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Authorisation Number: 1012349446497

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Subject: Capital gains tax

Question and answer:

Will you be entitled to disregard any capital gain you make from receiving property from a trust which is subject to a deed of arrangement between the beneficiaries?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

Under the will of your late parent, the estate was to be left in trust for your other parent during their lifetime, and upon their death the estate was to be divided equally between you and another party.

Probate of the will was subsequently granted and a testamentary trust established.

The primary asset of the trust is a property comprising of several titles.

The property titles are in the name of the trustee.

Your other parent has passed away and the assets of the trust will now be distributed to you and the other party.

Neither of you wish to sell the property titles.

You have decided to enter into a deed of arrangement regarding the transfer of the property titles.

There will be no cash adjustment in regard to the deed of arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Subsection 104-85(6)(a)

Income Tax Assessment Act 1997 Subsection 128-20(1)(d)

Reasons for decision

Subsection 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that for capital gains tax (CGT) purposes an asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset under a deed of arrangement provided that:

· the beneficiary entered into the deed to settle a claim to participate in the estate; and

· the consideration given by the beneficiary consisted only of the variation or waiver of a claim to an asset or assets that formed part of the estate.

Paragraph 222 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests specifies that for a deed of arrangement to be effective for the purposes of the above CGT legislation it must be entered into prior to the administration of the estate being completed.

In your case, this did not happen as probate of the will was granted and a testamentary trust created over the assets of the estate. Therefore, the deed you enter into will not be an effective deed of arrangement for CGT purposes. 

In your situation, the trustee of the trust will transfer the property titles to you and another party which will end the trust. The transfer of the trust property to you will constitute the disposal of a CGT asset by a trustee of a trust to a beneficiary of a trust, which is a CGT event E7 (section 104-85 ITAA 1997).

However, any capital gain or capital loss you make on the ending of your interest in the trust will be disregarded as you will not have acquired the trust property by assignment, or have paid anything to acquire the trust property (subsection 104-85(6)(a) ITAA 1997).

The deed of arrangement will take effect in conjunction with the ending of the trust and will have no CGT implications for you.

You will be entitled to disregard any capital gain you make when you acquire the property from the trust and will have no assessable income to declare on your income tax return.