Edited version of your written advice

Authorisation Number: 1051200001135

Date of Advice: 23 March 2017

Ruling

Subject:Trust - Deceased estate

Question 1:

Does the Commissioner consider Asset A was acquired in XXXX, not by the Estate of Person A, but by a residual trust fund of the estate (Trust A)?

Answer: Yes.

Question 2:

Will the capital gain made by Trust A on the sale of Asset A be disregarded in determining the net income of the trust?

Answer: Yes.

Question 3:

Will any capital gain otherwise arising to the non-resident beneficiaries on the termination of their interests in Trust A by payment of their respective entitlements be disregarded?

Answer: Yes.

Question 4:

Is the capital gain arising from CGT event A1 in relation to Asset B required to be included in beneficiary D's tax return?

Answer: No, refer to the decision at question 5 below.

Question 5:

Is the capital gain arising from CGT event A1 in relation to Asset B required to be included in the net income of the Estate of Person C?

Answer: Yes.

Question 6:

Will the Commissioner accept that the administration of the Estate of Person C was not complete as at 30 June XXXX?

Answer: Yes.

Question 7:

Will any capital gain otherwise arising to beneficiary D on the termination of her interest as residuary beneficiary in the Estate of Person C be disregarded?

Answer: Yes.

Question 8:

Does the Commissioner accept as reasonable the Trustees' method of apportionment of the sale proceeds to each of the assets A and B which were sold in one transaction?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

Person A:

Person A died several decades ago.

The Executor of Person A's Will was Person B.

Person B died a few years after Person A.

Person C replaced Person B as Executor of Person A's Will.

Person C was the only child of Person A.

The Will of Person A was granted probate.

Relevantly, the Will provided as follows:

● Person A devises and bequeaths all real and personal property under the Will to be held on trust for the trustee to sell, call in and convert to money

● Out of the moneys to arise from such sale calling in and conversion the trustee shall pay or provide for Person's A's debts, funeral and testamentary expenses and all probate estate and other duties payable in respect of the estate. Further, the trustee shall hold the residual of any monies, investments and the unsold part of the estate upon trust to pay income to the following two successive life tenant beneficiaries Persons B and C.

● The remainder beneficiaries were to be determined by the exercise of a general power of appointment vested in Person C.

The residuary capital of the Estate of Person A was cash and term deposits.

Prior to 20 September 1985 Person C as Trustee of the Estate of Person A acquired Asset A using part of the residual of the Estate of Person A.

There were no significant improvements to Asset A since 20 September 1985.

Person C:

Person C died a few years ago.

Person C's Will was granted probate.

There are a number of Trustees of Person C's Estate.

Person C had no children.

Relevantly, Person C's Will provides as follows:

● An exercise of the general power of appointment vested in Person C under The Will of Person A to appointed the residuary trust fund (of the Estate of Person A) in two equal parts to beneficiaries D and E as income beneficiaries and the children of beneficiary E as remainder beneficiaries in equal shares.

● Asset B (which was acquired by Person C prior to 20 September 1985) was bequeathed to beneficiary D;

● the residue of Person C's Estate was also bequeathed to beneficiary D;

● Person C's Will contained instructions in respect to pecuniary legacies and specific bequests.

Beneficiaries D and E are related to each other and are also related to Person C.

Beneficiary D does not have any children.

Beneficiaries D and E; E's spouse and the children of E reside in country K and are non-residents for Australian taxation purposes.

Assets A and B were sold by the Trustees for an un-dissected price.

At the time of the sale of Asset B, Person C's debts had not been fully paid nor had all the pecuniary legacies and specific bequests satisfied.

The proceeds from the sale of assets A and B were received in the following income year.

A valuation of assets A and B was undertaken by a registered valuer to determine the market values at the date of death of Person C.

The Trustees of Trust A and the Estate of Person C propose to apportion the sale proceeds to each asset using a particular method.

After the sale of Asset B was entered into, a relative of Person C notified the Trustees of Person C's Estate that they were considering lodging a claim against the Estate. The potential claim was settled by informal negotiation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 98(3)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 116-40(1)

Income Tax Assessment Act 1997 Section 128-10

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

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

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-40

Income Tax Assessment Act 1997 Subsection 855-40(2)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

The Estate of Person A and Trust A

Under Person A's Will, after payment of all of the debts, funeral and testamentary expenses, probate expenses and other duties payable in respect of the estate, whatever was left the Trustee was instructed to hold and maintain for the benefit of specified life tenants and remainder beneficiaries. We consider that this residual trust fund (Trust A) is a testamentary trust and it was this trust that acquired Asset A prior to 20 September 1985.

