Edited version of private advice

Authorisation Number: 1052351188564

Date of advice: 16 January 2025

Ruling

Subject: CGT - treatment of the trustee of a testamentary trust

Question 1

Will subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain or capital loss the Trustee of the Testamentary Trust makes from the transfer of the Relevant Assets to Individual A (the Primary Beneficiary)?

Answer

Yes.

Question 2

Will the modifications in subsection 128-15(4) of the ITAA 1997 apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Primary Beneficiary?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background Information

This description of facts is based on the following documents. The documents form part of the facts and are to be read with this description. The relevant documents are:

•                     Your Private Binding Ruling Application dated XX September 20XX (PBR Application); and

•                     Your response to our Further Information Request email dated XX December 20XX (Your FIR Response).

We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

The Deceased died on XX October 20XX, leaving a Will in which they established the Testamentary Trust. (Copy provided.)

Probate was granted in respect of the Will on XX May 20XX. (Copy provided.)

Your FIR Response provided the full inventory of the Property of the Estate (including its value where available), which was contained and filed with Probate.

Clause X of Estate of the Deceased - Resolution of Executors (Appendix X of your PBR Application) specified that four testamentary trusts were established under the Deceased's Will, one of which is the Testamentary Trust.

The Testamentary Trust was established under Clause X of the Deceased's Will primarily for the benefit of Individual A (spouse of the Deceased). Pursuant to Clause X.X of the Will, one quarter of the residue of the Deceased's estate was transferred to the Testamentary Trust.

The terms of the Testamentary Trust are contained in Schedule X of the Will. The terms of the Testamentary Trust also incorporate Schedule X of the Will.

The Trustee of the Testamentary Trust is Individual A (Trustee). The Primary Beneficiary of the Testamentary Trust is Individual A.

Your PBR Application provided that the residue of the Deceased's estate included the following assets (Relevant Assets):

a.            One quarter of the Deceased's shares in Company A;

b.            One quarter of the Deceased's shares in Company B;

c.            One quarter of the Deceased's loan account owing to them at the date of their death by the trustee of Trust A; and

d.            One quarter of the Deceased's loan account owing to them at the date of their death by the trustee of Trust B.

The Relevant Assets were acquired by the Deceased on or after 20 September 1985.

Your FIR Response confirmed the following facts:

•                     All assets of the Testamentary Trust are passed from the Estate. No assets have been acquired from elsewhere.

•                     All assets transferred to the Testamentary Trust included the Relevant Assets only.

•                     The Trustee's cost base and reduced cost base, for each asset, equals the cost base and reduced cost base for those assets on the day the Deceased died.

•                     The loan assets (items c and d) have not been repaid partly or fully up until the Proposed Transaction.

Further, it stated that the cost base and reduced cost based, for each asset, on the day the Deceased.

Proposed Transaction

It is proposed that, pursuant to Clause X.X of Schedule X of the Deceased's Will, there will be a distribution of the Relevant Assets from the Testamentary Trust to Individual A (Proposed Transaction).

The loan assets (i.e., c and d of the Relevant Assets) have not been repaid partly or fully up until the Proposed Transaction.

The purpose of the Proposed Transaction is to simplify Individual A's affairs by removing an unnecessary entity, being the Testamentary Trust.

It is intended that the Testamentary Trust will vest immediately after the Proposed Transaction. It is anticipated that this will occur in the year ended 30 June 20XX. The year ended 30 June 20XX was included in the private ruling application in the event there were any unforeseen delays.

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 subsection 108-5(2)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

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)

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 Paragraph 128-20(1)(a)

Income Tax Assessment Act 1997 subsection 128-20(2)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Summary

ATO Practice Statement Law Administration PS LA 2003/12 (Capital gains tax treatment of the trustee of a testamentary trust), will apply to the Trustee of the Testamentary Trust, and subsection 128-15(3) of the ITAA 1997 will apply to disregard any capital gain or capital loss the Trustee makes from the transfer of the Relevant Assets to Individual A (the Primary Beneficiary).

Detailed reasoning

Division 128

Division 128 of the ITAA 1997 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate.

