Edited version of private advice

Authorisation Number: 1052405857241

Date of advice: 12 June 2025

Ruling

Subject: Capital gains tax

Question 1

Will any capital gain or loss, made on the appropriation of the Listed Shares in specie to the Person B and C Share and the Person D Share, be disregarded under subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Will CGT Event K3 in section 104-215 of the ITAA 1997 happen on the appropriation of the Listed Shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust?

Answer 2

No

Question 3

Will any capital gain or loss, made on the appropriation of the Listed Shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust, be disregarded under subsection 128-15(3) of the ITAA 1997?

Answer 3

Yes

This ruling applies for the following period(s)

Income year ending 30 July XXXX

The scheme commenced on

1 July XXXX

Relevant facts and circumstances

You are the executors (the Executors) of the estate (the Estate) of the late Person A (the Deceased).

The Deceased died on XXXX and probate of her last will and testament, dated XXXX (the Will), was granted by the Supreme Court of X on XXXX to the Executors.

The primary assets of the Estate at the date of the Deceased's death:

•                the Deceased's residence with an approximate value of $XX;

•                cash/term deposits with an approximate value of $XX; and

•                a portfolio of listed securities with an approximate value of $XX (the Listed Shares).

The Listed Shares included shares acquired prior to 20 September 1985 and shares acquired after that date, including some bonus shares in respect of the pre-20 September 1985 holdings. Records exist that enable each acquisition of shares to be identified including the date of acquisition and their respective cost bases.

The will

The Deceased's residence and contents are bequeathed to Persons B and C (as tenants in common). This devise has been given effect and the residence has been transferred to them.

Person D is bequeathed a pecuniary legacy of a sum equal to the value of the residence at the date of death of the Deceased, which has been paid.

The balance of the Estate is to be applied as follows:

•                the payment of debts, funeral and testamentary expenses of the Estate, and

•                the division of the residue into three equal parts and one of such equal parts to be applied as follows:

o        one to Persons B and C (the Person B and C Share);

o        one to Person D (the Person D Share); and

o        one to such charitable bodies (the Charitable Share) and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as the trustees shall by deed appoint, provided that one of the charitable bodies to benefit is Organisation A (the trusts hereinafter described as the Charitable Trust).

Organisation B is the successor to Organisation A.

Clause 6 of the Will provides:

I direct that my trustees may exercise any powers given them at law and without limitation may in their absolute discretion:

•                sell, call in and convert any property into money or postpone the sale calling in and conversion or retain any properly in the same state of investment without being responsible for loss

•                make loans to beneficiaries or others, secure or unsecured, with or without interest and on whatever terms

•                borrow money and secure loans howsoever on any property

•                without the consent of a beneficiary partition or appropriate any property in or towards the satisfaction of a legacy or share of any beneficiary and determine the value of the property however they deem appropriate

•                invest or hold any asset as if they were beneficially entitled absolutely, and

•                purchase any properly from the estate at fair market value.

Administration of the estate

Full administration of the Estate was not completed by 30 June XXXX.

The following appropriation of shares in specie was completed in the income year ending 30 June XXXX:

•                one third of the Listed Shares to the Person B and C Share

•                one third of the Listed Shares to the Person D Share, and

•                one third of the Listed Shares to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

Proposed conduct of the charitable trust

Once the Listed Shares are vested in the Executors as trustees of the Charitable Trust, they contemplate realising them over time and appointing and paying various cash amounts amongst a number of charitable bodies.

Accordingly, the Charitable Share may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. It is anticipated that many of those charities will be deductible gift recipients (DGRs). It is therefore anticipated that capital, capital gains and income will be distributed over this period amongst such charities.

It is expected the Charitable Trust will make capital gains on the disposal of the Listed Shares and will also receive income from investments, including dividends, interest income and managed fund distributions.

For the income year ending 30 June XXXX the following entities are Australian residents for tax purposes and are not under a legal disability for the purposes of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936):

•       the Estate

•       the Charitable Trust

•       Person B

•       Person C, and

•       Person D.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-52

Income Tax Assessment Act 1997 Subdivision 50-B

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 paragraph 104-215(1)(a)

Income Tax Assessment Act 1997 subsection 104-215(5)

Income Tax Assessment Act 1997 subsection 115-30(1)

Income Tax Assessment Act 1997 subsection 118-60(1)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-10

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 subsection 128-20(1)

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

Income Tax Assessment Act 1936 Division 6

Australian Charities and Not-for-profits Commission Act 2012

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

All references are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

Any capital gain or loss made by you on appropriation of the Listed Shares in specie to the Person B and C Share and the Person D Share will be disregarded.