As Asset A is a pre-CGT asset of Trust A, the Trustees can disregard the capital gain made from the disposal of the asset during the income year.

Termination of the non-resident beneficiaries' interests in Trust A

Upon Person C exercising the general power of appointment under Person A's Will, the remainder beneficiaries (D and E) had a fixed entitlement to all the income and capital of the trust. Accordingly, Trust A is a fixed trust. Therefore, beneficiaries D and E (being non-resident beneficiaries) are able to disregard the capital gain made in respect of the ending of their interests in Trust A under subsection 855-40(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

The Estate of Person C

We acknowledge the Trustee's contentions that beneficiary D should be assessed on any gain as beneficiary D was specifically entitled to Asset B under Person C's Will.

However, it is the view of the Commissioner that beneficiary D was not absolutely entitled to Asset B as a beneficiary of Person C's Estate as they did not have an interest in the Estate's assets before the completion of the administration of the Estate.

Taxation Ruling TR 2004/D25 states the following:

Deceased estates

72. A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid, see Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692.

Also, Taxation Ruling IT 2622 states:

13. Until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in any specific investment forming part of the estate or in the income from any such investment. Both corpus and income are the property of the executors or administrators: Lord Sudeley v. Attorney-General [1897] A.C. 11; Dr Barnardo's Homes National Incorporated Association v. Commissioners for Special Purposes [1921] 2 A.C. 1. See also Pajels v. MacDonald (1936) 54 CLR 519 at 526; Corbett v. I.R.C. (1937) 4 All E.R. 700 at 707 and C.S.D. (Qld) v. Livingston (1964) 112 CLR 12.

As at 30 June XXXX, the administration of the Estate had not reached the stage where Person C's debts had been fully paid; nor had all the pecuniary legacies and specific bequests been satisfied.

Given these facts it is reasonable to conclude that the administration of Person C's Estate was not completed as at 30 June XXXX. Accordingly, beneficiary D was not absolutely entitled to Asset B.

As the asset was part of Person C's deceased estate, the Trustees are taken to have acquired it the day Person C died (subsection 128-15(2) of the ITAA 1997).

As Asset B was acquired by Person C prior to 20 September 1985, the first element of the asset's cost base in the hands of the Trustees is the market value of Asset B on the day Person C died (item 4 in the table of subsection 128-15(4) of the ITAA 1997).

CGT event A1 happened to Person C's Estate when the Trustees disposed of Asset B. Any capital gain or loss made by the Trustees of Person C's Estate on the sale of Asset B will form part of the income of Person C's Estate in the income year when the sale contract was entered into and not in the income year when settlement occurred. This accords with the Commissioner's view at paragraph 1 of Taxation Determination TD 94/89 which states:

that where the contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled.

Termination of Beneficiary D's interest as residuary beneficiary in the Estate of Person C

Beneficiary D has a fixed entitlement to the income and capital of Person C's Estate as the residuary beneficiary. Accordingly, Person C's Estate is a fixed trust. Therefore, Beneficiary D (being a non-resident beneficiary) is able to disregard the capital gain made in respect of the ending of their interest in Person C's under subsection 855-40(2) of the ITAA 1997.

Proceeds for the sale of assets A and B

Under subsection 116-40(1) of the ITAA 1997, an apportionment rule applies where a payment is received in connection with a transaction that relates to more than one CGT event. In such cases, the capital proceeds must be apportioned to determine the amount of capital proceeds that are reasonably attributable to the CGT event.

Example:

You sell a block of land and a boat for a total of $100,000. This transaction involves 2 CGT events.

The $100,000 must be divided among the 2 events. The capital proceeds from the disposal of the land are so much of the $100,000 as is reasonably attributable to it. The rest relates to the boat.

In this case, the assets were sold in one transaction for a lump sum. Under subsection 116-40(1) of the ITAA 1997, the sale proceeds must be apportioned to determine the amounts reasonably attributable to each asset using any approach that is appropriate in the circumstances of the particular case.

The Trustees have proposed a particular method to apportion the sale proceeds.

Having regard to the circumstances in the present case, the Commissioner considers the Trustees' proposal to be a reasonable apportionment method.