Edited version of your written advice

Authorisation Number: 1051196696599

Date of advice: 20 March 2017

Ruling

Subject: CGT -Transfer of shares under a Will - “new owner” of underlying pre-CGT assets

Issue 1

Question 1

When the pre-CGT shares in both the first and second company pass to you under the Last Will of your spouse, will the first element cost base (or reduced cost base) of your shares be the market value of those shares as at the date of your spouse's death pursuant to item 4 of the table in subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

When the pre-CGT shares in both the first and second company pass to the trustee of the Trust under the Last Will of your spouse, will the first element cost base (or reduced cost base) of the trustee's shares be the market value of those shares as at the date of your spouse's death pursuant to item 4 of the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes

Question 3

When the post-CGT shares in the second company pass to you under your spouse's Last Will, will the first element cost base (or reduced cost base) of your shares be the cost base of those post-CGT shares as at the date of your spouse's death pursuant to item 1 of the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes

Question 4

When the post-CGT shares in the second company pass to the trustee of the Trust under the Last Will of your spouse, will the first element cost base (or reduced cost base) of the trustee's shares be the cost base of those post-CGT shares as at the date of your spouse's death pursuant to item 1 of the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes

Question 5

When the post-CGT shares of both the first and second company pass to the trustee of the Trust under your Last Will, will the first element cost base (or reduced cost base) of the trustee's shares be the cost base of your shares as at the date of your death pursuant to item 1 of the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes

Issue 2

Question 6

In relation to the pre-CGT properties held by the first company, when the shares in the first company pass to the trustee of the Trust under either the Last Will of your spouse or your Last Will, will the beneficiaries of the trust be regarded as the 'new owner' for the purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997?

Answer

Yes

Question 7

In relation to the pre-CGT properties held by the second company, when the shares in the second company pass to the Trust of the under either the Last Will of your spouse or your Last Will, will the beneficiaries of the trust be regarded as the 'new owner' for the purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

From the income year ending 30 June 2017 to the end of the income year in which the estate of the last to die of you or your spouse is fully administered.

The scheme commences on:

1 July 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. You and your spouse are residents of Australia.

2. Your spouse currently holds shares in two companies. The shares your spouse holds in the first company are all pre-CGT shares. The shares your spouse holds in the second company are both pre-CGT and post-CGT shares.

3. Both companies hold real properties on capital account. They hold a portfolio of farming, industrial and commercial properties.

4. Your spouse is currently the sole beneficial shareholder of both companies.

5. All the real properties are pre-CGT assets. They were acquired by the companies either directly or through various CGT rollovers.

The Trust

6. The Trust is a discretionary trust established in 2017.

7. A copy of the trust deed has been provided and forms part of the facts.

8. The Trust intends to act as an investment trust holding passive investments on capital account. The Trust does not intend to carry on a business or otherwise trade investments on a short term basis for the purpose of profit making.

9. However, the trustee has broad investment and other powers under the trust deed.

10. The beneficiaries of the Trust are (in accordance with the definitions in the trust deed):

● You, your spouse and your child; and

● Lineal descendants of you, your spouse and your child.

11. The trust deed also allows for the following beneficiaries to be added (within the definitions in the trust deed):

● The trustee of any trust which is nominated by the trustee and approved by the appointer where any of the beneficiaries is a beneficiary;

● Any company nominated by the trustee and approved by the appointer of which a beneficiary (including a trustee beneficiary) is a Member, director or secretary (where applicable);

● Any other person nominated by the trustee and approved by the Appointer, subject to the trust deed.

● A charity, a deductible gift recipient and an entity exempt from income tax nominated by the trustee and approved by the appointer.

12. The trust deed excludes specified entities from being beneficiaries of the Trust. These include the siblings of the beneficiaries and the spouses of such siblings (within the definitions in the trust deed.)

13. Any company that would be nominated in the future would be expected to be a member of the same family group for the purposes of any family trust election that the trustee of the Trust is expected to make following its establishment.

14. On the vesting date the trustee will stand possessed of the then trust fund for the beneficiaries then living or their descendants' then living in equal shares. If none of the persons are living, then to the charitable foundation established under the Last Will if this in fact has been established, and if it has not been, to the charitable trusts to be established on the terms set out in the Last Will of the last to die of you, your spouse or your child.

