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Edited version of your written advice
Authorisation Number: 1012835363250
Date of advice: 7 July 2015
Ruling
Subject: Capital gains tax event K3 - transfer of assets to a tax advantaged entity
Question
Will the executor of the Estate be required to include a capital gain in the final individual income tax return of the deceased where the assets of their estate are transferred to charitable organisations as tenants in common through an in specie distribution?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The deceased passed away sometime after 20 September 1985 and left a substantial portfolio of assets including cash, shares and real property.
The deceased was a resident of Australia for taxation purposes.
The deceased's will provides that after making some specific bequests to a third party, the residual Estate is to be held on trust for a number of charitable organisation in equal shares.
The charitable organisations are also deductible gift recipients (DGR's).
The specific bequests have been made to the third party.
A small quantum of the shares have been sold by the executor of the Estate for working capital purposes.
Probate has been applied for and granted by the Court.
The executor of the Estate made an interim distribution to the charitable organisations.
The executor of the Estate is seeking to finalise the administration of the Estate through an in specie transfer of the residual assets to the charitable organisations as tenants in common.
For the purposes of this private ruling, the shares and real property which are currently held by the executor of the Estate and which are the subject of this private ruling are referred to collectively as the "residual assets".
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 128,
Income Tax Assessment Act 1997 Section 30-15,
Income Tax Assessment Act 1997 Section 104-215 and
Income Tax Assessment Act 1997 Section 118-60.
Reasons for decision
Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the general rules that apply where capital gains tax (CGT) assets pass to beneficiaries in a deceased estate.
However, these rules do not apply where a CGT asset the deceased owned just prior to their death passes to a tax advantaged or tax exempt entity. In such circumstances, CGT event K3 will occur in accordance with section 104-215 of the ITAA 1997. The time of the event is just before the deceased dies, which means that any resulting capital gain or capital loss is accounted for in the final income tax return lodged on behalf of the deceased.
A tax advantaged or tax exempt entity is one whose ordinary and statutory income is exempt from income tax.
Section 118-60 of the ITAA 1997 provides that a capital gain or capital loss made from a testamentary gift that would have been deductible under section 30-15 of the ITAA 1997 if it had not been a testamentary gift is disregarded. Effectively, this means that if the deceased could have claimed a deduction for the gift had they not passed away, any capital gain or capital loss is disregarded.
Application to your circumstances
CGT event K3 happened just before the deceased passed away.
However as the charitable organisations are tax exempt entities that are DGR, the deceased would have been entitled to a deduction for such gifts had they not been testamentary gifts.
Accordingly, any capital gain or capital loss made as a result of the in specie distribution of the residual assets to the charitable organisations is disregarded pursuant to section 118-160 of the ITAA 1997.