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Ruling

Subject: CGT - deceased estate

Question and Answer

1. Is the Estate liable to pay Capital Gains Tax on the disposal of shares?

No.

2. Will the Estate be required to lodge an income tax return?

No.

This ruling applies for the following period

1July 2011 to 30 June 2012

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.

Post 20 September 1985 the deceased passed away.

The deceased was a non-resident of Australia for taxation purposes.

The deceased owned some shares in publicly listed companies.

All shares were purchase Post 20 September 1985.

Post 20 September 1985 all shares were sold and the proceeds deposited into the bank.

The beneficiaries, child 1 and child 2, are non-residents of Australia for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97A

Income Tax Assessment Act 1936 subsection 97(3)

Income Tax Assessment Act 1936 subsection 98(2A)

Income Tax Assessment Act 1936 subsection 98(3)(a)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 subsection 128-20(1)

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Income Tax Assessment Act 1997 Section 855-25

Reasons for decision

Capital Gains Tax

A capital gain or capital loss may arise if a Capital Gains Tax (CGT) event happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset is any kind of property, or a legal or equitable right that is not property.

The most common CGT event happens if you dispose of an asset to someone else, under section 104-10 of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to happen. You dispose of an asset when a change of ownership occurs from you to another entity. Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Deceased Estate

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative or to a beneficiary in a deceased estate.

Subsection 128-20(1) of the ITAA 1997 provides that a CGT asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

1. under a will, or that will varied by a court order;

2. by operation of an intestacy law, or such a law as varied by a court order; or

3. under a deed of arrangement where:

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

b. any consideration given by the beneficiary for the asset consists only of a variation or waiver of a claim to one or more other assets that formed part of the estate.

Subsection 128-15(4) of the ITAA 1997 contains the cost base rules in respect of CGT assets that devolve to the trustee of the deceased estate. It provides, amongst other things, that:

§ if the asset was acquired by the deceased pre-20 September 1985, the legal personal representative is taken to have acquired it for its market value at the date of death (subsection 128-15(4) Item 4 of the ITAA 1997); and

§ if the asset was acquired by the deceased on or post-20 September 1985, the legal personal representative is taken to have acquired it for its cost base at the date of death (subsection 128-15(4) Item 1 of the ITAA 1997).

Beneficiaries

The method of taxing trust income varies according to whether or not a beneficiary of a trust is 'presently entitled' to the income of the trust and if they are under a legal disability or not.

Beneficiaries are presently entitled to the income of a deceased estate if they have an indefeasible, absolutely vested interest in the income. In other words, the beneficiaries have a claim or interest in the income that cannot be defeated by another person. They must also be able to demand immediate payment of the income. This means that beneficiaries can be presently entitled even though they may not have actually received an income distribution.

A foreign resident disregards any capital gain or capital loss made from a CGT event that happens to an asset, provided the asset is not Taxable Australian Property.

Shares are not Taxable Australian Property if the holder of the shares does not hold more than 10% in the entity.

Trustee

The trustee is to be assessed and is liable to pay tax [sections 98(2A) and 98(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)] where the beneficiary is:

§ a non-resident at the end of the income year

§ not a trustee of another trust

§ not owner of income equalization deposits [section 97A]

§ not a body exempt from tax [subsection 97(3)]

The trustee is to pay tax as if it were an individual in respect of the following:

§ so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

§ so much of that share 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 sources in Australia.

Application to your circumstances

The deceased, a non-resident of Australia for taxation purposes, purchased post-CGT shares in four publicly listed companies on the Australian stock exchange.

The beneficiaries, child 1 and child 2, are also non-residents of Australia for taxation purposes and from the information you have provided are presently entitled.

You sold the shares on post 20 September 1985 and as the shares are not Taxable Australian Property the capital gain made on the sale of the shares is disregarded.

The trustee will not be assessed on behalf of the non-resident beneficiaries on the capital gain and is not required to be included in the net income of the trust.