Edited version of your private ruling

Authorisation Number: 1012497167978

Ruling

Subject: Capital gains tax on the death of a taxpayer

Question 1

Will Event K3, pursuant to Sections 104-215(1) and (3) of the ITAA 1997 apply to the CGT assets owned by the taxpayer just before dying, and upon the taxpayer's death, be regarded as being bequeathed to a tax advantaged entity as per the terms of the taxpayers will and upon the due administration of the entity?

Answer

Yes

Question 2

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 learning institution or any other entity associated with the scheme's implementation?

Answer

No

Question 3

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 learning institution 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 learning institution 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

Background

The taxpayer was from 19XX until the date of the taxpayer's retirement in 20YY, Director of Finance/Chief Financial Officer at a learning institution. The learning institution is a public institution which is income tax exempt and endorsed since 20YY 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 learning institution to be used in perpetuity by it to benefit underprivileged students and prospective students in furthering the pursuit of academic excellence at the learning institution.

Scheme details

The taxpayer proposes to devise to the learning institution 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 with the learning institution. The parties will thereby covenant that in consideration of the taxpayer on death, devising by the taxpayer's will, the CGT assets to the learning institution, the learning institution in accordance with its constitution and the deed, will on receipt of the CGT assets establish the award. Pursuant to the obligations of the deed, the CGT assets will be converted into cash and the learning institution will invest the funds in a common Fund or like investment in order to provide the in perpetuity funding of the Awards.

The established common fund and similar investment platforms are 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 learning institution to place the bequest with the fund or similar platform, is ensuring the learning institution only pursues low risk investments.

No benefit of any description is to be derived by the taxpayer, the taxpayer's family or associates, the Entity or the Entity's associates in consequence of the implementation of the scheme. Neither the taxpayer nor the learning institution have any form of direct or indirect interest in the fund other than the returns that the learning institution 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 Property A, it is subject to a life interest granted to the taxpayer's partner as the partner's principal place of residence. The life interest is obliged to pay for the upkeep of the property during the tenancy's lifetime. On the death of the life tenant, the property will be transferred to the learning institution 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 learning institution will grant awards or other financial support (based on merit only) to the then current and prospective students of the learning institution 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 learning institution.

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 death.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104,

Income Tax Assessment Act 1997 section 121,

Income Tax Assessment Act 1997 section 171 and

Income Tax Assessment Act 1997 section 30-15.

Reasons for decision

Question 1

Summary

CGT event K3 will apply to the CGT assets bequeathed to the learning institution 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 2

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 learning institution 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 learning institution 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 learning institution is income of the taxpayer, and they are liable for any tax on that income. Once the arrangement takes effect the learning institution 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 learning institution, they would have been bequeathed to another person. That person will be presently entitled to income, from the assets to be bequeathed to the learning institution, 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 3

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 learning institution, 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 learning institution 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 learning institution 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 learning institution, 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 learning institution 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 learning institution.

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 learning institution.