Edited version of private ruling

Authorisation Number: 1011503307783

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax- Deceased Estate

Question 1

Is a capital gain disregarded where an asset owned by a company of which the deceased was sole shareholder at their death passes to a beneficiary?

Answer

No.

Question 2

Is a person a beneficiary even though in the deceased's will the person is not named as a beneficiary and is excluded from benefits, but receives benefits under a deed of arrangement prior to administration of the estate?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1^st July 2009

Relevant facts and circumstances

The deceased died on date X.

At the time of death, the deceased was the sole shareholder of a private company. The main assets constituting the value of the shares were a certain specified asset.

There were a number of these assets in total at the date of death.

In the Will, the deceased named you as their executor and trustee.

The deceased did not make provision for one of their relatives and specifically excluded them from benefit.

In order to resolve the dispute that has arisen between you and the excluded relative, a deed of arrangement has been prepared. For the purposes of this ruling, the deed will be entered into.

Under the deed, the company will transfer a number of these assets to the excluded relative.

The excluded relative is a resident for tax purposes and not subject to a legal disability.

You have provided the following documentation to support your application. These documents are to be read with and form part of the scheme for the purposes of the ruling:

- Copy of the Will

- Copy of probate, and

- Copy of the proposed Deed of Family Arrangement.

The estate is not yet fully administered.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 128-10,

Income Tax Assessment Act 1997 section 128-15 and

Income Tax Assessment Act 1997 section 128-20.

Reasons for decision

Question 1

Detailed reasoning

You make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common event occurs if you dispose of a CGT asset. This is called CGT event A1.

The provisions that relate to capital gains tax assets and the effects of death are found in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

Generally, when someone dies, a capital gain or capital loss from a CGT event that results for a CGT asset they owned just before dying is disregarded.

If a CGT asset a person owned just before dying:

- devolves to their legal personal representative; or

- passes to a beneficiary in their estate,

then the legal person representative, such as the executor of the estate, or the deceased's beneficiary, are taken to have acquired the asset on the day the person died. Any capital gain or loss that the executor of the estate makes if the asset passes to a beneficiary in the deceased's estate is disregarded.

In your case, at the time of the deceased's death the CGT assets, being the specified assets, were owned by the company. The company is a separate legal entity to the deceased. As such, Division 128 of the ITAA 1997 does not apply in this situation.

As the assets were not owned by the deceased just before death, when the company transfers the assets to the excluded relative CGT event A1 will occur.

Therefore, the capital gain resulting from an asset owned by a company of which the deceased was sole shareholder at their death, passing to a beneficiary, cannot be disregarded.

Note: Small business concessions may be available to the company.

Question 2

Detailed reasoning

A capital gain passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

(a) under a will, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such law as varied by a court order; or

(c) because it is appropriated to the beneficiary by the deceased legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased estate; and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

In your case, the effect of entering into a Deed of Arrangement will settle the dispute that arose between the relative excluded from the Will and you being the trustee of the estate. Upon entering the Deed of Arrangement this will effectively alter the original Will. The entitlements of the respective beneficiaries, which will now be inclusive of the excluded relative, will then be determined by the Deed of Arrangement.

Therefore the relative that was excluded from the Will is a beneficiary of the deceased estate.