Codicils to the last will of you and your spouse

15. The Codicils amend the Last Wills of you and your spouse, respectively, by specifically dealing with the shares in the first and second company.

16. A copy of the Codicils has been provided and forms part of the facts.

Assumptions

● The conditions for each of the roll-overs were satisfied, and roll-over relief was available for each of the relevant transfers.

● Your spouse is an Australian resident just before their death.

● You are an Australian resident just before your death.

● The assets (specified real properties) are not revenue assets or trading stock prior to the date of death of you or your spouse.

Relevant legislative provisions

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(4)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-15(4)

Income Tax Assessment Act 1997 subsection 149-15(5)

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(1A)

Income Tax Assessment Act 1997 subsection 149-30(2)

Income Tax Assessment Act 1997 subsection 149-30(3)

Income Tax Assessment Act 1997 subsection 149-30(4)

Income Tax Assessment Act 1936 section 160ZZN

Income Tax Assessment Act 1936 section 160ZZS

Reasons for decision

Issue 1

Question 1

Summary

When the pre-CGT shares of both companies pass to you under the Last Will of your spouse, the first element cost base (or reduced cost base) of your shares will be the market value of those shares' cost base (or reduced cost base) on the date of your spouse's death pursuant to item 4 of the table in subsection 128-15(4) of the ITAA 1997.

Detailed reasoning

Section 128-15 of ITAA 1997 sets out what happens to a CGT asset when the owner dies and it devolves to their legal personal representative, or passes to a beneficiary in their estate.

If you acquire an asset owned by a deceased person as their beneficiary, you are taken to have acquired the asset on the day the person died

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the beneficiary.

For instance, for pre-CGT assets, the first element of the asset's cost base (or reduced cost base) in the hands of the beneficiary will be the market value of the asset on the date of death.

Under the codicil to your spouse's Will, you will be given the shares owned by your spouse at the time of their death, if you survive them for 30 days. Provided they maintained their current holdings in the companies the shares will pass to you under their Last Will.

Your spouse acquired the shares prior to 20 September 1985, either at acquisition or by rollover.

Where you receive the shares under your spouse's Last Will, by operation of subsection 128-15(2) of the ITAA 1997 you will be taken to have acquired the pre-CGT shares on the day of their death.

Effectively this means there will be a refresh of the pre-CGT shares on the day of acquisition and they will stop being pre-CGT assets. According to item 4 of the table in subsection 128 15(4) of the ITAA 1997 the first element cost base (or reduced cost base) of the shares in your hands as beneficiary, will be the market value of the shares on the day of your spouse's death.

Question 2

Summary

When the pre-CGT shares of both companies pass to the trustee for the Trust under the Last Will of your spouse, the first element cost base (reduced cost base) of the trustee's shares will be the market value of those shares on the date of your spouse's death pursuant to item 4 of the table in subsection 128-15(4) of the ITAA 1997.

Detailed reasoning

Under the codicil to your spouse's Last Will, the trustee for the Trust will be given all shares owned by your spouse at the time of their death, where you do not survive your spouse for 30 days but your child or any of their issue does. Provided your spouse maintains their current holdings in the companies these shares will pass to the Trust under their Last Will.

Where the trustee for the Trust receives the pre-CGT shares of both companies under your spouse's Last Will, by operation of subsection 128-15(2) of the ITAA 1997, the trustee will be taken to have acquired the shares on the day of their death.

Effectively this means there will be a refresh of the pre-CGT shares on the day of acquisition and they will stop being a pre-CGT asset. According to item 4 of the table in subsection 128-15(4) of the ITAA 1997 the first element cost base (or reduced cost base) of those shares, in the hands of the trustee as beneficiary, will be the market value of the shares on the day of your spouse's death.

Question 3

Summary

When the post-CGT shares in the second company pass to you under the Last Will of your spouse, the first element of the cost base (or reduced cost base) of those shares in your hands will be the cost base of the shares on the date of your spouse's death (item 1 of the table in subsection 128-15(4) of the ITAA 1997).

Detailed reasoning

If you are a beneficiary and acquire an asset owned by a deceased person under a Will, you are taken to have acquired the asset on the day the person died. For post-CGT assets, the first element of the asset's cost base (or reduced cost base) in the hands of the beneficiary will be the cost base of the asset on the date of death.

