Edited version of private ruling

Authorisation Number: 1011874858493

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: CGT implications for executor of deceased estate

Question 1

Will a CGT event under section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the legal personal representative upon the sale of the land?

Answer

Yes

Question 2

Is the legal personal representative entitled to access the small business concessions in Division 152 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

The 2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The deceased purchased the property with his former spouse after 20 September 1985.

The deceased used the property in a primary production business from the date he acquired the property to the date of death.

The property was transferred to the deceased at a later time. No value of the property is given at that time.

The deceased (the Grantor) entered into an option deed on with the Grantee.

The agreement was for an option to purchase farming and grazing property.

The option was for a period on the terms and conditions contained in the deed and thereafter for the period of either the Grantor's natural life or at such earlier time as determined by either the Grantor or Grantee at market value.

The Grantor was to pay an option fee per annum, increased each year if the market rent exceeded that of the previous year's rent. The Grantor gave the Grantee a right to use some of the property.

The option fee was non-refundable.

The option could be exercised at any time during the initial and subsequent option periods.

Upon the exercise of the option, the Grantor was to be bound by the terms and conditions of the sale contract as if the counterparts of the sale contract had been duly exercised by the Grantor and then exchanged on the date the option was exercised.

Upon the death of the Grantor, his successors, executors, heirs and beneficiaries were to be bound by the terms of the option deed.

The option deed could only be amended or supplemented in writing, executed by the parties.

The Grantee commenced to the land in his business from the date the option deed was entered into.

The deceased died. The executors are his spouse, a Solicitor and a family friend.

The Grantee was ready to commit to the option of purchase. However, the deceased's spouse wished to remain in the family home and asked that a new agreement be negotiated, so that the home remained with her and the land is sold.

A deed was entered into endorsing the changed arrangements for the sale of the reduced parcel of land. All other terms remained the same.

The land was subdivided into two lots. The principal residence of the deceased was on the smaller lot.

The sale of the property with the amended contact was completed, with the estate receiving payment for the parcel of land.

The deceased's accountant advised that the deceased satisfied the maximum net asset value test (section 152-15 of the ITAA 1997) and that they were a small business entity under section 328-110 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95,
Income Tax Assessment Act 1936 Subsection 95(1),
Income Tax Assessment Act 1936 Section 96,
Income Tax Assessment Act 1936 Section 97,
Income Tax Assessment Act 1936 Section 98A,
Income Tax Assessment Act 1936 Section 99,
Income Tax Assessment Act 1936 Section 99A,
Income Tax Assessment Act 1936 Section 100,
Income Tax Assessment Act 1997 Section 102-5,
Income Tax Assessment Act 1997 Section 102-10,
Income Tax Assessment Act 1997 Section 102-20,
Income Tax Assessment Act 1997 Section 104-5,
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 115-215,
Income Tax Assessment Act 1997 Section 128-10,
Income Tax Assessment Act 1997 Subsection 128-15(3),
Income Tax Assessment Act 1997 Division 152,
Income Tax Assessment Act 1997 Section 152-10,
Income Tax Assessment Act 1997 Subsection 152-10(1),
Income Tax Assessment Act 1997 Section 152-15,
Income Tax Assessment Act 1997 Section 152-35,
Income Tax Assessment Act 1997 Subsection 152-40(1)
Income Tax Assessment Act 1997 Section 152-80, and
Income Tax Assessment Act 1997 Section 328-110.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Summary

The executors have not distributed the proceeds of the estate as they have not determined the taxation liabilities. As administration of the estate is not complete, the beneficiaries are not presently entitled to the income. The executors will be assessable on the income under sections 99 and 99A of the Income Tax Assessment Act 1936 (ITAA 1936).  Therefore any capital gain will be included in the income of the trust estate, and the executors of the estate will be liable to pay the tax on it.

Detailed reasoning

The capital gains tax (CGT) provisions are contained in the ITAA 1997.  The trust provisions are contained in the ITAA 1936.

CGT is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss as a result of a 'CGT event' (section 102-20 of the ITAA 1997).

A CGT event A1 happens when you dispose of a CGT asset (section 104-10 of the ITAA 1997).

When a person dies, a capital gain or a capital loss from a CGT event happening to a CGT asset owned by the deceased, just before death, is generally disregarded (section 128-10 of the ITAA 1997).

Where the asset devolves to the legal personal representative (the Trustee) or passes to a beneficiary of the deceased estate, the Trustee or beneficiary is taken to have acquired the asset on the day the person died. Therefore, you and your co-executors will be taken to have acquired The deceased's assets on the day they died.

Capital gains and capital losses made by the estate are aggregated to determine whether the estate has made a net capital gain or net capital loss for the year (sections 102-5 and 102-10 of the ITAA 1997).  A net capital gain is included in the estate's net income that is available for distribution to beneficiaries (section 102-5 of the ITAA 1997 and section 95 of the ITAA 1936).

The beneficiaries are liable to pay tax on the part of the estate's net income that they are presently entitled to (sections 97, 98A and 100 of the ITAA 1936).

The executor of the estate is assessable on any part of the estate's net income that no beneficiary is presently entitled to (sections 99 and 99A of the ITAA 1936).

Role as executor

In the administration and winding up a deceased estate, the executor may need to dispose of some or all of the assets of the estate. Assets disposed of in this way are subject to normal rules and any capital gain the executor makes on the disposal is subject to CGT.

In your case, you have disposed of some land.

The executor of the estate is assessable on any part of the estate's net income that no beneficiary is presently entitled to (section 99 or 99A of the ITAA 1936).

