Edited version of private ruling

Authorisation Number: 1011679265176

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Subject: Capital Gains Tax

Question 1

Will the Trustee of the deceased estate be liable for capital gains tax as a result of a CGT event E5 happening to the residential property?

Answer: No.

By virtue of section 97 of the Income Tax Assessment Act 1936 the income of the Trust is assessable to the presently entitled beneficiary who is not under a legal disability.

Question 2

Will the Trustee of the deceased estate be liable for capital gains tax arising from the disposal of a residential property during the year ended 30 June 2010?

Answer: No.

The Trustee of the deceased estate will not be liable for capital gains tax arising from the disposal of the residential property during the year ended 30 June 2010.

FACTS

The deceased passed away in the 1970's.

Pursuant to the will the deceased gave the whole of their estate to their Trustee upon trust, after paying certain legacies and their just debts, funeral and testamentary expenses and all death duties to hold the balance of the residue of their estate upon trust to pay the net income there from to their daughter ("the life beneficiary"), during their life and upon their death to hold the capital as well as the income from residuary estate for an income tax exempt entity.

By contract dated <date> the Trustees purchased a residential property ("the property") for the life beneficiary to tenant during their lifetime.

The life beneficiary died recently and accordingly the Trustees thereafter have administered the estate pursuant to the provisions of the Will for the residual beneficiary ('the remainder beneficiary').

By Contract dated <date> the Trustees sold the property. A capital gain was realised in respect of the sale of the property.

RULING

Sections 128-10 and 128-15 of the Income Tax Assessment Act 1997 ('ITAA 1997') provide that when a person dies any capital gain or loss that results from CGT assets they owned just before their death can be disregarded. This is provided that the CGT assets either devolve to their legal personal representative or pass to beneficiaries in their estate under the terms of their will.

These provisions only apply to assets which a deceased person owned 'just before their death'. They do not apply to assets which may have been subsequently acquired by the deceased's legal personal representative at a later time.

In this case the property was acquired by the Trustee of the deceased's estate ('the Trustee') after the date of death of the deceased. Therefore it is an asset to which Division 128 of the ITAA 1997 does not apply. The property is a 'post-CGT' asset.

Absolutely entitled beneficiary

Draft Taxation Ruling TR 2004/D25 explains when a beneficiary of a trust is absolutely entitled to a CGT asset of a trust as against the trustee. It states at paragraph 10 that a beneficiary is absolutely entitled when they have an indefeasible interest in an asset such that they can call for the asset to be transferred at their direction.

In the context of a trust involving a life tenant and a remainder beneficiary, Taxation Ruling TR 2006/14 states that a remainder beneficiary may become absolutely entitled to an asset on the death of a life tenant:

If, on the ending of a life interest, the remainder owner becomes absolutely entitled, as against the trustee, to a trust asset CGT event E5 in section 104-75 may happen.

The effect of the trust in this case was that the remainder beneficiary became absolutely entitled to the property on the death of the life tenant. Accordingly, the asset is deemed to be acquired at that time by the remainder beneficiary - refer subsection 109-5(2) of the ITAA 1997.

CGT event E5

A CGT event E5 occurs when a beneficiary becomes absolutely entitled to a trust asset. The legislation relevantly states:

SECTION 104-75 Beneficiary becoming entitled to a trust asset: CGT event E5

104-75(1)

CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

104-75(2)

The time of the event is when the beneficiary becomes absolutely entitled to the asset.

Trustee makes a capital gain or loss

104-75(3)

The trustee makes a capital gain if the *market value of the asset (at the time of the event) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset's *reduced cost base.

Exception for trustee

104-75(4)

A *capital gain or *capital loss the trustee makes is disregarded if it *acquired the asset before 20 September 1985.

History

S 104-75(4) amended by No 133 of 2009, s 3 and Sch 1 item 26, by substituting "section 130-80" for "section 130-90" in the note, applicable in relation to the ESS interests mentioned in subsections 83A-5(1) and (2) of the Income Tax (Transitional Provisions) Act 1997.

