Edited version of your written advice

Authorisation Number: 1051195136436

Date of advice: 28 February 2017

Ruling

Subject: CGT - K3 Event

Question 1

Are you required to include a net capital gain (or loss) in relation to the shares and units that were acquired the Deceased after 19 September 1985, and will be transferred the Beneficiary, in the Deceased's date of death return?

Answer

Yes.

Question 2

In calculating the net capital gain or loss referred to in Question 1, can the 50% discount be applied in relation to any shares and units that were acquired by the Deceased at least 12 months prior to their death and do not have an indexed cost base?

Answer

Yes.

Question 3

Will the shares and units that were acquired by the Deceased prior to 20 September 1985, and will be transferred to the Beneficiary, be subject to any income tax, including capital gains tax?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased died.

The assets at date of death included: shares in companies and units in public trusts which are listed on the Australian Stock Exchange, as well as cash on term deposit, and cash otherwise on deposit with other Australian financial institutions.

In the will, the Deceased left the whole of the estate to beneficiaries in equal shares.

One of the beneficiaries of the will (the Beneficiary) is a non-resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 subsection 104-215(1)

Income Tax Assessment Act 1997 subsection 104-215(2)

Income Tax Assessment Act 1997 subsection 104-215(3)

Income Tax Assessment Act 1997 subsection 104-215(4)

Income Tax Assessment Act 1997 subsection 104-215(5)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 855-15

Reasons for decision

Question 1

Detailed reasoning

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Generally, where a change of ownership occurs because a person dies, and an asset passes from their legal personal representative to a beneficiary, any capital gain or capital loss made on the change of ownership is disregarded.

However, any capital gain or capital loss is not disregarded where the deceased's beneficiary of an asset is a non-resident of Australia for taxation purposes and the asset is not “taxable Australian property” (section 104-215 of the ITAA 1997).

CGT event K3

CGT event K3 happens if a CGT asset owned by a person who was an Australian resident for tax purposes just before they died, passes to a beneficiary in their estate who is, when the asset passes, a non-resident of Australia for taxation purposes and the asset is not 'taxable Australian property'(in the hands of the non-resident beneficiary) (section 104-215 of the ITAA 1997).

Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to trigger just before the deceased's death. Where CGT event K3 is triggered, the trustee of the deceased estate will be required to calculate any capital gain or capital loss made on post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died.

A capital gain is made if the market value of the asset on the day the deceased died is more than the assets cost base. A capital loss is made if that market value is less than the assets reduced cost base. This explanation is provided in subsection 104-215(4) of the ITAA 1997.

In this case, the Deceased was a resident of Australia at the time of their death. One of the beneficiaries was a non-resident at the time of death. The assets in question (shares and units in unit trusts) are not 'taxable Australian property' in the hands of the non-resident beneficiary. Accordingly CGT event K3 will have been triggered.

With respect to the shares that are subject to CGT, they are acquired by the non-resident beneficiary and the time of the event is just before the Deceased died. Any capital gain or capital loss is taken into account in their date of death return. The cost base of the asset in the hands of the non-resident beneficiary is the market value of the shares at the deceased's date of death.

Question 2

Detailed reasoning

There are several requirements that must be met in order for someone to be eligible for a discount on the disposal of their CGT asset (sections 115-10, 115-15, 115-20 and 115-25 of the ITAA 1997). The requirements are that:

● the taxpayer is an individual; and

● the CGT event has occurred after 21 September 1999; and

● the cost base of the CGT asset must not have been worked out with indexing at any time; and

● the taxpayer must have owned the asset at least 12 months prior to the CGT event occurring.

In the Deceased's circumstances they were an individual and, as a result of transferring the shares and units to the Beneficiary, CGT K3 event will be triggered just before their death in October 20XX. Providing the cost base of the shares and units in unit trusts have not been calculated using the indexation method, and have been owned by the Deceased for a period of at least 12 months, then the 50% discount will be applicable.

Question 3

Detailed reasoning

Subsection 104-215(5) of the ITAA 1997 provides that a capital loss or gain is disregarded if you acquired the asset before 20 September 1985. Accordingly, in this case, the transfer of any shares or units in unit trusts that were acquired by the Deceased prior to 20 September 1985 will not be assessable income on the Deceased's date of death return.