A CGT asset has the meaning given by section 108-5 of the ITAA 1997, where subsection 108-5(1) defines a CGT asset to be:

(a)          any kind of property; or

(b)          a legal or equitable right that is not property.

To avoid doubt, subsection 108-5(2) of the ITAA 1997 lists the following as CGT assets:

(a)          part of, or an interest in, an asset referred to in subsection (1);

(b)          goodwill or an interest in it;

(c)          an interest in an asset of a partnership;

(d)          an interest in a partnership that is not covered by paragraph (c).

Section 128-10 of the ITAA 1997 states that when you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded.

Section 128-15 of the ITAA 1997 states the following at subsections 128-15(1), (2) and (3):

(1)          This section sets out what happens if a CGT asset you owned just before dying:

(a)          devolves to a legal personal representative; or

(b)          passes to a beneficiary of that person's estate.

(2)          The legal personal representative or beneficiary is taken to have acquired the asset on the day you died.

(3)          Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

Further, subsection 128-15(4) of the ITAA 1997 sets out modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.

The term 'legal personal representative' (LPR) is defined in subsection 995-1(1) of the ITAA 1997 and relevantly includes 'an executor or administrator of an estate of an individual who has died'.

Section 128-20 of the ITAA 1997 defines when a 'CGT asset passes to a beneficiary' in a person's estate. Relevantly, this will happen if the person / beneficiary becomes the owner under the deceased's will (paragraph 128-20(1)(a)).

Subsection 128-20(2) of the ITAA 1997 provides that a CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LPR transfers it under a power of sale.

Effect of PS LA 2003/12

PS LA 2003/12 confirms the Commissioner's longstanding administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).

PS LA 2003/12 further confirms that broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

Application to your circumstances

The Testamentary Trust was created under the Deceased's Will and is a testamentary trust. Pursuant to Clause 5 of the Deceased's Will, one quarter of the residue of the Deceased's estate was transferred to the Trustee of the Testamentary Trust, being Individual A. The Primary Beneficiary of the Testamentary Trust is also Individual A. Further, all assets of the Testamentary Trust (which included the Relevant Assets only) are passed from the Estate. No assets have been acquired from elsewhere.

In this case, PS LA 2003/12 will apply to treat the Trustee the same way as a legal personal representative for the purposes of Division 128 of the ITAA 1997 and not recognise any taxing point in relation to assets owned by the Deceased until those Relevant Assets cease to be owned by Individual A (being the beneficiary named in the Will).

Therefore, subsection 128-15(3) of the ITAA 1997 will apply to disregard any capital gain or capital loss that the Trustee makes from the Proposed Transaction.

Question 2

Summary

PS LA 2003/12 will apply and the modifications in subsection 128-15(4) of the ITAA 1997 will apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Primary Beneficiary.

Detailed reasoning

Division 128 and Effect of PS LA 2003/12

The Reasons for Decision to Question 1 contains the discussion on the relevant provisions and legal principles.

Further, paragraph 3 of PS LA 2003/12 provides the following:

The cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased's legal personal representative.

If the deceased acquired the asset before 20 September 1985 (that is, pre-CGT), the acquisition cost will be equal to the market value at the date of the deceased's death. If the deceased acquired the asset on or after 20 September 1985, the beneficiary's acquisition cost will be determined in accordance with table items 1, 2, 3 or 3A of subsection 128-15(4) of the ITAA 1997.

Application to your circumstances

The administrative practice of PS LA 2003/12 will apply to not recognise any taxing point in relation to assets owned by the Deceased until those Relevant Assets cease to be owned by Individual A (being the beneficiary named in the Will).

When the Trustee transfers the Relevant Assets to the Primary Beneficiary (i.e., the Proposed Transaction), the cost base and reduced cost base of each asset in the hands Individual A will be calculated in the same way as it would have been if the assets had passed to her from the Deceased's legal personal representative.

Accordingly, the modifications in subsection 128-15(4) of the ITAA 1997 will apply to the cost base and reduced cost base of the Relevant Assets in the hands of the Primary Beneficiary.

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