Detailed reasoning

Division 128 sets out what happens when a person dies and a CGT asset they owned just before dying devolves to their legal personal representative (LPR) or passes to a beneficiary in their estate.

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

When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215).

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (paragraph 104-215(1)(a)).

An exempt entity means an entity whose ordinary and statutory income is exempt from income tax because of the Income Tax Assessments Acts (subsection 995-1(1)).

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (subsection 128-15(3)).

Subsection 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; or

•       by absolute entitlement.

The LPR or beneficiary is taken to have acquired the asset on the day the taxpayer died (subsection 128-15(2)).

Application to your circumstances

You are the Executors of the Estate of the Deceased and will meet the definition of an LPR in subsection 128-15(3).

The recipients of the Person B and C Share and the Person D Share are all resident individuals named as beneficiaries in the Will and are not exempt entities as defined in subsection 995-1(1).

The Listed Shares will pass to the individual beneficiaries in the way set out in section 128-20 when you appropriate them to the Person B and C Share and the Person D Share.

Accordingly, any capital gain or loss made by you as the LPR will be disregarded under subsection 128-15(3) when the Listed Shares pass from you to the individual beneficiaries in satisfaction of the Person B and C Share and the Person D Share.

Question 2

Summary

CGT Event K3 does not happen to the Listed Shares when appropriated in specie to the Charitable Share as that beneficiary is not an exempt entity.

Detailed reasoning

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (paragraph 104-215(1)(a)).

A capital gain or capital loss that happens because of CGT event K3 is disregarded if the deceased acquired the asset before 20 September 1985 (subsection 104-215(5)).

A capital gain or loss made from a testamentary gift of property is also disregarded if the gift would have been deductible under section 30-15 had it not been a testamentary gift (subsection 118-60(1)).

For these purposes, an exempt entity includes an entity whose ordinary and statutory income is exempt because of Division 50 (subsection 995-1(1)).

A trust that is a registered charity will only be exempt if it is endorsed as such by the ATO under Subdivision 50-B (section 50-52).

An entity that is an ACNC type of entity is not exempt from income tax under Division 50 unless the entity is registered under the ACNC Act 2012 (section 50-47).

Application to your circumstances

Of the Listed Shares to be appropriated in specie that were acquired by the deceased post-20 September 1985, one third will pass to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

The Charitable Trust is not:

•       registered under the ACNC Act 2012, nor

•       endorsed to be exempt from income tax under Subdivision 50-B.

The Charitable Trust is not exempt from income tax under Division 50 and, accordingly, CGT event K3 will not happen when the shares pass to it.

Question 3

Summary

The Charitable Trust is a testamentary trust and you as its trustee are treated as an LPR when the Listed Shares are appropriated to it in specie. Any capital gain or loss you make on appropriation is disregarded as the trustee is not an exempt entity and the appropriation does not trigger CGT Event K3.

Detailed reasoning

Again, Division 128 sets out what happens when you die and a CGT asset you owned just before dying devolves to your LPR or passes to a beneficiary in your estate.

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (subsection 128-15(3)).

Law Administration Practice Statement 2003/12 (PS LA 2003/12) deals with the capital gains treatment of the trustee of a testamentary trust:

1. What this practice statement is about

This practice statement 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 Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3).

2. What is the effect of the practice for the trustee of a testamentary trust?

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).

3. What is the effect of the practice for a beneficiary?

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.

A testamentary trust is a trust established under a valid will.

Application to your circumstances

Clause 5(b)(iii) of the Will provides for the Charitable Share to be held, '... upon trust for such charitable bodies and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as my trustee shall by deed appoint provided that one of the charitable bodies to benefit will be Organisation A...'

You will appropriate one third of the Listed Shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

The Charitable Share may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. Accordingly, the Charitable Trust is not a perpetual trust and is not the ultimate beneficiary of the Charitable Share.

The Charitable Trust is a trust established under the Will and accordingly is a testamentary trust to which the administrative practice outlined in PS LA 2003/12 would apply unless CGT event K3 applies (it has been established above that it does not).

Accordingly, the trustee of the Charitable Trust will be treated in the same way as an LPR for the purposes of Division 128 and the Commissioner will not recognise any taxing point in relation to assets when they pass to it.

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