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Edited version of your written advice
Authorisation Number: 1012708325291
Ruling
Subject: CGT - deceased estate
Question 1
Will X make a capital gain or loss if the shares are transferred to the remaining beneficiaries?
Answer
No
Question 2
Will the acquisition date of the shares for capital gains tax (CGT) purposes for X and the remaining beneficiaries be the date of the deceased's death?
Answer
Yes
Question 3
Will dividends paid prior to the transfer of the shares to the remaining beneficiaries form part of the net income of the testamentary trust?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
The deceased's spouse, X, was the executor of the deceased's estate.
At the reading of the will, X's solicitor incorrectly advised that the deceased's will left a monetary amount to each of the deceased's grandchildren and the residue of the estate was left to X.
The will actually provided that a monetary amount was to be left to each of the deceased's grandchildren and that the residue of the estate was to be held on trust for X and the deceased's children, (collectively referred to as 'the remaining beneficiaries').
Based on their understanding that they were the sole beneficiary of the residue of the estate, X requested that their stock broker transfer the deceased's share portfolio into X's name.
X subsequently advised their solicitors to finalise the remainder of the estate.
X's solicitors requested the names and addresses of all the remaining beneficiaries to enable them to organise the transfer of the remaining assets. It was at this point in time that X and the remaining beneficiaries became aware of their incorrect understanding of the terms of the will.
It is intended to transfer the shares from the deceased's share portfolio to the remaining beneficiaries to give effect to the deceased's will, however you have been advised to obtain taxation advice before this transfer takes place.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 128-20
Reasons for decision
Under Division 128 of the ITAA 1997 when a person dies a capital gain or capital loss from a capital gains tax (CGT) event that results from a CGT asset the person owned just before dying is disregarded. In accordance with subsection 128-15(2) of the ITAA 1997, a legal personal representative (LPR) or a beneficiary is taken to have acquired the asset on the day the deceased died. Any subsequent disposal by the LPR or beneficiary is a CGT event which will result in a capital gain or loss.
Any capital gain or loss made by the trustee of a deceased estate (or LPR) is disregarded if an asset of the estate passes to a beneficiary in accordance with section 128-20 of the ITAA 1997. An asset can 'pass' to a beneficiary within the meaning of section 128-20 of the ITAA 1997 if the beneficiary becomes absolutely entitled to the asset (Taxation Determination TD 2004/3).
The trustee of a trust created under a will (a testamentary trust) is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997 (ATO Practice Statement Law Administration PS LA 2003/12).
Application to your circumstances
In this case, the deceased's share portfolio was left to X and the remainder beneficiaries.
Although legal title was transferred to X, we consider that based on the terms of the will, X could only have held the shares as trustee of the testamentary trust created by the will. Accordingly, when the shares are transferred to the remaining beneficiaries, any capital gain made by the trustee of the testamentary trust will be disregarded under subsection 128-15(3) of the ITAA 1997 as the shares will pass under the terms of the deceased's will.
Additionally, in accordance with subsection 128-15(2) of the ITAA 1997, X and the remaining beneficiaries will be taken to have acquired the shares on the date of the deceased's death.
As the shares have been held by X as trustee of the testamentary trust, any dividends paid prior to the transfer of the shares to the remaining beneficiaries will form part of the net income of the testamentary trust. X and the remaining beneficiaries may be assessed on these amounts depending on to what extent they are presently entitled to income of the testamentary trust.