Edited version of your written advice

Authorisation Number: 1013135986594

Date of advice: 9 December 2016

Ruling

Subject: Capital Gains Tax and deceased estates

Question 1

Will the allocation of half of each class of shares in Z Pty Ltd by the Trustees to X and Y respectively, result in the derivation of assessable income?

Answer:

No

Question 2

Will the transfer of half of each class of shares in Z Pty Ltd by the Trustees to X and Y result in the derivation of assessable income?

Answer:

No

Question 3 

Will X and Y each have a cost base for the parcel of shares in Z Pty Ltd transferred to them equal to half the market value of all the shares in Z Pty Ltd at the date of death of the deceased?

Answer:

Yes

This ruling applies for the following periods

Year ending 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

Prior to 20 September 1985 the deceased acquired shares in a number of different classes in Z Pty Ltd (the company).

The deceased passed away several years ago. At that time the deceased was the sole shareholder of the company.

The Will directed the Trustees to hold the shares in the company, paying the income from the shares to the deceased's spouse, and upon the spouse's death, the shares were then to be held on trust for X and Y (the beneficiaries) in equal shares as tenants in common.

The deceased's spouse has passed away.

The Trustees expect to transfer half of the shares in each class to each of the beneficiaries before 30 June 2017.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(1).

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 102-5(1).

Income Tax Assessment Act 1997 Subsection 128-10.

Income Tax Assessment Act 1997 Section 128-15.

Income Tax Assessment Act 1997 Subsection 128-15(1).

Income Tax Assessment Act 1997 Subsection 128-15(2).

Income Tax Assessment Act 1997 Subsection 128-15(3).

Income Tax Assessment Act 1997 Subsection 128-15(4).

Reasons for decision

Taxation of trusts

Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) requires the ascertainment of the net income of the trust estate as defined in subsection 95(1) of the ITAA 1936. The net income of the trust is then assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

Capital gains tax

Under subsection 102-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) your assessable income includes your net capital gain (if any) for the income year. A net capital gain is worked out in accordance with the method statement set out in subsection 102-5(1) of the ITAA 1997.

A capital gain or loss arises when a CGT event occurs. The most common CGT event is A1, disposal of a CGT asset, which is outlined in section 104-10 of the ITAA 1997.

Deceased Estate

Division 128 of the ITAA 1997 sets out what happens when a person dies and a CGT asset they owned just before dying devolves to their legal personal representative (LPR) (such as a trustee) or passes to a beneficiary of their estate.

Any capital gain or capital loss resulting from a CGT event in relation to an asset owned by the deceased person immediately prior to the time of death is disregarded (section 128-10 of the ITAA 1997).

If a CGT asset owned by the deceased immediately prior to their death devolves to their LPR or passes to a beneficiary of their estate, the LPR or the beneficiary (as the case may be) is deemed to have acquired the asset on the date of death of the deceased owner (subsection 128-15(2) of the ITAA 1997)

Any capital gain or capital loss made by the LPR when the asset passes to a beneficiary is also disregarded (subsection 128-15(3) of the ITAA 1997).

For assets acquired by the deceased prior to the 20 September 1985 the first element of the cost base (or reduced cost base) is the market value of the asset on the day the person died (subsection 128-15(4) of ITAA 1997).

Application to the circumstances in this case

In this case when the Trustees allocate and transfer ownership of each class of share in Z Pty Ltd to the beneficiaries as provided by the Will, any capital gain or capital loss made by the trust will be disregarded (subsection 128-15(3) of the ITAA 1997). Accordingly, no CGT liability will arise for the trust from the transfer.

Further the allocation or transfers of each class of shares by the Trustees to beneficiaries does not give rise to the derivation of assessable income to the beneficiaries or assessable income that forms part of the net income of the trust.

The beneficiaries are taken to have acquired the shares on the day the deceased died (subsection 128-15(2) of the ITAA 1997). As the deceased acquired the shares prior to the 20 September 1985 the first element of the cost base (or reduced cost base) is the market value of the shares on the day the person died (subsection 128-15(4) of ITAA 1997). Accordingly as each beneficiary is entitled to half of the total shares held by the trust, the cost base (or reduced cost base) for each beneficiary will be half the total market value of all the shares as determined at the date of death of the deceased. For each beneficiary the cost base of each class of share will have to be calculated as a proportion of the total cost base of the parcel of shares transferred to them.