Edited version of your private ruling

Authorisation Number: 1012496602138

Ruling

Subject: Capital gains tax on the death of a taxpayer

Question 1

Will Division 128 of the Income Tax Assessment Act 1997 apply in respect of the Capital Gains Tax assets which, on the death of the taxpayer, would then form part of and be controlled by the entity?

Answer

No

Question 2

Will CGT event K3, pursuant to subsections 104-215(1) and (3) of the Income Tax Assessment Act 1997 happen to CGT assets owned by the taxpayer at the date of the taxpayer’s death and pass to the university?

Answer

Yes

Question 3

In the event of a K3 capital gain happening to any of the CGT assets will the capital gain be disregarded?

Answer

Yes

Question 4

In the event of a capital gain being made as a result of CGT event K3 happening to CGT assets owned by the taxpayer at the date of death and pass to the university, is the capital gain included in the taxpayer’s assessable income earned up to the date of death?

Answer

Yes

Question 5

If subsection 118-60(1) of the Income Tax Assessment Act 1997 does not apply to disregard any capital gain made, because the assets to be gifted to the university have not been valued by the Commissioner at more than $5,000, will subsection 118-60(IA) of the Income Tax Assessment Act 1997 apply to disregard the capital gain?

Answer

Yes

Question 6

Will the scheme or any part of the scheme be considered a tax avoidance agreement as defined in Division 9C section 121F of the ITAA 1936, and not apply to the taxpayer, the entity, the university or any other entity associated with the scheme’s implementation?

Answer

No

Question 7

Will the scheme or any part of the scheme as per Part IVA of the ITAA 1936, apply whereby a tax benefit as the term defines in 177C(1) of the ITAA 1936, be derived by the taxpayer, the entity, the university or any other entity, associated with schemes implementation and can the Commissioner exercise his discretion pursuant to section 177F of the ITAA 1936 to render a tax benefit being incurred by the taxpayer, the entity, the university or any other entity, associated with the schemes?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017.

The scheme commences on:

1 July 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.

The entity is a public university which is income tax exempt and endorsed since 2000 as a deductible gift recipient. The taxpayer strongly believes in providing financial support to students that, although experiencing socio-economic deprivation or other harm, nevertheless attain academic excellence in disciplines of study related to business and commerce. The taxpayer further maintains that such support engenders in these students a sense of community responsibility, encouraging their future participation in philanthropy and benevolent activities.

The taxpayer is desirous that upon death, certain assets are devised to the university to be used in perpetuity by it to benefit underprivileged students and prospective students in furthering the pursuit of academic excellence at the university.

The taxpayer proposes to devise to the university the following assets (as scheduled from time to time) or additional assets as may arise in the future:

· Property A

· Property B and

· Various shareholdings interests and other securities;

(hereafter collectively referred to as the CGT assets). All CGT assets were acquired after 20 September 1985.

The taxpayer proposes to enter into a deed (Deed) with the university. The parties will thereby covenant that in consideration of the taxpayer on the taxpayer’s death, devising by the taxpayer’s will, the CGT assets to the university, the university in accordance with its constitution and the Deed, will on receipt of the CGT assets establish Award. Pursuant to the obligations of the Deed, the CGT assets will be converted into cash and the university will invest the funds in a common (established) fund or like investment in order to provide the in perpetuity funding of the Awards.

The common fund and similar investment platforms, is specifically established to receive investment funds from not for profit enterprises such as educational institutions. The fund’s investment strategy is conservative and designed to preserve capital. The taxpayer, by requiring the university to place the bequest with the fund or similar platform, is ensuring the university only pursues low risk investments.

No benefit of any description is to be derived by the taxpayer, the taxpayer’s family or associates, the university or the university’s associates in consequence of the implementation of the scheme. Neither the taxpayer nor the university have any form of direct or indirect interest in the fund other than the returns that the university would earn from its investment.

All of the annual net income earned from the Fund is to be used to provide financial assistance to students for the purposes of the Awards. It is intended that the capital will be preserved and if income is insufficient in any year to make a meaningful Award, they can be delayed until the income has increased to an appropriate level.

In relation to the Property A, it is subject to a life interest granted to the taxpayer’s partner as principal place of residence. The life interest is obliged to pay for the upkeep of the property during the life tenant’s lifetime. On the death of the life tenant, the property will be transferred to the university in satisfaction of its interest as the reversionary beneficiary.

