction of the beneficiary's interest (or part of it) in the trust capital. The timing of the event is when the disposal occurs.However, subsection 104-85(1) provides that CGT event E7 does not happen if the trust is one to which Division 128 of the ITAA 1997 applies.

Law Administration Practice Statement PS LA 2003/12 confirms that the ATO treats 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. The exception in subsection 104-85(10) of the ITAA 1997 will apply if a CGT asset the deceased owned when they died passes to a beneficiary in accordance with section 128-20 of the ITAA 1997. Here, that is satisfied as the asset has passed to Child B via a testamentary trust created in accordance with The Deceased's Will. The Deceased owned the asset at the time of their death. Therefore, Child B Trust is a type to which Division 128 of the ITAA 1997 refers.

Child B Trust has disposed of a trust asset (XX% share interest) to Child B in satisfaction of their interest in the trust capital, being the XX% share interest. However, as Child B Trust is one to which the exception in subsection 104-85(1) of the ITAA 1997 applies, CGT event E7 does not happen. As CGT event E7 is the most specific to this situation and it does not occur, no CGT event occurs on the transfer of shares from Child B Trust to Child B.

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