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Ruling

Subject: Deceased Estate - Foreign Trustee

Question and Answers

1. Does a CGT event K3 happen where a CGT asset owned by the deceased passes to a foreign trustee to sell?

No

2. Should the gain/loss from the disposal of Taxable Australian Property be included in the Estates tax return?

Yes

3. Should the gain/loss from the disposal of Non taxable Australian Property be included in the deceased's Estate tax return?

No

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The deceased is an Australian resident for tax purpose.

The assets of the deceased included ordinary shares in Australian companies, real property situated in Australia, a boat, cash on hand and uncashed cheques, personal effects and jewellery, cash in foreign banks and foreign income portfolio held outside Australia.

The deceased's will stated that all his real and personal property are given to the trustees to sell, call in, convert as they see fit without being liable for loss.

The will states that after all expenses and debts are met, the residuary estate is to be divided into equal parts between the trustees (who are also the beneficiaries) and their two adult children.

All the beneficiaries are not Australian residents for tax purposes.

The executors/trustees are also not Australian residents for tax purposes.

The trustees are intending to sell all the deceased's assets.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-215 of the Income Tax Assessment Act 1997

Section 128-20 of the Income Tax Assessment Act 1997

Section 855-20 of the Income Tax Assessment Act 1997

Section 855-25 of the Income Tax Assessment Act 1997

Section 855-10 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Section 95(1) of the Income Tax Assessment Act 1936

Reasons for decision

Capital Gains

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event A1 happens when a taxpayer disposes of a CGT asset. Disposal occurs if a change of ownership occurs from the taxpayer to another entity.

A CGT asset is any kind of property, or a legal or equitable right that is not property. Examples of CGT asset include land and buildings, shares in a company, foreign currency. Australian currency is not a CGT asset.

Section 128-10 of the ITAA 1997 states that generally, when a taxpayer dies, a capital gain or loss from a CGT event relating to a CGT asset the taxpayer owned just before death is disregarded unless CGT event K3 happens.

Section 128-15 of the ITAA 1997 states that special rules apply in relation to CGT assets that are owned by a taxpayer just before dying, which pass to the taxpayer's legal personal representative (trustee) or a beneficiary of the taxpayer's estate as a result of the taxpayer's death.

When a taxpayer dies, assets that pass to the legal personal representative or a beneficiary of the taxpayer's estate are taken to be acquired by them on the day the taxpayer died.

CGT event K3

Section 104-215 of the ITAA 1997 states that CGT event K3 happens when an Australian taxpayer dies and a CGT asset they owned just before dying passes to a beneficiary of the estate who is;

- Is an exempt entity or

- Is the trustee of a complying superannuation entity or

- Is a foreign resident

Section 128-20 of the ITAA 1997 states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset;

- Under a will

- By operation of an intestacy law

- Because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy

- Under a deed of arrangement if

· The beneficiary entered into the deed to settle a claim to participate in the distribution of your estate and

· Any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

As the assets do not pass to the beneficiaries, CGT event K3 does not happen in this case.

Foreign Trust for CGT purpose

Section 855-10 of the ITAA 1997 provides that you may disregard a capital gain or loss from a CGT event if:

- you are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens; and

- the CGT event happens on or after 12 December 2006 in relation to a CGT asset that is not taxable Australian property.

A foreign trust for CGT purposes is defined by section 995-1 of the ITAA 1997 to be a trust that is not a resident trust for CGT purposes.

A trust is a resident trust for CGT purposes if either the trustee is an Australian resident, or the central management and control of the trust is in Australia.

As the trustees of the deceased estate are not an Australian resident, it cannot be said that either the trustee nor the central management and control of the trust is in Australia.

Accordingly, the trust is considered a foreign trust for CGT purposes.

Taxable Australian Property

Section 855-20 defines taxable Australian real property as real property that is situated in Australia. 

There are five categories of assets that are taxable Australian property  

1. Taxable Australian real property (directly held)

2. Indirect interest in Australian real property

3. A business asset of a permanent establishment in Australia

4. An option or rights to acquire any of the CGT assets in items 1-3 or

5. A CGT asset that is deemed to be Australian taxable property where a taxpayer, on ceasing to be an Australian resident, makes an election under Section 104-165 of ITAA 1997.

Section 855-25 states that an indirect Australian real property interest refers to an interest in an entity, including a foreign entity, where you and your associates hold 10% or more of the entity and the value of your interest is principally attributable to Australian real property.

Conclusion

Shares

The shares acquired from the deceased by the non-resident do not meet any of the five above categories and therefore are not a taxable Australian property.

As the shares are not taxable Australian property (in the hands of the non-resident trustees), when the shares are subsequently sold, the non resident trustees will not be subject to further capital gains tax in Australia on their portion of the shares.

Therefore any capital gain or capital loss made on the sale of shares should be disregarded.

Real Property

The freehold property is taxable Australian property and the CGT event occurred after 12 December 2006. Therefore as a foreign trust, the capital gains made on the disposal of this property will be included in the estate tax return.

Foreign currency, boat

Foreign currency and boat are not a taxable Australian property. The disposal of these assets will result in a CGT event. However the capital gain/loss is disregarded.

The other assets of the estate are not CGT assets