Beneficiary makes a capital gain or loss.

104-75(5)

The beneficiary makes a capital gain if the *market value of the asset (at the time of the event) is more than the *cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset.

The beneficiary makes a capital loss if that market value is less than the *reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset.

Exceptions for beneficiary

104-75(6)

A *capital gain or *capital loss the beneficiary makes is disregarded if the beneficiary:

(a) *acquired the *CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or

(b) acquired it before 20 September 1985.

Expenditure can include giving property: see section 103-5.

CGT event E5 is triggered when a beneficiary becomes absolutely entitled to a trust asset as against the trustee. The trustee must account for any difference between the cost base of the relevant asset and the market value of the asset at the time that the beneficiary becomes absolutely entitled to the asset. The beneficiary will be deemed to have acquired the asset at the time the beneficiary became absolutely entitled to it - refer subsection 109-5(2) of the ITAA 1997.

In this instance the Trustee will make a capital gain from the event if the market value of the property at the time the beneficiary became absolutely entitled is more than its cost base - refer subsection 104-75(3) of the ITAA 1997.

A beneficiary will make a capital gain if the market value of the asset at the time of the event is more than the cost base of the beneficiary's interest in the trust capital to the extent that it relates to the asset - refer subsection104-75(5) of the ITAA 1997.

The cost base of the beneficiary's interest, if the beneficiary did not incur any expenditure to acquire it, would be subject to the market value substitution rule in subsection 112-20(1) of the ITAA 1997 - modification to cost base. Where no expenditure has been incurred the first element of the cost base of the asset is its market value at the time the beneficiary acquired it. The beneficiary would not have any interest in the trust capital prior to becoming absolutely entitled to the trust asset.

As the market value of the property at the time the beneficiary became absolutely entitled to it and the cost base of the beneficiary's interest in the asset are the same, there will be no CGT consequences for the beneficiary at that time in respect of the CGT event E5.

Effect of section 97 of the ITAA 1936

Subsection 97(1) of the ITAA 1936 provides that where a beneficiary is presently entitled to a share of the income of the trust estate and is not under a legal disability, the beneficiary is assessable on that share of the net income of the trust estate.

As the remainder beneficiary is now the sole beneficiary and presently entitled to the entire income of the trust, including the capital gain from the sale of the property, the Trustee will not be liable to tax on the capital gain arising from the CGT event E5 referred to above.

However as the remainder beneficiary is an income tax exempt entity, any income it derives will not be assessable to tax derived from the distribution from the estate.

Absolute Entitlement - Effect of section 106-50 of the ITAA 1997

The effect of section 106-50 of the ITAA 1997 is to attribute the actions of the trustee to a beneficiary who is absolutely entitled to a CGT asset as against the trustee. The section relevantly states:

SECTION 106-50 Absolutely entitled beneficiaries

If you are absolutely entitled to a *CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Once the remainder beneficiary became absolutely entitled to the property the actions of the Trustee in relation to the asset are deemed to be the actions of the remainder beneficiary.

Sale of the property

The remainder beneficiary is deemed to have acquired the property when it became absolutely entitled to it as against the trustee. The subsequent sale of the property by the Trustee resulted in a CGT event A1 occurring - a disposal of a CGT asset. This event occurs when you enter into a contract for the disposal of the asset - refer subsection 104-10(3) of the ITAA 1997.

Because of the operation of section 106-50 of the ITAA 1997 any capital gain arising from the disposal of the property will be assessable to the remainder beneficiary.

The remainder beneficiary will make a capital gain if the capital proceeds from the sale of the property are more than the asset's cost base - refer subsection 104-10(4) of the ITAA 1997. In this case the cost base is the market value of the property at the time the remainder beneficiary became absolutely entitled to the asset.

However, as the remainder beneficiary is an income tax exempt entity, any capital gain or loss is not assessable to tax.