Edited version of your private ruling

Authorisation Number: 1012495993770

Ruling

Subject: Capital gains tax implications on the disposal and transfer of properties

Question 1

Is the deceased estate liable for capital gains tax on the transfer of the legal title of the specifically bequeathed properties, when the beneficiaries become absolutely entitled to them?

Answer:

No

Question 2

Are the beneficiaries liable for capital gains tax on the transfer of the legal title of the specifically bequeathed properties, when the beneficiaries become absolutely entitled to them?

Answer:

No

Question 3

Is the deceased estate liable for capital gains tax on disposal of the remaining properties?

Answer:

Yes

Question 4

Is the first element of the cost base of the properties taken to be the deceased person's cost base of the properties on the day the person died?

Answer:

Yes

Question 5

If no beneficiary is made presently entitled to the income of the trust estate, will the trust be assessed at the top marginal rate of tax, being 46.5%?

Answer:

Yes

Question 6

If a beneficiary is made presently entitled to the income of the trust estate, and is not under a legal disability, will the beneficiary be assessed on their share of the net income of the trust estate at their individual marginal tax rate?

Answer:

Yes

Question 7

If a beneficiary is made presently entitled to the income of the trust estate, but is under a legal disability, will the trustee be assessed on their share of the net income of the trust estate at the beneficiary's individual marginal tax rate?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your application for private ruling

· copy of deceased's last Will and Testament

The deceased passed away several years ago.

The deceased's estate consisted of some residential investment properties, mostly under mortgage. All of the properties were acquired by the deceased after 20 September 1985.

On administering the estate, several properties were sold to pay out mortgages and other financial responsibilities, leaving X unencumbered residential properties.

According to the deceased's last Will and Testament;

· The first child of the deceased would inherit a property on attaining the age of X years, provided they are employed and are not abusing drugs or alcohol.

· A second child of the deceased would inherit a property on attaining the age of Y years, provided they are employed and are not abusing drugs or alcohol.

· at the winding up of the deceased's estate, and upon each child attaining Y years of age (provided each child is employed and not abusing drugs or alcohol) each child would receive the residue of the estate as tenants in common in equal shares.

The property bequeathed to the first child is specifically stated.

The property bequeathed to the second child is specifically stated.

You state the remaining unencumbered residential properties, will be sold on the market and the monies received will be apportioned between the children as detailed above.

The first child turned X years old, so they inherited their designated property and it was transferred to them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Detailed reasoning

Effect of death

The capital gains tax provisions that deal with the effect of death are located in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

When a person dies, the assets that make up their estate can:

· pass directly to a beneficiary (or beneficiaries), or

· pass directly to their legal personal representative (LPR) (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).

A legal personal representative can be either:

· the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will)

· an administrator appointed to wind up the estate if the person does not leave a will.

Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

Subsection 128-15(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for LPR's or beneficiaries of deceased estates. It provides that if the deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

Subsection 128-20(1) 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:

a) under your will, or that will as varied by a court order; or

b) by operation of an intestacy law, or such a law as varied by a court order; or

c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

d) under a deed of arrangement if:

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

ii. 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 your estate

Absolute entitlement

Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Further, at paragraphs 21 and 22 of TR 2004/D25 it states;

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction

As a sole beneficiary, in respect of an asset, has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible.

Importantly, paragraph 72 of TR 2004/D25 provides that;

A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692.

Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Accordingly, no CGT event will happen when the legal title in the asset is transferred to the beneficiary as the beneficiary is already considered to be the 'owner' of the asset.

However, the beneficiary will be the relevant taxpayer if a CGT event happens to the asset after it has passed to the beneficiary (eg. the beneficiary disposes of the asset in the future). This will also be the case if the trustee disposes of an asset, to which a beneficiary is absolutely entitled, on their behalf.

Further, as stated in paragraph 143 of TR 2004/D25:

Because the beneficiary is the relevant taxpayer, and the capital gain or loss is included in the beneficiary's income calculations, it is not included in the net income of the trust under section 95 of the ITAA 1936.

Application to your circumstances

The deceased passed away several years ago. At this time, the property of the deceased, passed to their estate, legal control over which is exercised by a legal personal representative (LPR)/executor. On administration of the estate several properties were sold to pay out mortgages and other financial responsibilities, leaving X unencumbered residential properties.

CGT consequences of transfer of property to the first child

The property was specifically bequeathed to the first child in the deceased's will, with their entitlement to receive this asset contingent on them attaining the age of X years.

On attaining X years of age, the first child became absolutely entitled to the property and the property was transferred to them as per the deceased's will. As the first child was considered absolutely entitled to the asset, no CGT event happens when the legal title in the asset is transferred to them.

Further, as the deceased person acquired this asset after 20 September 1985, the first element of the cost base and reduced cost base (in the first child's hands) is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

Accordingly, there are no CGT consequences for either the estate, or the first child, on transfer of the property. However, the first child will be the relevant taxpayer if a CGT event happens to the asset after it has passed to them (eg. if they dispose of the asset in the future).

CGT consequences on transfer of property to the second child

The property was specifically bequeathed to the second child in the deceased's will, with their entitlement to receive this asset contingent on them attaining the age of Y years.

On attaining Y years of age, the second child will become absolutely entitled to the property and the property will be transferred to them as per the deceased's will. As the second child will be considered absolutely entitled to the asset at this time, no CGT event will happen when the legal title in the asset is transferred to them.

Further, as the deceased person acquired this asset after 20 September 1985, the first element of the cost base and reduced cost base (in the second child's hands) is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

Accordingly, there will be no CGT consequences for either the estate, or the second child, on transfer of the property. However, the second child will be the relevant taxpayer if a CGT event happens to the asset after it has passed to them (eg. they dispose of the asset in the future).

CGT consequences on disposal of remaining two properties

Neither the first, nor second child, is absolutely entitled to either of the remaining properties and neither is entitled to have the properties transferred to them because to do so would defeat the interest of the other. Therefore, in order to satisfy the children's interests in the estate, the trustee must either sell the properties or transfer the properties to the children jointly.

You (as trustee of the deceased estate) intend to dispose of the remaining properties. Therefore, you, as trustee of the deceased estate will be the relevant taxpayer in respect of any capital gain or loss made on disposal of the properties.

As the deceased person acquired these assets after 20 September 1985, the first element of the cost base and reduced cost base (in your hands, as trustee of the deceased estate) is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

A capital gain or capital loss made on a trust asset is generally included in the trust's net capital gain or net capital loss calculation for the year (unless there is a beneficiary with 'absolute entitlement' to the asset). Where provided for by the trust deed, capital gains can be allocated to beneficiaries for tax purposes by making beneficiaries specifically entitled to the gains. If no beneficiary is specifically entitled to a capital gain, it is allocated proportionately to all beneficiaries based on their entitlement to income of the trust (with some modifications). In some cases the trustee is taxed on behalf of the beneficiary, such as where the beneficiary is under a legal disability.

Where the beneficiary is made presently entitled to the net income of the trust estate and they are not under a legal disability - the beneficiary will be assessed on their share of the net income of the trust estate at their individual marginal rates.

Where the beneficiary is made presently entitled to the net income of the trust estate and they are under a legal disability - the trustee will be taxed on the beneficiary's share of the net income of the trust estate at the beneficiary's individual marginal rates.

Where no beneficiaries are presently entitled to the net income of the trust estate - the trustee will be assessed at the highest marginal rate, currently 46.5%.