Edited version of private ruling

Authorisation Number: 1011766430058

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Ruling

Subject: Capital gains tax and the passing of an asset to a tax advantaged entity

Questions and Answers

1. Is it the case that no beneficiary is presently entitled to the income of the Estate and that the trustees will be liable for income taxation on any income derived during the income years which end whilst the Estate is still under administration?

Yes.

2. Will the charity become presently entitled to all of the net income of the trust in the income year in which administration occurs?

Yes.

3. Is any capital gain or capital loss made by the Estate on the passing of the properties to the charity disregarded?

Yes.

4. Will the Estate be liable for capital gains tax (CGT) due to the application of CGT event K3?

No.

This ruling applies for the following periods:

Year ended 30 June 2009
Year ended 30 June 2010
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014

The scheme commences on:

22 December 2008

Relevant facts and circumstances

The deceased died some time after 20 September 1985.

The deceased left a will.

Probate has been granted.

The majority of the Estate consists of four parcels of real property that were acquired by the deceased prior to 20 September 1985, namely:

· Property A - derives agistment income

· Property B - derives royalty income

· Property C (1/2 share) - vacant and does not derive income; and

· Property D - vacant and does not derive rental income.

Under the will;

· the deceased's share in property C is to be distributed equally amongst specific individual beneficiaries.

· the entirety of the "rest and residue" of the Estate is to be converted into money, such as is not already, and after the payment therefrom of all debts, testamentary expenses and taxes, the "net sum" is to be distributed to a charity.

Rather than transfer the residual money of the Estate to the charity, the Trustees are going make an in specie transfer of the three properties - property A, property B and property D - to the charity.

The transfer of the properties will occur once the administration of the Estate is complete.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-215,
Income Tax Assessment Act 1997 Section 118-60,
Income Tax Assessment Act 1997 Subsection 128-15(3) and
Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision

Present entitlement

The term 'present entitlement' is not defined in the Income Tax Assessment Act 1936 (ITAA 1936). It is therefore necessary to rely on the meaning which has been given to the term by the Courts.

The leading Australian case on present entitlement under a trust arising during the course of administration of an estate is the decision of the High Court of Australia in Federal Commissioner of Taxation. v. Whiting (1943) 68 CLR199; 7 ATD 179. The Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered.

This case, along with Taylor Trust, Trustees of v. Federal Commissioner of Taxation (1970) 119 CLR 444; 70 ATC 4026, has established that in order for a beneficiary to be presently entitled to trust income, the following two conditions must be satisfied:

· the beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is the interest must not be contingent, and

· the income must be legally available for distribution to the beneficiary. In the case of a deceased estate, the beneficiaries will not be presently entitled to income until it is possible to ascertain the residue with certainty (after provision for debts, legacies etc).

Taxation Ruling IT 2622 provides the Commissioners view on present entitlement during the administration of deceased estates.

Paragraph 7 of IT 2622 provides that whether a beneficiary of a deceased estate is presently entitled to a share of the income of a trust estate for the purposes of Division 36 of Part III of the ITAA 1936 depends on:

a. The stage reached in the administration of the deceased estate

b. The terms of the deceased's will or codicil, trust law and principles enunciated and orders made by the Courts

c. Whether any discretionary payments have been made to the beneficiaries by the executor or trustee.

Paragraph 9 of IT 2622 provides that the income of a deceased estate before the administration of the estate is complete is the income of the executors or the administrators and is not the income of the beneficiary. Paragraph 13 of IT 2622 also expresses the view that until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in the corpus or interest of the trust.

Accordingly, the Estate will be liable for any income tax payable on any income derived by the Estate until administration occurs. In the income year in which administration occurs, the charity will become presently entitled to all of the net income of the trust.

CGT on passing of asset

Subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that any capital gain or capital loss that the legal personal representative makes if the assets passes to a beneficiary is disregarded.

Therefore any capital gain or capital loss that is made by the Estate when it transfers the properties to the charity will be disregarded.

CGT event K3

Section 104-215 of the ITAA 1997 provides that CGT event K3 happens if a CGT asset owned by the deceased person just before they died passes to a beneficiary that is an exempt entity when the asset passes. The time of the event is just before the deceased died, which means that any resulting capital gain or capital loss is accounted for in the final income tax return lodged on behalf of the deceased.

An exempt entity is one whose ordinary and statutory income is exempt from income tax.

However, in accordance with section 118-60 of the ITAA 1997, any capital gain or capital loss made as a result of CGT event K3 happening may be disregarded if the testamentary trust is a deductible gift recipient.

In your situation, CGT event K3 will not apply to the Estate as the event would happen to the deceased, in their own right, rather that their Estate. Furthermore, as the charity is a deductible gift recipient, any capital gain or capital loss that the deceased may have made would have been disregarded.