Edited version of private ruling

Authorisation Number: 1011819523700

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Ruling

Subject: Capital gains tax - deceased estate - foreign exchange losses

Question 1

Did the Estate own foreign currency?

Answer

No.

Question 2

Is the amount paid to the deceased's partner to settle litigation in accordance with court orders considered a payment to a beneficiary?

Answer

No.

Question 3

Is the funding payment to a friend of the deceased who funded the legal action against the deceased's partner considered part of the cost base of the CGT asset of the estate?

Answer

Yes.

Question 4

Are the legal fees paid to your overseas solicitor part of the cost base of the CGT asset of the estate?

Answer

Yes.

Question 5

Will the estate be able to offset any resulting capital loss against the capital gain made in that year by the estate?

Answer

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

12 November 2008

Relevant facts and circumstances

The deceased passed away in overseas. He was not a resident of Australia for income tax purposes.

The executors of the deceased's estate are residents of Australia. The control of the deceased's estate is in Australia. The estate is a tax resident of Australia.

As at the date of death the deceased held substantial deposits in bank accounts, as well as securities in foreign currency with an overseas bank.

As the rightful executors of the estate you became presently entitled to these assets as at the date of the deceased's death.

Shortly after, a grant of probate was issued in an overseas court in favour of the deceased's partner. This grant of probate resulted from the presentation of a fraudulent Will.

All accounts held with the overseas bank were then closed following the transfer of the funds to the deceased's partner.

The Executors of the estate became aware of the existence of the fraudulent Will following receipt of a letter from the overseas bank indicating that funds had been released to the deceased's partner.

The Executors then lodged a caveat with the Supreme Court of a state to prevent the deceased's partner from obtaining a grant of probate in that state.

The Executors then applied for a freezing order against the deceased's partner before an overseas court. The order was granted by the Court on that same day.

The overseas court then froze the funds and subsequently, following litigation in that country, ordered that the remaining funds which had been obtained fraudulently be returned to the estate.

An amount in foreign currency was then returned to the estate. The amounts were deposited to an account held in trust by an overseas solicitor which acted for the Executors.

A grant of probate in favour of the Executors, was made by the Supreme Court.

An amount of foreign currency was returned to the Executors in Australia. The balance of funds were retained by the overseas solicitor to cover possible further costs of administering the estate.

During the period the account was held in trust by the overseas solicitor deposits were made into the account. These deposits comprised the following from various sources, from recovered funds and interest earned.

During this period, withdrawals were also made from the account. The withdrawals comprised of monies repaid to the friend of the deceased who funded the litigation, legal fees paid to the overseas solicitor, and other levies due to be paid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-10
Income Tax Assessment Act 1997 Section 102-15
Income Tax Assessment Act 1997 Subsection 104-10(2)
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Subsection 104-25(3)
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Subsection 110-25(6)
Income Tax Assessment Act 1997 Subsection 128-15(2)
Income Tax Assessment Act 1997 Subsection 128-15(3)
Income Tax Assessment Act 1997 Subsection 124-15(4)
Income Tax Assessment Act 1997 Paragraph 128-20(1)(d)
Income Tax Assessment Act 1997 Subsection 960-50(6)

Reasons for decision

Question 1

Under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 97), foreign currency is a capital gains tax (CGT) asset. However, bank accounts denominated in a foreign currency are not foreign currency but rather a chose in action, or more specifically a debt (or debts), denominated in foreign currency.

A bank account is a single asset, a debt and chose in action. As the bank account is a single asset, each deposit adds to its cost base and reduced cost base. Each withdrawal constitutes a part satisfaction of the debt asset. Each withdrawal is a CGT event C2 happening to that relevant portion of the asset.

A C2 event happens if your ownership of an intangible CGT asset ends. The date of the event is at the date any contract is entered into that results in the asset ending, or if there is no contract, as at the date the asset ends.

For a C2 event you make a capital gain if the capital proceeds from the asset ending are more than the asset's cost base. You make a capital loss if those proceeds are less than the assets reduced cost base.

Item 5 of the table in subsection 960-50(6) of the ITAA 97 requires any transaction or event involving money or property denominated in foreign currency to be converted to AUD at the time of the transaction or event. Therefore, each deposit or withdrawal must be converted to Australian dollars (AUD) to work out the relevant cost base and capital proceeds of the debt asset.

In your case, as you are the rightful executors of the estate you became entitled to the monies on deposit with deceased's bank as at the time of the deceased's death. These assets were held in a bank account in foreign currency, and as such are considered to be a chose in action, which is a CGT asset. Each deposit and withdrawal constitutes a separate C2 event, which reduces or increases the assets cost base. As the proceeds from your chose in action are less than your asset's reduced cost base, you have made a capital loss.

Question 2

Under sub paragraph 128-20(1)(d) an asset will pas to a beneficiary in your estate if:

· the beneficiary becomes the owner of the asset under a deed of arrangement, and,

· the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate.

If funds are paid to as per court order to someone who is not a beneficiary so as to prevent them from making any claims on the estate, sub paragraph 128-20(1)(d) would then not apply.

These costs would then be considered to be capital expenditure incurred to preserve or defend your title to the asset.

The cost base of a CGT asset is made up of five elements:

· Money or property given for the asset

· Incidental costs of acquiring the CGT asset or that relate to that event

· Costs of owning the asset

· Capital costs to increase or preserve the value of your asset or to install or move it

· Capital costs of preserving or defending your ownership of rights to your asset

The amount for each element is calculated, then added together to work out the cost base of your CGT asset.

Accordingly, the costs incurred in preserving or defending the title to an asset are fifth element costs, and are including when calculating your cost base.

In your case, the deceased's partner was at no time a beneficiary of the estate of the deceased, as per the deceased's legitimate will drawn up some years ago. As such the monies received by the deceased's partner are not considered to have passed to them as a beneficiary. However, they are considered to be capital expenditure incurred to preserve or defend your title to the asset, and as such are fifth element costs and should be included when calculating your cost base.

Question 3

As previously stated capital expenditure that has been incurred in preserving or defending the title to an asset are fifth element costs and should be included in your cost base of a CGT asset.

In your case your funding agreement with a friend of the deceased was made to enable the funding of legal action that would preserve and defend your rights to the CGT asset. The funding agreement was critical to the legal action going ahead, without which you would not have been able to exercise your legal right of ownership to the asset. Accordingly, payments to the friend of the deceased as per the funding agreement are considered fifth element costs and should be included when calculating your cost base.

Question 4

As previously stated capital expenditure that has been incurred in preserving or defending the title to an asset are fifth element costs and should be included in your cost base of a CGT asset.

The amounts paid to your overseas solicitor to represent you in legal action against the deceased's partner have been incurred in preserving and defending your title to the CGT asset. You would have been unable to take legal action without employing a solicitor to act on your behalf. Accordingly, the payments made to your solicitor are considered fifth element costs and should be included when calculating your cost base.

Question 5

Your assessable income includes any net capital gain you have made during the income year. You work out your net capital gain by reducing any capital gains made during the income year by the capital losses you made during the year. Although you cannot deduct a capital loss from your assessable income, you can apply it against a capital gain in a future year.

In your case you have incurred a capital loss. You can apply this loss against a capital gain in the same year that it was incurred, or you can apply it against a capital gain in future years.