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Ruling

Subject: Deceased estate

Questions and Answers

1. Does the estate have a capital gains tax liability as the result of the transfer of dwelling B to the beneficiaries?

Yes

2. Are there any CGT implications for the deceased's date of death return?

No

3. Is it necessary for a final tax return to be lodged for the deceased?

No

4. Is the resulting share of the capital gain which is distributed to the non-resident beneficiary assessable to the trustee at non-resident rates?

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

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 bought a property (dwelling A) before 20 September 1985.

In his will the deceased granted his spouse the right to have use and enjoyment of dwelling A.

The deceased's will also provided that that his spouse may request the executors to sell dwelling A and to purchase a substitute land and dwelling and that she would have the right to use and enjoyment of the substitute property for her life.

On date X after 20 September 1985, the deceased's spouse requested that dwelling A be sold and a substitute property be purchased (dwelling B).

The deceased's spouse died on date Y. She resided in dwelling B as her main residence until some years prior to death when she moved to an aged care facility.

Dwelling B was the deceased's spouse's only residence. The dwelling was left vacant and not rented out during her absence.

You are the trustee of the testamentary trust.

Pursuant to the will of the deceased, dwelling B was transferred to the deceased's two children, one of whom is an Australian resident for tax purposes and the other who is a non-resident of Australia. The transfer occurred in the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 104-85.

Income Tax Assessment Act 1997 Division 128.

Income Tax Assessment Act 1936 Section 97.

Income Tax Assessment Act 1936 Subsection 98(2).

Income Tax Assessment Act 1936 Paragraph 98(2)(d).

Reasons for decision

Division 128 of the Income Tax Assessment Act 1997 sets out what happens when a person dies and a CGT asset they owned just before dying devolves to their trustee or passes to a beneficiary of their estate.

In your case, dwelling B was not owned by the deceased prior to his death so this Division does not apply.

More than one beneficiary with interests in a trust asset

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not the entire asset.

Where more than one beneficiary has an interest in the trust assets, absolutely entitlement can only be established if the asset is fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another.

If the assets are not fungible, but more than one beneficiary has an interest in them, then that is the clearest possible indication that, under the terms of the trust, individual beneficiaries are not entitled to a particular assets to the exclusion of others.

If there is only one asset in the asset class, then the fungibility is not satisfied because there is no other asset that could replace it. If the asset is not divisible, it is impossible, from the asset, to satisfy the claims of a beneficiary with a shared interest.

Dwelling B is not a fungible asset, therefore, the beneficiaries cannot be absolutely entitled to their shares in it.

Transfer of property to the beneficiaries

A disposal of dwelling B occurred when you, as the trustee of the trust, transferred the legal title of dwelling into the two beneficiaries' names. The transfer of dwelling caused a change of ownership of the property.

Where more than one CGT event (except CGT events D1 and H2) can happen, you use the one that is most specific to your situation.

Both CGT event A1, disposal of a CGT asset and CGT event E7 happen if the trustee of a trust disposes of a CGT asset of the trust to the beneficiaries in the satisfaction of the beneficiaries' interest, or part of it, in the trust capital. The time of the event is when the disposal occurs.

CGT event E7 is more specific to your situation. CGT event E7 occurred when you transferred dwelling B into the beneficiaries' names on, so it is used when determining how the capital gains provisions apply to your situation.

How this applies to your situation

In your role as trustee, you transferred the legal ownership of the dwelling B to the two beneficiaries.

You cannot claim the exemption that would be available if Division 128 of the ITAA 1997 applied. Nor were the beneficiaries absolutely entitled to the property as at the date you transferred it to them.

Consequently, CGT event E7 occurred and the time of the event is the date you transferred the property into the names of the two beneficiaries..

Therefore, as trustee, you make the capital gain as a result of transferring the ownership interest in dwelling B to the two beneficiaries.

You calculate your capital gain by comparing the market value (as calculated at the date of transfer) to the cost base of the property.

Beneficiaries presently entitled

In this case the two beneficiaries are presently entitled to all or part of the capital gain made by the trust as the result of CGT event E7 happening.

Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where a beneficiary of a trust is not under a legal disability they will be assessed on any distributions from a trust.

Resident beneficiary

For a beneficiary who is an Australian resident and not under a legal disability, the capital gain to which they are presently entitled will need to be included in their assessable income as part of their net capital gain under subparagraph 97(1)(a)(i) of the ITAA 1936.

Non-resident beneficiary

Subsection 98(2) of the ITAA 1936 applies where a non-resident beneficiary who is not under a legal disability receives a distribution from a trust estate.

Specifically, paragraph 98(2)(d) of the ITAA 1936 provides that the trustee will be liable to pay tax in respect of:

§ so much of the net income of the trust estate as is attributable to when the beneficiary was a resident, and

§ so much of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to an Australian source.

The trustee will pay the tax as if it was the income of the individual and was not subject to any deduction.

In your case, this means that you as trustee will be liable to pay tax on the non-resident's share of the net income at their ordinary tax rates that apply to them in Australia (that is, non resident tax rates).

Tax return for deceased

As the asset in question (dwelling B) was not owned by the deceased at the time of his death, there are no CGT implications for the deceased's date of death return nor is there a need to ledge a final return for the deceased.