Under the codicils to your spouse's Last Will, if you survive them for 30 days, you will be given all the shares owned by your spouse, this includes post-CGT shares in the second company.

Where the post-CGT shares of the second company pass to you under the Last Will of your spouse by operation of subsection 128-15(2) of the ITAA 1997, you will be taken to have acquired those shares on the day of their death. According to item 1of the table in subsection 128-15(4) of the ITAA 1997, the first element cost base (or reduced cost base) of the post-CGT shares in your hands as beneficiary, will be the cost base (or reduced cost base) of the shares on the day of their death.

Question 4

Summary

When the post-CGT shares in the second company pass to the trustee for the Trust under the Last Will of your spouse, the first element cost base (or reduced cost base) of those shares in the hands of the trustee will be the cost base (or reduced cost base) of the shares as at the date of their death (item 1 of the table in subsection 128-15(4) of the ITAA 1997).

Detailed reasoning

If you are a beneficiary and acquire an asset owned by a deceased person under a Will, you are taken to have acquired the asset on the day the person died. For post-CGT assets, the first element of the asset's cost base (or reduced cost base) in the hands of the beneficiary will be the cost base (or reduced cost base) of the asset on the date of death.

Under the codicils to the Last Will of your spouse, if you do not survive them for 30 days after their death, the shares will pass to the trustee for the Trust, this includes post-CGT shares in the second company. By operation of subsection 128-15(2) of the ITAA 1997, the trustee will be taken to have acquired the shares on the day of their death.

According to item 1of the table in subsection 128-15(4) of the ITAA 1997, the first element of the cost base (or reduce cost base) of the post-CGT shares in the hands of the trustee as beneficiary, will be the cost base (or reduced cost base) of the shares on the day of your spouse's death.

Question 5

Summary

When the post-CGT shares of both companies pass to the trustee for the Trust under your Last Will, the first element of the cost base (or reduced cost base) of those shares in the hands of the trustee will be the cost base (or reduced cost base) of your shares on the date of your death (item 1 of the table in subsection 128-15(4) of the ITAA 1997).

Detailed reasoning

If you ae a beneficiary and acquire an asset owned by a deceased person under a Will, you are taken to have acquired the asset on the day the person died. For post-CGT assets, the first element of the asset's cost base (or reduced cost base) in the hands of the beneficiary will be the cost base (or reduced cost base) of the asset on the date of death.

Under the codicils, if you survive your spouse for 30 days after their death, you will be given all the company shares owned by your spouse. Provided they maintain their current holding in the companies these shares will pass to you under their Last Will. Furthermore, under your Last Will those shares will subsequently pass to the trustee for the Trust on your death, where your child or any of their issue survives you for more than 30 days.

Where the post-CGT shares of both companies pass to the trustee under your Last Will by operation of subsection 128-15(2) of the ITAA 1997, the trustee will be taken to have acquired those shares on the day of your death. According to item 1of the table in subsection 128-15(4) of the ITAA 1997, the first element cost base (or reduce cost base) of the shares in the hands of the trustee as beneficiary, will be the cost base (or reduced cost base) of the shares on the day of your death.

Issue 2

Question 6

Summary

When the first company shares pass to the trustee of the Trust under either your Last Will or the Last Will of your spouse, the beneficiaries of the Trust will be regarded as the 'new owner' of the pre-CGT assets held by the company for the purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997.

Detailed reasoning

Division 149 of the ITAA 1997 determines when an asset stops being a pre-CGT asset. The rules for assets held by non-public entities are found in Division 149-B.

Under subsection 149-30(1) of the ITAA 1997 the asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

The terms 'ultimate owner' and 'majority underlying interest' are central to the provision.

'Ultimate owner' means an individual or other entities specified in subsection 149-15(3) of the ITAA 1997.

'Majority underlying interests' is defined in subsection 149-15(1) of the ITAA 1997 to mean more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in the asset and in any ordinary income that may be derived from the asset.

Subsections 149-15(4) and 149-15(5) of the ITAA 1997 establish when an ultimate owner indirectly has a beneficial interest in the pre-CGT asset through other entities.