The deed provides for the awards to be administered in accordance with a series of predetermined rules. The university will grant awards or other financial support (based on merit only) to the then current and prospective students of the university that experienced socio-economic disadvantage. The awards’ objective is to enhance these students’ capacity to achieve academic excellence in their studies in commerce and other business related disciplines.

A separate trust (aside from the deceased estate) will not be established under the will. The taxpayer’s will directs the trustee to sell the taxpayer’s property to discharge debts and pay for funeral expenses; and to pay or transfer the balance to the university.

The taxpayer may acquire further additional assets in the future. All public company shares are acquired for investment purposes and are intended to be held for periods greater than 12 months.

Assumptions

1. The residual assets of the estate will be

a. Property A;

b. Property B

c. Publically listed share and securities acquired by the taxpayer more than 12 months before the taxpayer’s death.

The taxpayer’s estate will be fully administered within the financial year of the taxpayer’s death.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-215,

Income Tax Assessment Act 1997 104-220,

Income Tax Assessment Act 1997 118-60,

Income Tax Assessment Act 1997 128-10,

Income Tax Assessment Act 1997 177,

Income Tax Assessment Act 1997 Subsection128-20(1) and

Income Tax Assessment Act 1997 Subsection128-20(2).

Reasons for decision

Question 1

Summary

Division 128 (Effects of Death) of the Income Tax Assessment Act 1997 (1997 Act), specifically section 128-10, 128-15(1) and 128-15(3) of the 1997 Act, would not apply in respect to the CGT assets which, on the death of the taxpayer, would then form part of and be controlled by the Entity.

Detailed reasoning

Section 128-10 of the ITAA states that when one dies, a capital gain or capital loss from a CGT event that results for a CGT asset one owned just before dying is disregarded.

Section 128-15 states the CGT assets that one owns just before dying that devolves to the personal legal representative or passes to a beneficiary in the estate are acquired by the legal personal representative or beneficiary on the date of death for the cost base or reduced cost base.

Subsection 128-15(3) disregards any capital gain made by the legal personal representative if the asset passes to a beneficiary in the estate.

Note 1 to section 128-10 states there is an exception to this rule under Section 104-215 if the CGT event K3 asset passes to a beneficiary in the estate who is an exempt entity.

The effect of CGT event K3 happening is 128-10 no longer applies to disregard any capital gain or loss from a CGT event that resulted from CGT assets owned just before dying. Basically this means that the legal personal representative will need to account for any capital gain or loss made due to assets passing to a tax exempt entity in the final (date of death) tax return.

The taxpayer’s will states that the CGT assets will pass to the university, an income tax exempt entity. Therefore the CGT event K3 will apply, potentially resulting in a capital gain being assessed in your date of death return, and section 128-10 will not apply.

Question 2

Summary

CGT event K3 will apply to the CGT assets bequeathed to the university as they are a tax exempt entity.

Detailed reasoning

Section 104-215(1) states that a CGT event K3 happens if one dies and a CGT asset owned just before dying passes to a beneficiary in the estate who (when the asset passes) is an exempt entity. The time of the event is just before one dies.

The CGT assets in question as per the taxpayer’s will are to pass to the university which is a tax exempt entity. Therefore CGT event K3 will happen to the CGT assets of the taxpayer’s estate.

Question 3

Summary

In the event a capital gain would arise from the happening of a CGT event K3 in respect to any of the CGT assets the capital gain would be disregarded due to the exception contained in section 118-60 of the ITAA 1997.

Detailed reasoning

The note after subsection 104-215(5) if the ITAA 1997 states there is an exception to the operation of CGT event K3, contained in section 118-60 of the ITAA 1997.

Subsection 118-60(1) of the ITAA 1997 states that a capital gain or capital loss made from a testamentary gift is disregarded if the gift would have been deductible under section 30-15 of the ITAA 1997 had it not been a testamentary gift.

The university is an educational institution hence covered by Item 1 of the table in subsection 30-15(2) of the ITAA 1997.

Column 2 of the said table sets out the types of gifts that can be given to the university for which a tax deduction can be claimed if the gift had not been a testamentary gift. Column 3 states how much can be deducted and column 4 places special conditions that must be satisfied before a deduction may be claimed.

