Edited version of private advice

Authorisation Number: 1051943938848

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Date of advice: 28 January 2022

Ruling

Subject: CGT - deceased estates - double death

Question 1

For CGT purposes, on what date did the Estate of the Deceased acquire the entitlement share (entitlement) in the property from the Estate of Parent of the Deceased?

Answer

For CGT purposes, the Estate of the Deceased would be considered to have acquired the entitlement in the property at the time (or date) of death of the Deceased.

Question 2

Did the entitlement cease to be a pre-CGT asset in the hands of the Trustee for the Estate of the Deceased?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 November 20xx

Relevant facts and circumstances

The child (Deceased) died on 1 November 20xx leaving a Will dated 16 February 20xx.

The Will named Mr X as sole Executor and Trustee (Trustee).

Probate was granted by the Court to the Trustee on 13 January 20xx.

Shareholdings of the Deceased in certain listed companies will be given equally to their childs under the Will.

Residue of the Estate of the Deceased will also go to the sons on equal shares under the Will.

The parents of the Deceased were the registered owners of a land (the property). The parents owned the property in equal shares as tenants in common. The parents acquired the property pre-CGT. The acquisition cost of the property is not known. There was no dwelling on the property.

The Parent of the Deceased died intestate before 20 September 1985 (pre-CGT date).

Letters of Administration for the Estate of Parent of the Deceased were issued to Mr Y by the Supreme Court after 20 September 1985 (post-CGT date).

Intestacy laws at the time of death of the Deceased's Parent were such that the Deceased would inherit a certain percentage share or an interest in the property, the entitlement of the Deceased in the property.

On 5 July 20xx, the property was sold by the Trustee for the Estate of the Deceased and by the Administrator for the Estate of Parent of the Deceased as tenants in common for a price specified under the contract for sale.

The Estate of the Deceased is still in administration as at the date of this ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 paragraph 108-5(2)(a)

Income Tax Assessment Act 1997 section 128-10

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 128-15(4)

Probate and Administration Act section 61

Probate and Administration Act subsection 44(1)

Reasons for decision

Application of law

Income Tax Assessment Act 1997

Section 108-5 CGT assets

Subsection 108-5(1) provides that a CGT asset is any kind of property or a legal or equitable right that is not property. Paragraph 108-5(2)(a) provides that to avoid doubt, part of, or an interest in, an asset referred to in subsection (1) is a CGT asset.

Division 128 - Effect of death

Section 128-10 provides for a CGT exemption when the assets the deceased owned just before they die are transferred to the Executor or legal personal representative (LPR).

Subsection 128-15(1) sets out what happens if a CGT asset you owned just before dying:

(a)  devolves to your LPR; or

(b)  passes to a beneficiary in your estate.

Subsection 128-15(2) provides that the LPR, or beneficiary, is taken to have acquired the asset on the day you died. Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3).

The table in subsection 128-15(4) sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the LPR or beneficiary.

For the pre-CGT asset - the cost base and reduced cost base will be the market value of the asset on the date of death of the deceased.

For the post-CGT asset - the LPR or the beneficiary will inherit the asset's cost base and reduced cost base of the deceased on the date of death.

When does an asset pass to a beneficiary?

Relevantly, subsection 128-20(1) provides that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

(a)  ...

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

(c)   ...

(d)  ...

Probate and Administration Act

Section 61 provides that real and personal property of the deceased will vest in the Public Trustee upon death regardless of a testate or an intestate status.

Subsection 44(1) provides that upon grant of representation, property passes to the executor or administrator and title vests back to date of death.

The table below provides a summary of the rules in the relevant jurisdiction.

Application to your facts and circumstances

The percentage share or interest (the entitlement) in the property is a CGT asset within the meaning of section 108-5.

An issue arises as to whether the entitlement in the property will be considered an asset owned by the Deceased just before they died, so that asset would have devolved to the Executor and Trustee (Trustee) for the Estate of the Deceased for the purposes of Division 128.

The Parent of the Deceased died intestate before 20 September 1985 (pre-CGT date). Mr Y was appointed as Administrator for the Estate of Parent of the Deceased on 15 February 20xx (post-CGT date) as evidenced by the Letters of Administration issued by the Supreme Court.

Based on subsection 44(1) of the relevant Probate and Administration Act, upon Grant, title of property would pass to the Administrator for the Estate of Parent of the Deceased. Despite the Grant occurred on a post-CGT date, title of property would vest back to the date of death of Parent of the Deceased on a pre-CGT date as provided in the relevant Act.

This would mean the Administrator for the Estate of Parent of the Deceased is deemed to have acquired the asset for CGT purposes at the time (or date) of death of Parent of the Deceased back on a pre-CGT date. As such the asset would remain a pre-CGT asset in the hands of the Administrator for the Estate of Parent of the Deceased.

The asset in this case, is the property in which the Deceased has the entitlement share or interest (the entitlement) based on intestacy law when their parent died back in the pre-CGT date.

It is considered that asset is taken to have passed to the Deceased after the death of their within the meaning of paragraph 128-20(1)(b), that is by operation of intestacy law at the time of death of Parent of the Deceased back in the pre-CGT date. Accordingly, that asset (which is a pre-CGT asset) would be taken to have been owned by the Deceased just before they died for the purposes of section 128-10.

Consequently, the Trustee for the Estate of the Deceased is taken to have acquired that asset on the day the Deceased died in November 20xx for the purposes of subsection 128-15(2). The cost base of the asset is determined by the rules in subsection 128-15(4).

For a pre-CGT asset - the cost base and reduced cost base would be the market value of the asset on the date of death of the Deceased in November 20xx.

Accordingly, the asset which is the Deceased's entitlement in the property would have ceased to be a pre-CGT asset in the hands of the Trustee for the Estate of the Deceased.

Conclusion

Therefore, based on the foregoing, for CGT purposes, the Estate of the Deceased would be considered to have acquired the entitlement share or interest (the entitlement) in the property from the Estate of Parent of the Deceased at the time (or date) of death of the Deceased.

By operation of law, the entitlement ceased to be a pre-CGT asset in the hands of the Trustee for the Estate of the Deceased.

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