Edited version of private advice

Authorisation Number: 1051828954826

Date of advice: 19 April 2021

Ruling

Subject: CGT - deceased estate and rollover of shares

Question

Can the Administrators disregard any capital gain or loss made on the transfer of the shares in Company C to the Beneficiaries of the Estate?

Answer

Yes

This ruling applies for the following period(s)

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Person X died intestate on XX/XX/XXXX.

Child X was born on XX/XX/XXXX, who is the child of Person X and his spouse.

Letters of Administration were granted to the spouse and Company XXX (the Administrators) on XX/XX/XXXX and all of Person X's assets devolved to his estate on this date (the Estate).

Under the provisions of the Administration and Probate Act, the spouse and the child (the Beneficiaries) are respectively entitled to a share of the Estate, apart from a statutory legacy and the chattels which pass to the spouse.

Due to legal proceedings against the Estate, the Administrators have not lodged tax returns for a few years. The legal proceedings have now been resolved and the Administrators are now preparing these tax returns.

Just before Person X's death, the assets he owned comprised mainly cash, real property, and Australian shares, including shares in Company B. All of those assets devolved to the Administrators as the Deceased's 'legal personal representative' in relation to the Estate.

A Class Ruling was obtained for the exchange of shares in Company B to Company C and the Commissioner's opinion on the arrangement is set out in this Class Ruling.

The Class Ruling sets out the tax consequences of the exchange of shares in Company B to Company C as follows:

•                     CGT event A1 happened when participating Company B shareholders exchanged their Company B shares for Company C shares under the terms of the scheme[1]

•                     CGT event A1 happened on the Implementation Date, being XX/XX/XXXX

•                     a participating Company B shareholder made a capital gain from CGT event A1 happening if the capital proceeds from the disposal of a Company B share exceeded the cost base of that share. The capital gain is the amount of the excess.[2]

•                     a participating Company B shareholder made a capital loss from CGT event A1 happening if the capital proceeds from the disposal of a Company B share were less than the reduced cost base of that share. The capital loss is the amount of the excess[3].

•                     the capital proceeds in respect of CGT event A1 happening were the market value of any new Company C shares received by the participating Company B shareholders as consideration for each Company B share exchanged.[4] The market value of any new Company C shares received was worked out as at the time of CGT event A1, which was on the Implementation Date.[5]

•                     a participating Company B shareholder is eligible to choose roll-over under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997).

•                     a participating shareholder who chooses roll-over under Division 615 will disregard any capital gain or capital loss made from the disposal of their Company B shares[6]

•                     for a participating shareholder who chooses roll-over under Division 615, the first element of the cost base and reduced cost base of each new Company C share they have acquired under the scheme will be the total of the cost bases of all their Company B shares (worked out at the time of their disposal) apportioned over the number of new Company C shares issued to the shareholder in exchange[7]

•                     for the purposes of determining any discount capital gains under Division 115 on a future disposal of their Company C shares acquired under the scheme, a participating shareholder who chooses roll-over will be taken to have acquired those Company C shares on the same date they had acquired their corresponding Company B shares.[8]

On XX/XX/XXXX, under the Company B Scheme, the Administrators exchanged the Estate's Company B shares for XXX shares in Company C.

The Administrators will, in the tax return for the year ended 30 June XXXX, choose the roll-over under Division 615 in relation to the Estate Company B shares.

The administration of the Estate is in the process of being completed. In the ordinary course, some of the Estate Company C shares have been sold by the Administrators. As part of completing the administration, the Administrators will transfer the balance of the Estate Company B shares to the spouse and as the child is a minor, to the trustee of a trust established for the benefit of the child.

Information provided

You have provided the following documents in relation to the ruling request:

(a)          your private ruling application received on XX/XX/XXXX, and

(b)          supplementary information provided via email on XX/XX/XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 104-10

Income Tax Assessment Act 1997, Subsection 104-10(3)

Income Tax Assessment Act 1997, Subsection 104-10(4)

Income Tax Assessment Act 1997, Subsection 115-30(1)

Income Tax Assessment Act 1997, Subsection 116-20(1)

Income Tax Assessment Act 1997, Paragraph 116-20(1)(b)

Income Tax Assessment Act 1997, Division 128

Income Tax Assessment Act 1997, Section 128-15

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 128-20(1)

Income Tax Assessment Act 1997, Division 165

Income Tax Assessment Act 1997, Section 615-40

Income Tax Assessment Act 1997, Subsection 995-1(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Can the Administrators disregard any capital gain or loss made on the transfer of the shares in Company C to the Beneficiaries of the Estate?

Summary

The Administrators can disregard any capital gain or loss made on the transfer of the shares in Company C to the Beneficiaries of the Estate.

Detailed reasoning

Division 128 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate.

Section 128-15 relevantly states:

1. This section sets out what happens if a *CGT asset you owned just before dying:

(a)          devolves to your *legal personal representative; or

(b)          *passes to a beneficiary in your estate.

2. The *legal personal representative, or beneficiary, is taken to have *acquired the asset on the day you died.

Special rule for legal personal representative

3. Any *capital gain or *capital loss the *legal personal representative makes if the asset *passes to a beneficiary in your estate is disregarded.

'Legal personal representative' is defined in subsection 995-1(1) and means:

a)            an executor or administrator of an estate of an individual who has died; or

b)            a trustee of an estate of an individual who is under a legal disability; or

c)            a person who holds a general power of attorney that was granted by another person.

As the spouse and Company X were granted Letters of Administration by the Supreme Court, they would fall within the meaning of a legal personal representative.

On the day Person X died he owned shares in Company B, a publicly listed company, and these shares formed part of his Estate. Pursuant to subsection 128-15(2), the Administrators are taken to have acquired the Estate Company B shares on the date he died, that is, XX/XX/XXXX.

Pursuant to Company B's scheme of arrangement, the Estate received Company C shares for its Company B's shares.

At the date of the exchange of shares, the Administrators were the legal owners of the Estate Company B's shares, as no Beneficiaries of the Estate were absolutely entitled to these shares at this time due to the ongoing legal proceedings. The Administrators were a 'participating shareholder' for the purposes of the Company B Scheme and the Class Ruling. Therefore, the Administrators are entitled to choose roll-over relief under Division 615, if all the requirements have been satisfied.

In your Application, you state the Administrators will, in the tax return for the year ended 30 June XXXX, choose the roll-over under Division 615 in relation to the Estate Company B's shares.

The tax consequences for choosing roll-over relief under Division 615 is set out in the Class Ruling.

For the Estate Company C shares that the Administrators sold as part of the administration of the Estate, the tax consequences are to be determined in accordance with the Class Ruling.

For the Estate Company B shares that the Administrators will transfer to the Beneficiaries, any capital gain or capital loss the Administrators makes is disregarded if the Estate Company B shares 'passes to a beneficiary'.[9]

Subsection 128-20(1) relevantly states:

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 ...

The Estate Company C shares will 'pass to a beneficiary', as the Estate Company C shares are to be transferred by the Administrators to the Beneficiaries under an intestacy law as varied by a court that will result in the Beneficiaries becoming the owner of the shares. Any capital gain or capital loss that will be made by the Administrators can be disregarded under subsection 128-15(3).

[1] Section 104-10

[2] Subsection 104-10(4)

[3] Subsection 104-10(4)

[4] Subsection 116-20(1)

[5] Paragraph 116-20(1)(b)

[6] Section 615-40 with subsection 124-15(2)

[7] Section 615-40 with subsection 124-15(3)

[8] Item 2 of the table in subsection 115-30(1)

[9] Subsection 124-15(3)

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