Edited version of private advice

Authorisation Number: 1052152444576

Date of advice: 31 August 2023

Ruling

Subject: CGT - deceased estates - shares

Question 1

Did the sale of half of the joint shareholding on X XX 20XX, and the agreement between Person A and the deceased, result in half the Unsold Shares being held by Person A on trust solely for the benefit of the deceased from XX XXX 20XX onwards?

Answer

Yes.

Question 2

Was the cost base of the unsold Bank shares XX XXX 20XX, half of the cost base of the sold Bank shares at the same date?

Answer

Yes.

Question 3

Has the dividend income represented by the shares issued pursuant to the dividend reinvestment plan since XX XXX 20XX properly been returned as the sole income of the deceased until the death of the deceased and thereafter as income of the Estate?

Answer

Yes.

Question 4

Has any of the dividend income of the unsold Bank shares since XX XXX 20XX been income of Person A?

Answer

No.

Question 5

Will the proposed share transmission to Person A be a transfer from the deceased to an executor of the deceased and therefore not constitute a CGT Event?

Answer

Yes.

Question 6

In the alternative, if the Bank requires the unsold Bank shares to be transferred to Person A and Person B as joint executors of the Estate, will such a transfer result in any CGT Event?

Answer

No.

Question 7

Assuming the unsold Bank shares are transferred solely to Person A pursuant to the proposed share transmission to Person A, will the subsequent proposed share transfer to Person B as beneficiary result in any CGT Event?

Answer

No.

Question 8

If the unsold Bank shares are first transferred to Person A and Person B as joint executors of the Estate, will a subsequent share transfer to Person B as beneficiary under the will result in any CGT event?

Answer

No.

Question 9

If the unsold Bank shares are transferred to Person B as beneficiary, will Person B inherit the CGT cost base of the deceased in the unsold Bank shares and be liable to account for any capital gain or loss on subsequent disposal of the unsold Bank shares by Person B?

Answer

Yes.

Question 10

Will the Estate have any tax liability as a result of the proposed share transmission to Person A?

Answer

No.

Question 11

Will the Estate have any tax liability as a result of the proposed share transfer to the beneficiary?

Answer

No.

Question 12

Will the expenditure incurred by the executors, in making this private ruling application form part of the cost base of the unsold Bank shares in the hands of the beneficiary pursuant to section 128-15(5) of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes.

Question 13

Was there a GST implication from the sale of the sold Bank shares?

Answer

N/A

Question 14

Will there be a GST implication on the proposed share transmission to Person A?

Answer

N/A

Question 15

Will there be a GST implication on the proposed share transmission to the beneficiary?

Answer

N/A

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

Person A and the deceased jointly purchased XXX Bank shares in 19XX when the Bank first floated on the stock exchange as joint owners.

Additional shares issued after the initial purchase pursuant to a dividend reinvestment plan and a share purchase plan. By XX XXX 20XX an additional XX Bank shares had issued pursuant to the Dividend Reinvestment Plan (DRIP).

Person A by partition agreement with the deceased, sold his half of the joint share-holding in 200X, being XXX Bank shares on XX XXX 20XX (sold shares).

This left XXX Bank shares remaining in the joint names of Person A and the deceased on XX XXX 20XX (unsold shares).

The partition by agreement divided the initial allotted parcel equally and subsequent allotment pursuant to the dividend reinvestment plan equally between the portioning parties.

Person A received the total proceeds of the sale of the sold Bank shares X April 20XX.

Person A disclosed the disposal of the sold Bank shares in his 20XX financial year income tax return and included the relevant capital gain (after the CGT discount) on the entirety of the sold Bank shares in his taxable income.

By agreement between Person A and the deceased, following the sale of the sold Bank shares, the remaining unsold Bank shares were the sole beneficial property of the deceased. However, the share register, still showed the unsold Bank shares remained registered in both joint names of Person A and the deceased.

In 20XX, Person A and the deceased attempted to update the share register by removing Person A's name as an owner of the unsold Bank shares. Person A during 20XX signed a share registry form to remove their name from the share register.

Person A believed that the deceased had submitted the signed form to the share registry as agreed.

For reasons unknown to the applicants, Person A's name was not removed from the share register as a joint holder of the unsold Bank shares as intended.

The Bank shares were subject to a dividend reinvestment plan both before and after the sale of the sold Bank shares. Pursuant to the dividend reinvestment plan XX shares were allotted on XX XXX 20XX and XX shares were allotted on XX XXX 20XX.

The total purchase price for the Bank shares issued on XX XXX 20XX pursuant to the share purchase plan was contributed by the deceased alone.

Person has not received any income from the unsold Bank shares since the disposal of the sold Bank shares.

Following the sale of the sold Bank shares the deceased reinvested Bank dividends under the Bank dividend reinvestment plan or received cash dividends for their sole benefit.

Person A has not claimed any franking credits in their tax returns in respect to the unsold shares since the date of disposal of the sold Bank shares.

Person A's Tax File Number (TFN) is not linked to the unsold Bank shares.

