Edited version of private advice

Authorisation Number: 1052104347413

Date of advice: 29 June 2023

Ruling

Subject: Deceased estate - repayments of loan principal and interest

Question

Does any part of the Settlement Payment form part of your assessable income?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2021

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

More than 25 years ago, your late spouse (Individual A) entered a verbal agreement with Individual B to establish a company and purchase a particular residential property (the Property).

Individual A and Individual B were otherwise unrelated financially.

Company X was established with Individual A and Individual B as directors and each holding one of the two shares issued.

Individual A borrowed money using the family home that was shared with you. The borrowed money was on-lent to Company X for the purpose of purchasing the Property.

It was agreed by Individual A, Individual B and Company X that the loan principle and accrued interest on the loan to Company X were to be repaid upon the sale of the Property with the applicable rate of interest being the home loan variable rate of interest charged to Individual A on their loan.

Company X proceeded to purchase the Property.

You were not a party to the agreement between Individual A, Individual B and Company X.

Disagreements between Individual A and Individual B occurred including the amount of interest repayable to Individual A and the use of the Property by relatives of Individual B.

The disputes were not settled at the time of the death of Individual A.

You are the sole administrator and beneficiary of Individual A's estate (the Estate). In this capacity you have entered a deed with Individual B and Company X (the Deed) in relation to dealing with the proceeds from a proposed sale of the Property.

The Deed sets out that the Estate will receive a Settlement Payment of more than half of the sale proceeds. This will likely be achieved through the issuing of dividend access shares to the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Summary

As you were not party to the loan agreements, we do not consider you to be the owner of the right to repayment of the debt for the purpose of capital gains tax. For the same reason we do not consider that you have derived the interest income. No part of the Settlement Payment is considered to assessable income to you.

Detailed reasoning

Your assessable income includes income according to ordinary concepts, which is called ordinary income (subsection 6-5 of the ITAA 1997).

Your assessable income includes your net capital gain (if any) for the income year (subsection 102-5(1) of the ITAA 1997).

Interest is in most circumstances of an income nature and is therefore income according to ordinary concepts under section 6-5 of the ITAA 1997.

Subsection 108-5(1) of the ITAA 1997 defines a CGT asset to be any kind of property, or legal or equitable right that is not property. One of the examples provided in the notes to section 108-5 of the ITAA 1997 is a debt owed to the taxpayer. Thus, an unpaid loan is considered a debt that is owing to the taxpayer.

CGT event C2 in section 104-25 of the ITAA 1997 happens if a taxpayer's ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited.

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) ITAA 1997).

In determining which entity derives assessable income, consideration is required of all the facts and circumstances of the contractual arrangements and agreements.

In this case CGT event C2 will occur upon the repayment of the outstanding loan principal as allowed for in the Deed. Also, the component of interest included in the settlement payment is likely to be considered ordinary income for the Estate under section 6-5 of the ITAA 1997.

CGT event C2 and the derivation of interest income are attributable to the agreements Individual A made with Individual B, and Company X. Any assessable income arising as a result of the agreements will be assessable to Individual A (or now Individual A's Estate).

As you were not party to the loan agreements, we do not consider you to be the owner of the right to repayment of the debt for the purpose of capital gains tax. For the same reason we do not consider that you have derived the interest income. No part of the Settlement Payment is considered to assessable income to you.

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