Capital gain or loss disregarded

Any capital gain or capital loss the legal personal representative makes when an asset passes to a beneficiary is disregarded (subsection 128-15(3) of the ITAA 1997).

Therefore, your capital gains tax liability arises when the assets are subsequently disposed of (that is, when sold), and normal CGT rules apply. There would be no capital gains tax liability if they were transferred into your name as beneficiary or executor.

Present entitlement of the beneficiaries

Beneficiaries cannot enjoy present entitlement to income derived by the estate during the administration of the estate. Income of the estate in income years before administration is complete is the income of the executors and is not income of the beneficiaries (paragraph 9 of Taxation Ruling IT 2622).

However, the beneficiaries are presently entitled to any amounts that are actually paid to them by the executors.  Where the amounts are paid from the estate's net income of the year, the liability to tax falls on the beneficiaries (paragraph 14 of Taxation Ruling IT 2622).

Are you as executor liable to pay tax on any part of the net capital gain made by the estate?

During this income year the deceased's estate had not been fully administered and the net residue was not ascertained, and the residuary beneficiaries had no proprietary interest in any specific investment forming part of the estate or the income from any investments (paragraph 13 of Taxation Ruling IT 2622).

As such, you as executor of the estate are liable for the tax that is due on the parts of the net income that were not distributed to beneficiaries during the year.

In your case, the estate's net income was not paid to beneficiaries during the financial year.  Any beneficiaries that are presently entitled to amounts will be liable to pay tax on those amounts that they are presently entitled to. Any other amounts to which there is no beneficiary presently entitled is income of the executors and the executors will be liable to lodge a tax return and pay any tax.

Assessing trust income

Section 96 of the ITAA 1936 provides that a trustee shall not be liable as trustee to pay income tax on the income of the trust estate unless there is a specific provision that requires them to be assessed and to pay tax. 

Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, section 97 of the ITAA 1936 operates to include in the assessable income of the beneficiary, their share of the net income of the trust.  

Net income is defined in subsection 95(1) of the ITAA 1936 as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less allowable deductions. 

Taxation Ruling IT 2622 considers the income tax liabilities of executors and beneficiaries under the estates of deceased persons during stages of administration of deceased estates.

Where residue of the estate has been ascertained and the estate has been fully administered, residuary beneficiaries enjoy present entitlement to income derived by the estate. Beneficiaries who enjoy present entitlement to income derived by the estate are liable to pay tax on their share of the income received.

The trust estate's capital gains are treated as the beneficiary's capital gains (section 115-215 of the ITAA 1997). If the residue of the estate has not been determined, then the estate has not been fully administered, and the beneficiaries are not presently entitled. In this case the executors will be liable for the tax on the income of the estate.

In your case, the executors have not distributed the proceeds of the estate as you have not determined certain liabilities. As administration of the estate is not complete, the beneficiaries are not presently entitled to the income. The executors will be assessable on the income under sections 99 and 99A of the ITAA 1936.  Therefore any capital gain will be included in the income of the trust estate, and the executors of the estate will be liable to pay the tax on it.

Question 2

Summary

The deceased satisfied the conditions in section 152-80 of the ITAA 1997 immediately before their death. You satisfy the basic conditions for relief in subsection 152-10(1) of the ITAA 1997. You are therefore entitled to access the small business concessions in relation to the capital gain from the disposal of the land.

Detailed reasoning

Section 152-80 of the ITAA 1997 discusses when a CGT event happens to an asset held by a legal personal representative within two years of the date of death of the individual. A legal personal representative will be entitled to apply the small business concessions in Division 152 of the ITAA 1997 providing the following apply:

the CGT asset forms part of the estate of a deceased individual

the asset devolves to the individual's legal personal representative

the individual would have been able to reduce or disregard a capital gain under this Division if a CGT event had happened in relation to the CGT asset immediately before their death and

a CGT event happens in relation to the CGT asset within two years of the individuals death.

The small business relief provisions are contained in Division 152 of the ITAA 1997. The requirements to access these concessions are contained in section 152-10 of the ITAA 1997. These conditions (as applied to the deceased immediately before their death) are:

· a CGT event happens to a CGT asset of yours

· the event would have resulted in a gain

· at least one of the following applies:

o you are a small business entity for the income year

o you satisfy the maximum net asset value test

· the CGT asset satisfies the active asset test.

The active asset test is outlined in section 152-35 of the ITAA 1997. A CGT asset satisfies the active asset test if:

· you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years.

Subsection 152-40(1) of the ITAA 1997 states that a CGT asset is an active asset if, at that time:

· you use it, or hold it ready for use, in the course of carrying on a business, or

· it is used, or held ready for use, in the course of carrying on a business by your affiliate or by another entity that is connected with you.

In your situation:

1) The sale for the part of the land being disposed of was completed within the two year period.

2) The sale of the land is a disposal and is CGT event A1 under section 104-5 of the ITAA 1997.

3) If the deceased had disposed of the land just prior to his death, it would have resulted in a capital gain.

a. The deceased was a small business entity under section 328-110 of the ITAA 1997.

b. The deceased would satisfy the maximum net asset value test under section 152-15 of the ITAA 1997.

4) The deceased acquired the land and used it in a primary production business until their death. The land was used in the course of carrying on the deceased's primary production business for over 15 years. Therefore the active asset test in section 152-35 of the ITAA 1997 is satisfied.

The deceased satisfied the conditions in section 152-80 of the ITAA 1997 immediately before his death. You satisfy the basic conditions for relief in subsection 152-10(1) of the ITAA 1997. You are therefore entitled to access the small business concessions in relation to the capital gain from the disposal of the land. It should be noted that some of these concessions have extra conditions that must be satisfied.