Edited version of private ruling

Authorisation Number: 1011763863128

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Ruling

Subject: Beneficiary of deceased estate - discretionary trust - Isolated transactions - carrying on a business - pre-CGT or Post-CGT interest in land.

Issue 1

Question 1

Is your share of the profit from the disposal, by the Executors of the Estate of Landholder (deceased) (the deceased estate) of its interest in land known as Lot A, ordinary income in your hands?

Answer

No.

Question 2

Is your share of a profit, from the disposal by the Family Trust of its interest in a specified area of land within Lot A (Sub lot) ordinary income in your hands?

Answer

No.

Issue 2

Question 1

Is your share of the deceased estate's capital gain, from its interest in Lot A assessable to you?

Answer

Yes.

Question 2

Can you disregard your share of the Family Trust's capital gain from Sub lot?

Answer

Yes.

This ruling applies for the following period:

Financial year ended 30 June 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

At a time before 20 September 1985 (pre-CGT) an individual (Landholder) became the owner of a property (Original Property).

By a pre-CGT contract of sale Landholder disposed of an undivided interest in Original Property to the Family Trust.

Title in Original Property was not changed at the time of contract and remained unchanged for many years, until a time after the first subdivision described below.

On a post-CGT date Original Property was subdivided into two lots (Lot 1 and Lot 2) for the purpose of selling Lot 2. The two lots remained registered in the name of Landholder. Lot 1 contained the area we are calling Sub lot, to which part of this ruling applies.

A short time later the title to Lot 2 was registered in the name of the trustee for the Family Trust, and then the Family Trust disposed of Lot 2 to an unrelated entity.

Some years later Landholder subdivided Lot 1 into two blocks (Lot 1a and Lot 1b). The area called Sub lot was now part of Lot 1a.

Before this subdivision, Lot 1 was still registered in the name of Landholder, and after it, both Lot 1a and Lot 1b remained registered in their name.

Landholder's dwelling was contained in Lot 1b, to which development restrictions applied.

Landholder had never been a trustee of the Family Trust, but the Family Trust's deed required the trustee to consult with them on all or most decisions.

Some years later Landholder died. After their death the executors of their deceased estate and the trustee of the Family Trust (the executors/trustee) attempted to obtain evidence and old records from former accountants and the bank, to better understand the history and legal status of Lot 1a, Lot 1b and the Family Trust. None of them had been trustees of the Family Trust when earlier events occurred. Their attempts were not successful.

Soon after Landholder's death the executors/trustee engaged consultants to make town planning applications for Lot 1a. They proposed that part of Lot 1a be used for commercial purposes.

They negotiated with the local council, and negotiations continued for a number of years. Applications were rejected, appealed against and altered as town planning proposals by the council changed from time to time.

Years later the council approved a subdivision of the property into two different lots. These most recent subdivisions are:

· Lot A which consists of much of former Lot 1a, including Sub lot and the area approved for commercial use; and

· Lot B, comprising mostly the area previously called Lot 1b.

Lot B was sold in one parcel in a recent financial year.

Proceeds from the sale were deemed by the executors/trustee to belong wholly to the deceased estate. The executors of the deceased estate distributed the net capital proceeds to the beneficiaries of the deceased estate and advised them that they were assessable on their shares of the capital gain.

During the financial year ended 30 June 2010 the executors/trustee considered selling Lot A without waiting for the outcome of another council review later in the financial year. With the agreement of the beneficiaries they decided against waiting and sold Lot A.

You are one beneficiary of the deceased estate. You are also a potential beneficiary of the Family Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Subdivision 115-C
Income Tax Assessment Act 1936 subsection 95(1)
Income Tax Assessment Act 1936 subparagraph 97(1)(a)(i)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1 Questions 1 and 2

Reasoning

1. Is your share of the profit from the disposal, by the executors of the deceased estate, of its interest in land known as Lot A, ordinary income in your hands?

2. Is your share of the profit, from the disposal by the Family Trust of its interest in a specified area of land within Lot A (Sub lot) ordinary income in your hands?

We made private rulings for the executors of the deceased estate and the trustee of the Family Trust (the executors/trustee). These considered whether the respective profits of the deceased estate and the Family Trust from the disposal of their respective interests in Lot A (including the area called Sub lot) were ordinary income of the deceased estate and the Family Trust. We ruled that the executors/trustee were not dealing with Lot A or Sub lot in the course of carrying on a business. Nor were they carrying out any profit making undertakings or schemes. The profits arose partly from the disposal of an asset in the course of administering a deceased estate. They were also partly from the mere realisation of an investment asset.

Therefore your share of the profits on the two disposals are not assessable to you as ordinary income. They are capital in nature, and their treatment for taxation has to be determined under the capital gains provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Issue 2 Question 1

Reasoning

· Is your share of the deceased estate's capital gain, from its interest in Lot A assessable to you?

We issued a private ruling for the deceased estate, stating that it acquired its interest in Lot A after 19 September 1985. We said that its capital gain on that interest is assessable income of the deceased estate. As such it is included in the calculation of its net income for the financial year ended 30 June 2010. You are presently entitled to a share of the income of the deceased estate. Therefore your assessable income for the financial year ended 30 June 2010 includes a share of the net income of the deceased estate (subparagraph 97(1)(a)(i) of the Income Tax Assessment Act 1936 (ITAA 1936).

The correct amount of the deceased estate's capital gain to be included in your assessable income is worked out under Subdivision 115-C of the ITAA 1997. We believe that the deceased estate will reduce its capital gain by the CGT discount. You therefore have to double the amount which is your share of the deceased estate's net capital gain. You then reduce this by your capital losses, if any. You then reduce any remaining capital gain amount by 50%.

Issue 2 Question 2

Reasoning

· Can you disregard your share of the Family Trust's capital gain from Sub lot?

We ruled that the capital gain which the Family Trust made from sub lot is disregarded by it, because it acquired Sub lot before 20 September 1985. Therefore this capital gain is not included in the assessable income of the Family Trust for the financial year ended 30 June 2010. Thus, the capital gain is not used in working out its net income.

You are presently entitled to a share of the family trust's income for the financial year ended 30 June 2010, so your assessable income will include a share of its net income (if any). Since the capital gain from Sub lot is not used in the calculation of the net income of the Family Trust, it cannot form part of the calculation of your assessable income from a share of the Family Trust's net income. So you can disregard your share of the Family Trust's capital gain from Sub lot.