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Edited version of your written advice
Authorisation Number: 1013033891449
Date of advice: 14 June 2016
Ruling
Subject: Capital gains tax
Question 1
Can any capital gain made by the estate on the disposal of the deceased's assets to the beneficiary be disregarded?
Answer
Yes.
Question 2
Did the beneficiaries trigger CGT events when they disclaimed their interests in the estate?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You are the executor of the deceased estate
The deceased's will appointed you as the executor of the estate to hold the shares and investments of the deceased on trust, where the income of the investments would be paid to you during your lifetime and on your death the investments would form part of the remainder of the estate.
In turn, the remainder of the estate would pass to the other beneficiaries.
A Deed of Family Arrangement was subsequently prepared. It was entered into prior to the completion of the administration of the estate.
The effect will be that you will directly receive all of the shares and investments (residuary of the estate) of the deceased and all income and capital appreciation in respect of the shares and investments.
Probate has since been granted.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 128-15
Income Tax Assessment Act 1997 - Section 128-20
Reasons for decision
Question 1
Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out special CGT rules for deceased estates.
Under Division 128 of the ITAA 1997 when a person dies a capital gain from a CGT event that results for a CGT asset the person owned just before dying is disregarded. The legal personal representative (or trustee of the estate) is taken to have acquired the asset on the day the deceased died. Under subsection 128-15(3) of the ITAA 1997 any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in the estate is disregarded.
Under paragraph 128-20(1)(d) of the ITAA 1997 a CGT asset passes to a beneficiary of the estate if the beneficiary becomes the owner of the asset under a deed of arrangement where:
(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the 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 the estate.
A taxpayer is not required to commence legal proceedings in order to establish, for the purposes of paragraph 128-20(1)(d), that they have a claim to participate in the distribution of the assets of the estate. A claim may be established by a potential beneficiary communicating to the trustee their dissatisfaction with the will.
The deed of arrangement must be entered into prior to the administration of the estate being completed unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entertained their application for family provision, or an extension of time in which to make such an application.
In your situation, the beneficiaries entered into a deed of family arrangement to revoke their interests in the property in favour of the property being transferred to the life interest holder as listed by the will. The deed will be entered into prior to the transfer of the deceased's assets. Under these circumstances the deed will satisfy paragraph 128-20(1)(d) of the ITAA 1997.
As a result, the assets will pass to a beneficiary and any capital gain that the trustee makes on the transfer is disregarded under subsection 128-15(3) of the ITAA 1997.
Question 2
Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests, sets out the Commissioner's views on whether a CGT event is triggered when a life or remainder interest in an asset is disclaimed by a beneficiary. It states that no CGT event happens to a life or remainder owner in respect of the effective disclaimer of their interest because if a life or remainder owner effectively disclaims their interest, they are retrospectively disentitled to it.
However, an effective disclaimer must be intentional and show unequivocally that the nominated life or remainder owner rejects their interest. The right to disclaim is lost if that person has engaged in positive conduct indicating an acceptance of their interest. The right may also be lost if it is not exercised within a reasonable time, in that someone who remains silent beyond the time when they may be expected to disclaim their interest may be presumed to have accepted it.
In this case, the beneficiaries explicitly disclaimed their interests in the estate in the Deed of Family Arrangement. As previously stated, the Deed of Family Arrangement was entered into prior to probate being granted and the subsequent transfer of the assets of the deceased. Therefore, no CGT event occurred when the beneficiaries disclaimed their interests in the estate.