Edited version of your written advice

Authorisation Number: 1051233351375

Date of advice: 7 June 2017

Ruling

Subject: Deceased estate

Question 1

Will the proposed Deed of Compromise constitute, when duly exercised by the parties, a deed of arrangement under and for the purposes of paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the Estate?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The deceased died on XX June 20XX.

Prior to the deceased’s death, the deceased gifted an interest in their home, valued at approximately $X.

Prior to the deceased’s death, the deceased gave amounts of cash to various parties (Monetary Payment).

The deceased left three wills which were variously executed on:

● XX January 20XX (will 1);

● XX February 20XX (will 2), and

● XX July 20XX (will 3).

Following negotiations the relevant parties have agreed to enter into a Deed of Compromise to distribute the assets of the estate in place of Will 2 and Will 3.

The proposed Deed of Compromise will include a provision requiring the executor of the estate to apply to the Supreme Court seeking a grant of probate for Will 1.

Whilst that Deed will be binding upon the parties at the time of execution, a condition precedent to the distribution of the assets of the Estate is that the Supreme Court grant probate of Will 1, failing which the obligations of the parties in accordance with the Deed will come to an end.

The Deed will provide an agreement between the parties as to the distribution of the estate which can be summarised as follows:

● The beneficiaries of Will 1, in their personal capacity (as beneficiaries of the estate) and in their capacity as executors of Will 1:

○ Will not make any claim to or in relation to the deceased’s home that was gifted prior to their death, and

○ Will not make any claim to or in relation to the Monetary Payment.

● The executors of Will 1, must from the estate of the deceased pay the relevant parties in equal shares the sum of $X. The payment shall be a charge upon the assets of the estate and raised out of or on the assets of the estate.

● Other than that provided by the terms of the deed of arrangement, the executors of Will 1, will administer the estate in accordance with the terms of that will.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 subsection 128-15(3)

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 subsection 128-20(1)

Income Tax Assessment Act 1997 paragraph 128-20(1)(d)

Reasons for decision

Summary

If the proposed arrangement, being an effective Deed of Compromise, is entered into as provided, it will mean that the trust property will be considered to pass to the beneficiaries in terms of paragraph 128-20(1)(d) of the ITAA 1997 and therefore there will be no CGT consequences for the relevant parties at that time.

Detailed reasoning

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or beneficiary in a deceased estate.

Section 128-10 of the ITAA 1997 provides that when a person dies, that person disregards a capital gain or loss from a CGT event happening to a CGT asset the person owned just before their death.

Section 128-15 of the ITAA 1997 operates when a CGT asset owned by a person just before death passes to the deceased's legal personal representative (trustee) or to a beneficiary in the deceased's estate.

Subsection 128-20(1) of the ITAA 1997 explains that a CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset in any of the following ways:

(a) under a Will of the deceased, or that Will as varied by a court order

(b) by operation of an intestacy law, or such a law as varied by a court order

(c) because it is appropriated to the beneficiary by the deceased's legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the deceased's estate, or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased's 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 deceased's estate (subsection 128-20(1) of the ITAA 1997).

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by the deceased's legal personal representative.

The word 'claim' is not defined in the ITAA 1997 and therefore it takes its ordinary meaning.

The Shorter Oxford English Dictionary defines a claim as:

1. ' A demand for something as due; an assertion of a right to something.

2. Right of claiming; right or title.'

It is considered that where a potential beneficiary asserts their right to the assets of the deceased estate by communicating this to the legal personal representative, a valid claim will be established.

A taxpayer is not required to commence legal proceeding in order to establish, for the purposes of paragraph 128-20(1)(d) of the ITAA 1997, that they have a valid claim to participate in the distribution of the assets of the estate (Taxation Ruling TR 2006/14 (TR 2006/14) para 37). The Commissioner considers that for the purposes of paragraph 128-20(1)(d) a taxpayer must generally enter into a deed of arrangement in respect of an asset prior to the legal personal representative completing the administration of the estate in respect of that asset.

We accept that the proposed Deed of Compromise meets the conditions outlined in paragraphs 35 to 37 of TR 2006/14.

Therefore, the parties to the proposed Deed of Compromise upon entering of the Deed of Release, are taken to have acquired the whole of the property of the estate under paragraph 128-20(1)(d) of the ITAA 1997.

The capital gain or capital loss made by the trustee when the asset passes is disregarded under subsection 128-15(3) of the ITAA 1997. This is because the requirements of paragraph128-20(1)(d) of the ITAA 1997 have been satisfied in that:

● the asset will be transferred to under an arrangement (Deed of Compromise), and

● you will provide consideration for the asset by way of the release by you of the Estate from any Family Provision Act claim. There will be not be an exchange or variation of any other assets of the Estate, and

● if applicable, any CGT liability arising as a result of the proposed transfer by your sibling of their half interest in the property to you.

What this means is that any capital gain or loss made by the Estate is disregarded.

The proposed Deed of Compromise provides for the beneficiaries of the will of the deceased to vary their respective entitlements in return for settling a claim to participate in the Estate. No consideration is being given by the beneficiaries as part of the settlement other than a variation or waiver of a claim to the assets that form part of the Estate. Further, the Estate is yet to be fully administered.

Accordingly, if the proposed arrangement, being an effective Deed of Compromise, is entered into as provided, it will mean that the trust property will be considered to pass to the beneficiaries in terms of paragraph 128-20(1)(d) of the ITAA 1997 and therefore there will be no CGT consequences for the relevant parties at that time.

Conclusion

The proposed Deed satisfies the requirements of section 128-20 of the ITAA 1997 as:

● it is an arrangement that is made by a deed;

● the arrangement is made between persons who may variously benefit from the Estate and accordingly constitute beneficiaries;

● the proposed Deed settles the rights of the beneficiaries to participate in the distribution of the Estate; and

● the consideration given by the relevant parties consists solely of the variation or waiver of a claim to one or more of the CGT assets of the Estate;

The payment of the legacy out of the Estate does not involve the passing of a CGT asset to the relevant parties. The entering into the proposed Deed and giving effect to it will not give rise to CGT event C2 or indeed any other CGT event occurring. This approach is consistent with the view expressed at paragraph 34 of Taxation Ruling TR 2006/14 as the interests of the “intended owners of those interests are treated as if they had not been bequeathed to them.”