Edited version of private ruling

Authorisation Number: 1011775155193

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 and deceased estate

Question 1

Will any capital gain or capital loss made upon transfer of part of the Collection to Entity B and Entity C be disregarded?

Answer:
Yes.

Question 2

Will any capital gain or capital loss made upon transfer of part of the Collection to Entity D and Entity E be disregarded?

Answer:

No.

Question 3

Is the market value of the post-CGT assets forming part of the Collection of nominal value as a result of the restrictions imposed under the deceased's Will?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on

1 July 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.

The deceased died in a previous income year. Probate was granted in the same income year.

The deceased bequeathed CGT assets to Entity A.

Entity A is a Charitable Institution endorsed to receive tax concessions including an income tax exemption. Entity A is not endorsed as a Deductible Gift Recipient (DGR). Entity A operates four funds:

· Entity B;

· Entity C;

· Entity D; and

· Entity E.

Entity B and Entity C are registered as DGRs.

The bequest did not specify a particular fund as the beneficiary.

The purpose of Entity D is to provide eligible scholarships, bursaries or prizes.

The purpose of Entity E is to provide relief to indigenous persons for their maintenance, advancement, education or benefit.

Entity A has been unable to locate and provide the Executors with copies of any trust deeds or founding documents for the Entity B and Entity C. However, it is understood that these funds are consistent with Taxation Ruling 96/8 (TR 96/8) and Taxation Ruling 2000/10 (TR 2000/10) as they are endorsed as DGRs.

The Will imposes a number of conditions and restrictions on the use of the Collection including:

· the Collection must be used for the study and advancement of art (with the exception of the property)

· all artworks in the Collection must be retained and may not be disposed of;

· the 5/13^th residue of the Estate must be used for the operation, maintenance, security and care of the Collection and to purchase any further artworks;

· the Collection must be taken on one country tour each year except where for reasons beyond Entity A's control, it is impractical to do so;

· the Collection must be kept together as a whole for display purposes either at the property or an alternative location on or near the Entity A's site; and

· if the property is sold, the proceeds of the sale must be used solely for housing, storage, preservation and display of the Collection.

The assets forming the Collection are pre and post-CGT assets acquired prior to and after 20 September 1985.

Real property A is a post-CGT asset.

The Collection has been removed from the property and will be distributed to Entity A and likely to be dispersed and displayed in existing Entity A buildings.

You have provided the following documents to support your ruling application:

· a copy of the deceased's Will;

· a copy of Entity A's constitution; and

· copies of the trust deeds for Entity D and Entity E.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 30-15
Income Tax Assessment Act 1997 - Section 50-1
Income Tax Assessment Act 1997 - Section 50-5
Income Tax Assessment Act 1997 - Section 50-55
Income Tax Assessment Act 1997 - Section 104-10
Income Tax Assessment Act 1997 - Section 104-215
Income Tax Assessment Act 1997 - subsection 118-60(1)
Income Tax Assessment Act 1997 - Section 128-10

Reasons for decision

Question 1

Capital gains tax (CGT) event K3 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate who is:

· an exempt entity; or

· is the trustee of a complying superannuation entity; or

· is a foreign resident.

An exempt entity is one whose ordinary and statutory income is exempt from income tax because of Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997)

CGT event K3 is taken to happen just before the deceased's death.

A capital gain is made if the market value of the asset on the day the deceased died is more than the assets cost base. A capital loss is made if that market value is less than the assets reduced cost base.

Capital gains or losses that are made from a capital gains tax (CGT) event K3 when CGT assets owned by a deceased taxpayer passes from the taxpayer's executor to a beneficiary is disregarded under subsection 118-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997), if the beneficiary is a Deductible Gift Recipient (DGR).

The capital gains or losses may be disregarded because the testamentary gift of the CGT assets would have been deductible to the deceased under Section 30-15 of the ITAA 1997 had it been made by the deceased before they died.

Where CGT event K3 happens, the trustee of the deceased estate will be required to calculate any capital gain or capital loss made on post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died.

The table of gifts provides that the recipient be a fund, authority or institution covered by an item in any of the tables in subdivision 30-B of the ITAA 1997. The type of gift or contribution may be a gift of money or property. The deduction may be the amount given and in regards to property, the lesser amount between the market value of the property on the day the gift was made and the amount benefactor paid for the property. Special conditions determine the recipient entity must be in Australia, endorsed as a DGR and the gift exceed a value of $2.

In this circumstance, the deceased bequeathed CGT assets, to be known as the Collection, to Entity A.

Entity A, a Public Education Institution and Charitable Institution is endorsed to access tax concessions, being income tax exemption. Entity A operates two funds, known as Entity B and Entity C, who are DGRs. Gifts to these funds may be deductible.

These two funds are exempt entities under section 50-55 of the ITAA 1997 and when the CGT assets pass to the Funds as tax-advantaged entities, a CGT event K3 will occur. The timing of the event is just before the deceased died. Any capital gain or capital loss made from the CGT event K3 occurring are disregarded under Subsection 118-60(1) of the ITAA 1997.

Question 2

Entity D and Entity E are not endorsed as DGRs and, as such, are not exempt entities. Any gifts to these funds are not deductible.

When the CGT assets pass to Entity D and Entity E, a CGT event K3 will not occur. The resulting CGT consequences for the deceased do not allow for the disregard of any capital gain or capital loss made when the post CGT assets pass to the beneficiaries. However, any capital gain or capital loss is disregarded where the CGT assets were acquired before 20 September 1985.

The trustees of the estate must include any net capital gain for the income year when the deceased died in the date of death income tax return.

Question 3

When a CGT event K3 occurs, the timing of the event is just before the deceased dies. In order to determine if a capital gain has been made, the market value of the asset on the day the person dies must be more than the asset's cost base. A capital loss is made if the market value is less than the asset's reduced cost base.

In this circumstance, the deceased imposed considerable restrictions on the recipient of the bequest detailed in the Will. However, the issue of the market value of the CGT assets as it relates to the deceased remains unimpeded by the restrictions of the testamentary gift. At the time of the deceased's death, there were no restrictions imposed on the deceased, as the Collection was their personal property and held for their personal use and enjoyment. There were no factors contributing to any reduction in the market value of the collection in relation to the deceased. The market value is unaffected.