Edited version of private advice

Authorisation Number: 1051840246865

Date of advice: 20 May 2021

Ruling

Subject: CGT - life and remainder interests

Question 1

Does section 128-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain or loss on the creation of the life and remainder interests under the will of the deceased?

Answer

Yes. When a person dies, a capital gain or capital loss from a capital gains tax (CGT) event that results for a CGT asset the person owned just before dying is disregarded under section 128-10 of the ITAA 1997. Consequently, although CGT event E1 happens when the administration of the deceased's estate in respect of the original asset is completed, any capital gain or loss made by the deceased from the event happening is disregarded.

Question 2

Does section 128-10 of the ITAA 1997 apply to disregard any capital gain or loss on the ending of the life interest on the death of the spouse of the deceased?

Answer

Yes. Where there is a life interest, CGT event C2 happens when the measuring life for the life interest dies because the interest expires at that time. Consequently, although CGT event C2 happended when the life interest ended on the death of the spouse of the deceased, any capital gain or loss made from the event happening is disregarded under section 128-10 of the ITAA 1997.

Question 3

Will an Australian resident beneficiary of the estate of the deceased, or the executors of the estate, be assessed on net capital gains arising from the shares the deceased owned at the time of death when those shares pass to the Australian beneficiary?

Answer

No. CGT event E7 does not happen if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary of the trust in satisfaction of the beneficiary's interest if the trust is one to which Division 128 of the ITAA 1997 applies.

Question 4

When the shares the deceased owned at the time of his death pass to a foreign beneficiary of his estate and CGT event K3 happens, does section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) allow the Commissioner to amend the prior year income tax assessment of the deceased?

Answer

No. Where a CGT asset of a trust estate (that is not taxable Australian property) passes to a beneficiary who is a foreign resident and CGT event K3 happens, the trustee of the estate must include any resulting capital gain in the date of death return of the deceased. However, in this case, there are no circumstances that meet any of the criteria laid out in section 170 of the ITAA 1936 that allow the Commissioner to amend the prior year income tax assessment of the deceased to reflect any capital gain.

This ruling applies for the following period periods:

Years ending 30 June 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased was an Australian tax resident and passed away in early 20XX.

The will of the deceased created life and remainder interests in certain assets of the estate which included a passive share portfolio of Australian and foreign listed company shares. None of the shares are taxable Australian property.

The spouse of the deceased was granted a life interest in the income of the residuary estate.

The remainder interest of the residuary estate was divided into equal shares between other relatives of the deceased.

The spouse of the deceased passed away in 20XY.

One of the beneficiaries of the estate is an Australian resident for tax purposes and the others are foreign residents.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 170

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

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