Edited version of private advice

Authorisation Number: 1052251470354

Date of advice: 14 May 2024

Ruling

Subject: CGT - deceased estate

Question 1

Do you have a CGT asset within the meaning of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) being a "chose in action" (the Chose in Action) constituting your legal right to sue the executor of Parent's estate by bringing an application for a family provision order under Chapter 3 of the Succession Act?

Answer

Yes. You are entitled to bring a claim for family provision against the estate of Parent. Your "right to sue" gives rise to the Chose in Action which is a CGT asset within the meaning of subsection 108-5(1) of the ITAA 1997.

Question 2

Is the first element of the cost base of your Chose in Action nil?

Answer

Yes. The first element of the cost base of your Chose in Action is nil. The first element of the cost base of a CGT asset is worked out under subsection 110-25(2) of the ITAA 1997.

Question 3

Will CGT event C2 happen to your Chose in Action when the Settlement Deed is executed, and the releases under clause 4 of the Settlement Deed are provided?

Answer

Yes. Pursuant to section 104-25 of the ITAA 1997, CGT event C2 happens if your ownership of an intangible asset ends by the asset being released, discharged or satisfied. The time of the event is when the Settlement Deed is executed.

Question 4

Does the 'Residual Amount' to be paid to the discretionary trust to be established represent capital proceeds for the CGT event C2 that happens to your right?

Answer

No, on the basis of the information provided about the proposed settlement and the new discretionary trust, the capital proceeds for the ending of your right to make a family provision claim is another right, being a right to be included as a discretionary beneficiary of the trust.

Question 5

What are the capital proceeds for CGT event C2 happening to your right?

Answer

As per question 4 above, the capital proceeds for CGT event C2 happening to your right to make a family provision claim is another right, being a right to be included as a discretionary beneficiary of the trust, the value of which is likely to be 'nil' or 'negligible' as the trust is a discretionary trust and there are other beneficiaries of the trust.

Question 6

Will the contribution of the Residual Amount to the Trust give rise to any net income of the Trust under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

You have withdrawn this question. You have requested general guidance to be issued instead.

Question 7

Will the amount of the loan made by the Trustee to you from the Residual Amount be included in your assessable income pursuant to subsection 99B(1) of the ITAA 1936?

Answer

You have withdrawn this question. You have requested general guidance to be issued instead.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

xx/xx/20xx

Relevant facts and circumstances

Your parent passed away on xx/xx/20xx. Your Parent was preceded in death by the other parent. Your parents had three children: Child 1, Child 2 and you. You, your child and your spouse, have resided in the home of the Property for over XX0 years. You are and will continue to be an Australian resident for income tax purposes. The Property is estimated to have a market value of $x million. You and your spouse own an investment property estimated at $xxx. The Last Will and Testament of both parents are drafted in materially the same way, and both appoint Child 1 as executor in the event of the death of the other.

The terms of your parents' wills relevantly provide:

•         The whole of the estate is given to Parent or the other parent (subject to that person surviving the other by 30 days)

•         The XXX grandchildren of your parents each received a legacy of $xxx

•         The remainder of the estate is to be divided equally between Child 1, Child 2 and relative, and

•         The Property is to be sold and any occupants (being you and your family) are to vacate within three months from the date of probate.

No provision, benefit or legacy was left to you in either your parents' will.

You are eligible to make an application for a family provision order in the Supreme Court as you are an eligible person in respect of both your parents as you are their child. You informed Child 1 that you intended to make a family provision claim in respect of your Parent's estate. Subsequently, on or around xx/xx/20xx, you, Child 1, Child 2 and relative attended an informal settlement conference which resulted in all the parties agreement to the terms stipulated in the Heads of Agreement. Shortly thereafter the Settlement Deed was prepared to give effect to the Heads of Agreement.

The Settlement Deed

The relevant terms of the Settlement Deed can be summarised as follows:

•         You agree to comply to vacate the Property within three months,

•         You will be paid certain costs associated with you vacating the Property and if you and your child do not vacate, rent will need to be paid to the Executor or Administrator,

•         Uncle agrees to disclaim his entitlement under your Parent's will,

•         Upon the distribution of Parent's estate to Child 1 and Child 2, Child 1 and Child 2 will cause an amount equivalent to one third of the residue of the Estate (i.e., the Residual Amount as mentioned above) to be paid to the Trust. The Trust must be for the benefit of you and your child, but its beneficiaries cannot include your spouse,

•         Certain amounts paid to you may be deducted from the Residual Amount

The Estate of Parent has not yet been administered, but it is intended that the Residual Amount will be paid to the Trustee by Child 1 and/or Child 2 from the amount remaining after all expenses, including any Commonwealth taxes, have been paid in connection with the distribution of the estate to Child 1 and Child 2 (noting that relative has disclaimed their entitlement).

The Proposed Discretionary Trust (the Trust)

The Discretionary Trust (the Trust) is a proposed discretionary trust. It is noted that:

•         The term "Trust Fund" is defined to include any further or additional Property donated to, assigned to, transferred to or vested in or caused to be vested in the Trustee to be held upon the trusts and subject to the powers and provisions of this Trust.

•         The Trustee has the power to advance and lend money to any person.

•         The term "Beneficiaries" of the Trust is defined to be those persons under the Schedule of the Trust (which are stated to be you and your child). The definition of Beneficiary further includes an expansive list of the relatives of you and your child, your companies, trusts and charities as well as any spouse.

•         The Trustee has the power to exclude persons, or classes of persons, as beneficiaries.

Your spouse is not listed as an "excluded beneficiary" of the Trust but can be so excluded should the proper declaration be executed (it is expected that a declaration would be made excluding your spouse from being a beneficiary of the Trust).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

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

Income Tax Assessment Act 1997 subsection 110-25(2)

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).