Person A has claimed no beneficial interest in the unsold Bank shares since XX XXX 200X, being the date of disposal of the sold Bank shares.

The deceased passed on XX XXX 20XX.

Person A and Person B were named as joint executors in the will of the deceased.

Person A and Person B applied for probate of the will of the deceased and probate was granted on XX XXX 20XX by the Supreme Court.

Person A became aware that his name was still on the Bank share register as a joint owner of the unsold shares after the death of the deceased.

Clause 7c of the will of the deceased states the following:

(c) To give to Person B, all my shares in the Bank provided they survive me and if not this gift shall from part of the rest and residue of my estate.

The beneficiary named in clause 7c did survive the deceased.

Assumptions

In accordance with the will of the deceased, Person A and Person B as executors of the deceased, propose completing and lodging a share transmission application for the transfer of all unsold Bank shares together with any additional shares registered in the joint names of Person A and the deceased, to Person A as executor of the Estate (proposed share transmission to Person A).

Following the completion of the proposed share transmission to Person A, Person A proposes transferring the unsold Bank shares to Person B as the beneficiary of the Bank shares owned by the deceased pursuant to clause 7c of the will of the deceased (proposed share transfer to beneficiary).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10(2)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15(2)

Income Tax Assessment Act 1997 section 128-15(4)

Income Tax Assessment Act 1997 section 128-15(5)

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Beneficial ownership

A beneficial owner is defined in Taxation Ruling IT 2486 and Taxation Determination TD 92/106. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset.

Legal

A legal owner is the individual who has their name on the legal documents associated with the CGT asset, an example would be the title deed for a property. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner of a CGT asset that is liable for capital gains tax upon sale of the assets.

In some cases, it is possible for legal ownership to differ from beneficial ownership. A beneficial owner is a person or entity who is beneficially entitled to the income and proceeds from the asset. An individual may hold a legal ownership interest in a dwelling for another individual in trust.

It is, accordingly, the beneficial owner of the CGT asset who is liable to declare the capital gain or loss from the event. As noted by Jagot J, in Ellison & Anor V Sandini Pty Ltd & Ors and further in FC of T v Sandini Pty Ltd & Ors, 2018 ATC 20-651, for these purposes the beneficial owner for CGT event A1 purposes is identified under rules of equity:

"...To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset;..."

'Rights which a court of equity would enforce' include those governed by equity principles for situations where beneficial ownership may be separated from legal ownership. In situations where legal title may differ from beneficial ownership for property, intent at start of ownership is a key element needing to be established for equity principal application purposes. As noted by Gibbs CJ, in Calverley v Green [1984] HCA 81:

"...3 Where a person purchases property in the name of another, or in the name of himself and another jointly, the question whether the other person, who provided none of the purchase money, acquires a beneficial interest in the property depends on the intention of the purchaser...9..... Where one person alone has provided the purchase money it is his or her intention alone that has to be ascertained....12. The extent of the beneficial interests of the respective parties must be determined at the time when the property was purchased..."

In these cases, it will be the beneficial owner of a CGT asset that is liable for any capital gains tax attributable, upon sale of the assets.

The concept of beneficial ownership is also explained in Taxation Determination TD 2017/11. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset.

A legal owner is the individual who has their name on the legal documents associated with the CGT asset, an example would be the title deed for a property. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner of a CGT asset that is liable for capital gains tax upon sale of the assets.

CGT on shares

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss when a CGT event happens to a CGT asset that you have an ownership interest in. For this reason, it is important to establish who the owner of a CGT asset is at the time a CGT event occurs.

CGT event A1 occurs when there is a change in ownership of a CGT asset. However, CGT event A1 does not occur if there is only a change of legal ownership and not a change of beneficial ownership.

The legal owner of shares is determined by the share's title, according to the relevant law. A beneficial owner refers to a person or entity who is beneficially entitled to the income and proceeds from shares.

In exceptional circumstances, the legal owners of a shares may not be the same as the beneficial owners. Where this occurs, there needs to be sufficient evidence to establish that the beneficial owners of the shares are different to the legal owners.

108-7 of the ITAA 1997 treats a CGT asset that is owned jointly as if that interest is held as tenants in common in equal shares. In other words, each individual who owns a CGT asset jointly is notionally treated as owning a separate asset constituted by an equal interest in the asset. Provided that there is no change in the beneficial ownership, then the conversion of a joint tenancy to tenancy in common in equal shares, or vice versa, has no CGT consequences.

Application to your circumstances

Person A and the deceased jointly purchased XX Bank shares as joint owners.

Additional shares issued after the initial purchase pursuant to a dividend reinvestment plan and a share purchase plan.

After this time, Person A and the deceased commenced steps to severe the joint tenancy and become co-owners of the property as tenants in common of two equal undivided shares. This occurred on XX 20XX.

Evidence of the changing in ownership from joint ownership to tenants in common:

•         Person A by partition agreement with the deceased, sold his half of the joint share-holding in 20XX, being XXX Bank shares on XX XXX 20XX (sold Bank shares).