The said table basically states

(a) The fund, authority or institution must be endorsed as a deductible gift recipient

(b) If the gift is money the amount of the gift must be at least $2

(c) If the gift is property (including trading stock) that has a value of less than $5,000 it must have been purchased within 12 months prior to making the gift, and its value must be at least $2

(d) If the gift is property, that was acquired more than 12 months before the gift was made, it must be valued by the Commissioner at more than $5,000.

(e) If the gift is shares in a publically listed company the shares must have been acquired at least 12 months before making the gift and have a market value of at least $5,000.

The amount of the deduction available in respect of (a) to (e) above is:

(a) The amount of the gift

(b) The value of the property at the time of making the gift

(c) The value of the property as determined by the Commissioner.

(d) The market value of the shares at the date of the gift.

The testamentary gift in question will consist of real estate and shares in public companies.

As per the table in subsection 30-15(2) of the ITAA 1997, on the assumption that the publically listed shares have a value of more than $5,000 at the time of the gift a deduction to the value of the shares would be deductible under section 30-15 of the ITAA 1997.

Note: If the shares had been held for less than 12 months at the time gifted, no deduction is allowable for their value.

With regards to the real estate a deduction would not be allowable if the real estate is not valued by the Commissioner at more than $5,000. However because this will be a testamentary gift subsection 118-60(IA) of the ITAA will deem the real estate to have been valued by the Commissioner at more than $5,000.

Therefore any gain made as a result of the CGT event K3 happening on the bequeathing of the residual of your estate will be disregarded.

Section 30-15 contains a table of gifts or contributions that you can deduct. The recipient must be a deductible gift recipient, which is defined as a fund, authority or institution covered by item 1 or 2 in the table.

The following gift types are deductible if given to a deductible gift recipient, under section 30-15 of ITAA 1997

(a) money, if the amount is more than $150; or

(b) property that you purchased during the 12 months before making the contribution, if the lesser of:

· the *market value of the property on the day you made the contribution; and

· the amount you paid for the property; is more than $150; or

(c) property valued by the Commissioner at more than $5,000, if you did not purchase the property during the 12 months before making the contribution; or

(ca) *shares that you have acquired in a *listed public company if:

· the shares are listed for quotation in the official list of a stock exchange that is listed under the heading "Australia" in regulations made for the purposes of the definition of *approved stock exchange; and

· the market value of the shares on the day you made the contribution is more than $150 and less than or equal to $5,000; and

· you acquire the shares at least 12 months before making the contribution.

(d) the contribution is not a gift; and

(e) either:

· the contribution is made in return for a right permitting you to attend, or participate in, a particular *fund-raising event in Australia; or

· the contribution is made in return for a right permitting an individual (other than you) to attend, or participate in, a particular fund-raising event in Australia.

* denotes a term defined in section 995-1 of the ITAA 1997.

Question 4

Summary

Any capital gain made as a result of CGT event K3 happening will not be included in the taxpayer’s taxable income up to the date of their death, as the gain will be disregarded.

Detailed reasoning

See detailed reasoning for question 3.

Question 5

Summary

If the real estate to be gifted by the taxpayer to the university is not valued by the Commissioner at more than $5,000 subsection 118(IA) of the ITAA 1997 will apply to disregard any capital gain made as a result of CGT event K3 happening.

Detailed reasoning

See detailed reasoning for question 3

Question 6

Summary

The scheme, nor any part of the scheme, will be considered as a tax avoidance agreement as defined in Division 9C section 121F, as elements of the definition of a tax avoidance agreement are not present in your scheme.

Detailed reasoning

The definition of a tax avoidance agreement has several elements:

1. agreement

2. the agreement was entered into after 24 June 1980

3. had the agreement not be entered into the taxpayer would have been liable to income tax

4. the agreement was entered into for purposes that include the purpose of securing a reduction in tax

For the arrangement to be a tax avoidance agreement each of the four elements of the definition must be satisfied.

1. Agreement is defined in subsection 121F(1) of the ITAA 1997 as any agreement, arrangement or understanding, whether formal or informal, whether expressed or implied and whether or not enforceable, or intended to be enforceable by legal proceedings.

The definition of agreement is very broad. Therefore, almost any arrangement or undertaking would be an agreement. It is considered that the taxpayer’s will and the undertaking by the university to use the assets bequeathed for financial assistance of students, in the form of the Award, is an agreement.

