Edited version of private advice

Authorisation Number: 1052019341309

Date of advice: 12 August 2022

Ruling

Subject: Discount capital gain

Question

Is the trustee for the deceased estate entitled to the discount capital gain pursuant to section 115-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away during the 20XX income year.

The executor of the Deceased obtained probate of the deceased's will.

The executor of the deceased estate was granted to the spouse of the Deceased.

The Deceased's will created life interests in certain assets of the deceased estate which included a share portfolio of listed companies.

The Deceased's will provided a life interest in their estate to their spouse.

The spouse was granted a life interest to the share portfolio.

The Deceased and the trustee of the deceased estate acquired a number of shares in various companies over a number of income years.

The shares were acquired after 19 September 1985.

The shares were held by on behalf of the spouse for a number of years as a result of her life interest created by the will.

The spouse passed away during the 20XX income year.

The deceased estate's shares were sold in the first quarter of 20XX to enable the trust to be wound up.

The shares were sold at market to third parties, not to any beneficiaries of the deceased estate.

At that time the only shares not held for twelve months by the estate are Company A shares acquired during the 20XX income year. However, the Company A shares were issued as a result of a demerger between Company B and Company A.

The capital gain is to be reported in the 20XX income tax return.

It is intended the capital gains will be worked out using a cost base that has been calculated without reference to indexation.

The estate is currently still in the process of administration.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Section 115-5 of the ITAA 1997 states that a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

The first requirement to be eligible for the discount capital gain, section 115-10 of the ITAA 1997 states:

To be a discount capital gain, the capital gain must be made by:

          (a)        An individual,

          (b)        A complying superannuation entity

           (c)        A trust, or

          (d)        A life insurance company in relation to a discount capital gain from a CGT event in respect of a CGT asset that is a complying superannuation asset.

You are a trust that disposed of shares which resulted in a capital gain. Accordingly, you meet the first requirement to be eligible for the discount capital gain under paragraph 115-10(a) of the ITAA 1997.

The second requirement to be eligible for the discount capital gain, section 115-15 of the ITAA 1997 states:

To be a discount capital gain, the capital gain must result from a CGT event happening after 11:45 am (by legal time in the Australian Capital Territory) on 21 September 1999.

CGT event A1 happens if you dispose of CGT asset pursuant to subsection 104-10(1) of the ITAA 1997.

In this case, the trust acquired the various parcel of shares (being the CGT assets) after 21 September 1999 as a result of the Deceased passing away (see subsection 128-15(2) of the ITAA 1997 that states the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died). The trust later disposed of all of the shares it held to third parties during the 20XX income year. Accordingly, you meet the second requirement to be eligible for the discount capital gain under section 115-15 of the ITAA 1997.

The third requirement to be eligible for the discount capital gain, subsection 115-20(1) of the ITAA 1997 states:

To be a discount capital gain, the capital gain must have been worked out:

            (a)        Using a cost base that has been calculated without reference to indexation at any time or

            (b)        For a capital gain that arose under CGT event K7, using the cost of the depreciating asset concerned.

It is intended the capital gains will be worked out using a cost base that has been calculated without reference to indexation at any time. Accordingly, you meet the third requirement to be eligible for the discount capital gain under paragraph 115-20(1)(a) of the ITAA 1997.

The fourth requirement to be eligible for the discount capital gain, subsection 115-25(1) of the ITAA 1997 states:

To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

The trust disposed of the shares it owned to third parties. This resulted in CGT event A1 occurring to the shares held by the trust. The majority of the shares were held by the trust for longer than 12 months except for the Company A shares. The trust acquired the Company A shares during the 20XX income year and later disposed the same shares on during the 20XX income years which is less than 12 months from the acquisition date.

However, the Company A shares were acquired as a result of demerger between Company B and Company A. Under the demerger, Company B shareholders received one Company A share for each Company B share they held. For determining whether a Company B Shareholder can make a discount capital gain from a future CGT event that happens to a Company A share they acquired under the demerger, where the share corresponds with a Company B, it will be taken to have been acquired on the date the Company B Shareholder acquired, for CGT purposes, that Company A share (item 2 of the table in subsection 115-30(1)).

As a result, all of the shares held by the trust for more than 12 months will be eligible for the discount capital gain pursuant to subsection 115-25(1) of the ITAA 1997.

Conclusion

The trust will be entitled to the discount capital gain under section 115-5 of the ITAA 1997 as you have satisfied the following requirements:

•         you are a trust

•         a capital gains tax (CGT) event happens to the shares you owned

•         the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

•         you acquired most of the shares at least 12 months before the CGT event occurred except for the Company A shares which were acquired under a demerger and are deemed to be held for 12 months as they relate to Company B shares, and

•         you intend not to choose to use the indexation method.

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