•         This left XXX Bank shares remaining in the joint names of Person A and the deceased on XX XXX 20XX (Unsold Bank Shares).

•         The partition by agreement divided the initial allotted parcel equally and subsequent allotment pursuant to the dividend reinvestment plan equally between the portioning parties.

•         Person A received the total proceeds of the sale of the sold Bank shares XX XXX 20XX.

•         Person A disclosed the disposal of the sold bank shares in his 20XX financial year income tax return and included the relevant capital gain (after the CGT discount) on the entirety of the sold Bank shares in their taxable income.

•         By agreement between Person A and the deceased, following the sale of the sold Bank shares, the remaining unsold Bank shares were the sole beneficial property of the deceased. However, the share register, still showed the unsold Bank shares remained registered in both joint names of Person A and the deceased. The share register is maintained by the share registry.

•         Annexed and marked "D" is a copy of a holding information statement issued by the share registry as at XX XXX 20XX. Annexure "D" shows that the total number of Bank shares registered in the name of the deceased and Person A at XX XXX 20XX is XXX.

•         The will of the Deceased attached states the following:

(c) To give to Person B all my shares in the Bank provided he survives me and if not this gift shall from part of the rest and residue of my estate.

Based upon the information provided, we accept that from the date XX% of the total shares were sold it was intended that you did not have a beneficial interest in the remaining XX% of the shares.

You provided a copy of the deceased's will, which gave the whole of the deceased's Bank shares, exclusively to Person B.

On this basis, it is the Commissioner's view that in addition to their 50% legal ownership interest, the deceased became the beneficial owner of Person A's 50% ownership interest in the remaining shares on XX 20XX.

We recognise the legal title on the shares still includes the names of both the deceased and Person A; however, the actions and events subsequent to the XX% sale of the shares on XX XXX 20XX support the position the deceased was the sole beneficial owner at the time of their passing.

Consequently, any income derived from the remaining shares after the sale on xx 20XX either via dividends or the DRIP would be considered assessable income of the beneficial owner - the deceased.

Cost base of the remaining shares

Section 108-7 of the ITAA 1997 provides that where assets are jointly owned, then for CGT purposes each of the owners is treating as owning a CGT asset in equal shares.

On this basis, it is the Commissioner's view that you became legal and beneficial owner of your XX% ownership interest in the shares at the time you became co-owner of the property as a tenant in common.

Taxation Determination TD 97/3 provides that if you subdivide a block of land into separate blocks, each of those blocks becomes a new asset. As such the cost base or reduced cost base relating to subdivision should be apportioned to all new assets.

You work out the cost base of each new asset as follows:

•         work out each element of the cost base of the original asset at the time of the subdivision apportion in a reasonable way the costs to each new asset.

•         a reasonable apportionment of the original cost of the land itself can usually be achieved on an area basis if all the land is of similar size and market value or on a relative market value basis if this is not the case.

When a taxpayer's legal personal representative or a beneficiary of the taxpayer's estate acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the legal personal representative or beneficiary are modified under the table in subsection 128-15(4) of the ITAA 1997.

If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base - the acquisition cost - is the deceased's cost base for the asset on the day they died under Item 1 in the table, unless it is covered by another item in the table.

Cost base for beneficiary of the will

Capital Gains Tax (CGT) event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997).

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Division 128 sets out what happens when a CGT asset passes to you as a beneficiary of a deceased estate.

Section 128-20(1) provides that an asset is taken to have passed to a beneficiary when the beneficiary becomes the owner of the asset in any of the following circumstances:

•         under a Will or a Will varied by court order

•         by operation of intestacy law

•         by appropriation to a beneficiary

•         under a Deed or arrangement.

The beneficiary will be taken to acquire the asset that passes to them on the date the deceased died (subsection 128-15(2) of ITAA 1997).

Subsection 128-15(4) of ITAA 1997 sets out the modifications to the cost base and reduced cost base of CGT asses that pass to you as a beneficiary of a deceased estate.

Item 1 of the table in subsection 128-15(4) of ITAA 1997 provides that the cost base or reduced cost base of shares that pass to you as a beneficiary of a deceased estate that they acquired on or after 20 September 1985 will be the deceased's cost base of the shares on the date they died.

Section 128-15(5) of the ITAA 1997 states, 'A beneficiary can include in the cost base or reduced cost base of the asset any expenditure that the legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it. This means the expense incurred by the legal representative/executor in submitting the private ruling application could be included in the cost base for the shares inherited by the beneficiary.

GST and Share investing

If you hold your shares for the purpose of earning income from dividends and capital growth, you will be regarded as a share investor. Your shares would be treated as capital gains tax (CGT) assets with any gains from the disposal of the shares included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

The deceased, the executors and the sole beneficiary would all be deemed to be share investors and not in the business of share trading as per the factors outlined in QC 66047- Share investing versus share trading.

Consequently, GST is not applicable with regards the sale, transmission or inheritance by the beneficiary.

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