2. The agreement has not yet been entered into. Hence, will be entered into after 24 June 1980.

3. The university is a beneficiary in the taxpayer’s will. The arrangement comes into effect upon the taxpayer’s death. Hence up until the taxpayer’s death any income earned from the assets to bequeath to the university is income of the taxpayer, and he is liable for any tax on that income. Once the arrangement takes effect the university is liable for tax on any income from the bequeathed assets.

Had the agreement not been entered into, i.e. the assets had not been bequeathed to the university, they would have been bequeathed to another person. That person will be presently entitled to income, from the assets to be bequeathed to the university, and liable for the tax on that income.

Hence element 3 of the definition of tax avoidance agreement in subsection 121F(1) is not satisfied.

4. As element 3 of the definition is not satisfied, there is no need to determine if element 4 is satisfied.

As element 3 of the definition of tax avoidance agreement is not satisfied the agreement is not a tax avoidance agreement.

Question 7

Summary

Part IVA of the ITAA 1936 is a general anti-avoidance rule. Part IVA gives the Commissioner the discretion to cancel a ‘tax benefit’ (or part of a ‘tax benefit’) that has been obtained, or would, but for section 177F, be obtained by a taxpayer in connection with a scheme to which Part IVA applies.

Part IVA of the ITAA 1936 would not apply as although a scheme will exist, there is no specific tax benefit, where as, if the scheme is not implemented, the same benefit is likely to occur through application of Division 128 of ITAA 1997.

Detailed reasoning

For the Commissioner to determine that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies, the following three elements must be established:

(i) There must be a scheme, as defined in section 177A of the ITAA 1936;

(ii) There must be a tax benefit obtained in connection with the scheme, as defined in section 177C of the ITAA 1936; and

(iii) The scheme must be entered into for the sole or dominant purpose of obtaining a tax benefit under subsection 177A(5) of the ITAA 1936, with regard to the eight matters outlined in section 177D of the ITAA 1936.

Does a scheme exist?

The term ‘scheme’ is defined in very wide terms under section 177A of the ITAA 1936. It includes any agreement, arrangement, understanding, plan, proposal, action, course of action or course of conduct.

As the definition of ‘scheme’ is drafted very widely, there will usually be little doubt that a scheme can be identified. The proposed arrangement, which includes the bequeathing of the CGT assets to the university, for the purpose of establishing the Award to provide financial assistance to students, constitutes a scheme.

The scheme will be entered into or carried out the taxpayer and the university may receive a tax benefit from the scheme.

Does a tax benefit exist?

Under section 177C of the ITAA 1936 a tax benefit arises where an amount is not included in assessable income, where that amount would have been included, or might reasonably be expected to have been included, in assessable income if the scheme had not been entered into.

Having regards to the facts, the Commissioner considers it might reasonably be expected that if the scheme was not carried out the following would have happened:

The taxpayer will gift to the university the assets that will form the residual estate before the taxpayer dies.

Under counterfactual (alternative) the taxpayer will still be entitled to a tax deduction under section 30-15 of the ITAA 1997 by having the property valued by the Commissioner. Therefore the taxpayer will not receive a tax benefit under the scheme. The university, being tax exempt, will not be liable for tax if the scheme is carried out, nor under the counterfactual (alternative). Therefore, as with the taxpayer, the university will not gain a tax benefit if the scheme is carried out.

Note: Had the Commissioner determined that a tax benefit will be obtained by the carrying out of the scheme, having regard to the eight matters in subsection 177D(b) of the ITAA 1936:

1. The manner in which the scheme was entered into or carried out;

2. The form and substance of the scheme;

3. The time at which the scheme was entered into and the length of the period during which the scheme was carried out;

4. The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

5. Any change in the financial position of the relevant taxpayer that has resulted, will result or may reasonably be expected to result, from the scheme;

6. Any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

7. Any other consequence for the relevant taxpayer, or for any person, of the scheme having been entered into or carried out; and

8. The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in point 6,

It would have been concluded that the dominant purpose of the scheme is altruistic, in providing financial support for students of the university.

Therefore the Commissioner will not make a determination under section 177F of the ITAA 1936 to deny a deduction under section 30-15 for the testamentary gift to be made to the university.