There are special rules that apply when the underlying interests of a person in an asset pass, by reason of that person's death, to another natural person. Specifically, subsections 149-30(3) and 149 30(4) of the ITAA 1997 provide that if a person (new owner) holds an interest in an asset because it was transferred to them because of the death of a person, the person is taken to have held the underlying interests of the former owner for the period the former owner held them.

Subsection 149-30(2) of the ITAA 1997 provides that if the Commissioner is satisfied or thinks it reasonable to assume that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case.

Application to discretionary trusts

ATO ID 2003/778 Income Tax: CGT: majority underlying ownership and deceased estate - discretionary trust - beneficiary a 'new owner,' considers whether beneficiaries of a discretionary trust can be an ultimate owner (new owner) for the purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997.

Prima facie, the interest of a beneficiary of a discretionary trust in the asset would not qualify as an 'underlying interest' for the purposes of section 149-15(2) because under ordinary legal concepts no beneficiary of a discretionary trust is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or appoint capital.

However, drawing on the reasoning in IT 2340 Income tax: Capital gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date, ATO ID 2003/778 concludes that section 160ZZS of the ITAA 1936 (former section), by its terms, necessarily supplants normal legal concepts of interests in assets. Thus, for the purposes of that section a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets.

This approach is also consistent with IT 2340 where it states at paragraph 2:

“underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be “looked through” in order to determine whether there has been a change in the effective interests of natural persons in the assets.”

Therefore, where an interest in an asset is given to a trustee upon the death of the former owner, the beneficiaries of the trust - being individuals - will become the 'new owners', as new ultimate owners of the asset, through the trust.

The pre-CGT assets held

The company holds a number of properties it acquired prior to 20 September 1985.

The owners of the company just before 20 September 1985 were you and your spouse.

The share structure has not changed since that time up to today. Therefore, the ultimate owners with majority underlying interest in the assets have not changed.

Shares given to the Trust under your spouse's Last Will

Under your spouse's Last Will, the trustee for the Trust will be given shares in the company where you have not survived them for 30 days but your child or their issue has.

In event of your spouse's death, subsections 149-30(3) and 149-30(4) of ITAA 1997 will apply when working out the majority underlying interest of the pre-CGT assets held by the company.

The 'new owner' will stand in the shoes of your spouse as ultimate owner and their ownership will be taken to have begun when their ownership begun.

On the terms of the codicils and the current beneficiaries of the Trust, on the date of your spouse's death the beneficiaries of the Trust, namely your child and their family (lineal descendants), will become the 'new owners' of the pre-CGT assets for the purposes of subsections 149-30(3) and 149 30(4) of ITAA 1997.

Because of these subsections the death of the ultimate owner will not trigger a change in the majority underlying interest of the pre CGT assets held by the company. The assets will retain their pre-CGT status when the shares are given to the Trust under your spouse's Last Will.

Shares given to the Trust under your Last Will

Where the shares in the company are given to you as beneficiary under your spouse's Last Will, subsections 149-30(3) and 149-30(4) of ITAA 1997 will apply and you will stand in for them as ultimate owner (new owner).

When the shares are subsequently transferred to the trustee for the Trust on the day of your death under the codicils to your Last Will, the same provisions will apply, and as described above the majority underlying interests in the assets will be taken to have remained with the same ultimate owners. The beneficiaries of the Trust will become the 'new owners' and the assets will not stop being pre-CGT assets.

Question 7

Summary

When the shares of the second company pass to the trustee of the Trust under either your Last Will the Last Will of your spouse, the beneficiaries of the Trust will be regarded as the 'new owner' of the pre-CGT assets held by the company for the purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997.

Detailed reasoning

As described in Question 6, the operation of Subdivision 149-B of the ITAA 1997 is modified when underlying interests of a person in an asset pass, by reason of that person's death, to another natural person.

Therefore, when the shares are passed to the trustee for the Trust either under your Last Will or your spouse's Last Will, subsections 149-30(3) and 149-30(4) of ITAA 1997 will apply and the beneficiaries of the trust will stand in for you or them as ultimate owners (new owners) of the pre-CGT properties held by the company.

The effect of these provisions means that the percentage of underlying interests held by the deceased is deemed to have been held by the person to whom they pass, in this case the beneficiaries of the Trust, as the 'new owner'. Therefore, the death of you or your spouse will not trigger a change in the majority underlying interest of the pre CGT properties held by the company.