Edited version of your private ruling

Authorisation Number: 1012498517698

Ruling

Subject: Capital gains tax implications on disposal and transfer of shares

Question 1

Is the estate required to include an amount, by way of a capital gain in respect of the disposal of the X and Y shares, in the net income of the trust under Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Question 2

Is the estate required to include an amount, by way of a capital gain in respect of the transfer of the legal title of the Z shares to the beneficiary, in the net income of the trust under Division 6 of the ITAA 1936?

Answer:

No

Question 3

Is the beneficiary required to include an amount in their assessable income under section 97 of the ITAA 1936 in the respect of the disposal of the X and Y shares?

Answer:

No

Question 4

Is the beneficiary required to include an amount, referrable to any capital gain made on the disposal of the X and Y shares, in the calculation of their net capital gain and hence their assessable income?

Answer:

Yes

Question 5

Are the costs incurred by the estate in obtaining probate for the will, transferring the shares to the beneficiary or disposing of the shares on the beneficiary's behalf, included in the cost base of the shares when calculating any capital gain made by the estate on disposal or transfer of the shares?

Answer:

Not applicable

Question 6

Are the costs incurred by the estate in obtaining probate for the will, transferring the shares to the beneficiary or disposing of the shares on the beneficiary's behalf, included in the cost base of the shares when calculating any capital gain made by the beneficiary on disposal of the shares?

Answer:

Yes

Question 7

Is any capital gain made by the beneficiary on the disposal of the shares eligible for the 50% general discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The deceased owned and held shares in X, Y and Z. The shares were all purchased post 20 September 1985.

The deceased's will, provided for the shares to be bequeathed to A, the beneficiary.

In 20XX, the deceased died leaving the shares to the beneficiary.

Probate was granted to you some 6 months later.

The beneficiary, A, was solely entitled to the shares from the estate in terms of the will.

Later, the beneficiary instructed you, in writing, that the shares in X and Y are be sold on their behalf, and that they will be retaining the Z shares.

You, as the legal personal representative (LPR), duly transferred the Z shares to the beneficiary and sold the remaining shares on behalf of the beneficiary.

The beneficiary, not the estate, received the net proceeds of the sale of the shares.

The beneficiary continues to hold and own the remaining Z shares.

The estate did not dispose of any of the shares, except for those shares that passed to the beneficiary in terms of the deceased's will.

All claims against the estate will be finalised, barred, discharged and/or satisfied prior to 30 June 20XX.

You state that the estate has been fully administered and the residue has been determined.

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

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

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 in 20YY. 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. The estate has been fully administered and the residue determined.

Tax consequences on the disposal of the X and Y shares

The shares in X and Y were specifically bequeathed to beneficiary, who is the sole beneficiary of the shares, according to the deceased's will.

Therefore, on completion of the administration of the deceased estate, the beneficiary became absolutely entitled to the shares. Once the beneficiary became absolutely entitled to the shares as against the trustee, any act done by the trustee is taken to be an act done by the taxpayer.

Accordingly, it is the beneficiary who is the relevant taxpayer and the beneficiary (and not the trustee) will be required to account for any capital gain or loss that arises on disposal of the X and Y shares in the calculation of their net capital gain or net capital loss and hence their taxable income.

As any capital gain or loss is included in the beneficiary's income calculations, it is not included in the net income of the trust.

Further, as the deceased person acquired the shares after 20 September 1985, the first element of the cost base and reduced cost base (in the beneficiary'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.

Tax consequences on the transfer of the Z shares to the beneficiary

The shares in Z were specifically bequeathed to the beneficiary, who is the sole beneficiary of the shares, according to the deceased's will.

Therefore, on completion of the administration of the deceased estate, the beneficiary became absolutely entitled to the shares. Once the beneficiary became absolutely entitled to the shares as against the trustee, any act done by the trustee is taken to be an act done by the taxpayer.

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 shares in the future).

Cost base for a CGT asset

Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base;

1) money paid, or market value of property given, to acquire the asset

2) incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset

3) costs of owning the asset

4) capital expenditure on improvements

5) capital expenditure in respect of title or right to the asset

Section 110-35 of the ITAA 1997 provides that incidental costs (the second element of the cost base) include remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.

Subsection 110-25(4) of the ITAA 1997 explains that costs included in the third element of the cost base (costs of owning the asset) include:

· costs of maintaining, repairing or insuring the asset

· rates or land tax (if the asset is land)

However, you do not include costs in the second and third elements if you:

· have claimed a tax deduction for them in any year, or

· did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

Subsection 110-25(6) of the ITAA 1997 states that capital expenditure you incurred to establish, preserve or defend your title to the asset is included in the fifth element of the cost base. This would include costs incurred by an executor to obtain probate (see ATO Interpretative Decision ATO ID 2001/729).

If you acquired a CGT asset after 13 May 1997, the cost base of the asset does not include:

· any expenditure in the first, fourth or fifth element that you have claimed a tax deduction for in any year or did not claim a deduction for but can still claim it because the period for amending the relevant income tax assessment has not ended

Subsection 112-30(1A) of the ITAA 1997 explains that if you incur expenditure and only part of it relates to another element of the cost base or reduced cost base of a CGT asset, that element includes that part of the expenditure that is reasonably attributable to that element.

Subsection 128-15(5) of the ITAA 1997 provides that a beneficiary can include in the cost base or reduced cost base of the asset any expenditure that the legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

Application to your circumstances

It has already been established that the estate is not the relevant taxpayer in relation to any capital gain made on disposal of the X and Y shares or on transfer of the Z shares to the beneficiary.

Accordingly, as there will be no CGT consequences for the estate, it is not necessary to consider what costs can be included in the cost base of the shares for the estate.

However, as per subsection 128-15(5) of the ITAA 1997, the beneficiary can include in the cost base of the shares any expenditure that the LPR or executor would have been able to include at the time the asset passes to the beneficiary. These costs may include:

Obtaining probate and proving the will

The costs incurred by the LPR/executor to obtain probate (and proving the will) may be included in the fifth element of the cost base of an asset, and being that it relates to all the assets of the estate, it should be apportioned appropriately across the cost bases of all the assets of the estate, and not merely the shares.

Transferring or disposing of the shares

Costs incurred by the LPR/executor in transferring the shares of the estate to the beneficiary (or disposing of them as requested by the beneficiary, such as selling costs) may be included in the cost base of the shares as an incidental cost under the second element.

50% CGT discount

A 50% discount may be applied to a discount capital gain realised by an individual. In order to be considered a discount capital gain, the asset that gave rise to the capital gain must have been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

Subsection 115-30(1) of the ITAA 1997 explains that for the purposes of determining whether a capital gain made by on disposal of an asset qualifies for the CGT discount (that is, applying section 115-25 of the ITAA 1997) the section applies as if an entity (the acquirer) had acquired a CGT asset described in an item of the table at the time mentioned in the item. Item 4 of the table states that for a CGT asset that passed to the acquirer as the beneficiary of a deceased individual's estate, except one that was a pre-CGT asset of the deceased immediately before his or her death, the beneficiary is taken to have acquired the asset when the deceased acquired the asset.

Application to your circumstances

For the purposes of the CGT discount, the beneficiary of the deceased estate is taken to have acquired the asset when the deceased acquired the asset. Therefore, in this situation the beneficiary would satisfy the required ownership period of 12 months, and will be eligible to apply the 50% CGT discount to any capital gain made on disposal of the X, Y and Z shares.