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Edited version of your written advice
Authorisation Number: 1051503422690
Ruling
Subject: Capital gains tax and testamentary trusts
Question 1
Will the Commissioner treat the Trustees in the same way as a personal legal representative in relation to section 128-15(3) of the Income Tax Assessment Act 1997?
Answer
Yes
Question 2
Can any capital gain that arises in relation to the proposed transfers of interests in Properties A, B and C between the Testamentary Trusts be disregarded?
Answer
Yes
Question 3
Can any capital gain that arises from the proposed transfers of interests in Property X between the Testamentary Trusts be disregarded?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 2018
Relevant facts and circumstances
The deceased acquired Properties A, B, C and X after 19 September 1985
The deceased died leaving a will.
The will provides that the residuary of the estate was to be divided equally between the deceased’s three children as tenants in common.
The Testamentary Trusts were established for each of the children in accordance with the Will.
Two of the children are the executors of the Estate and trustees of the Testamentary Trusts.
The Properties formed part of the residuary of the estate and were bequeathed to the Testamentary Trusts under the Will.
In 20XX, the Executors administered the Estate and as part of this administration, transferred legal title to the Properties to the two children as trustees for the Testamentary Trusts.
The Estate was administered such that each Testamentary Trust received a one third share in the residuary estate under the Will comprising the Properties.
The two children were registered on the title for each of the Properties to reflect a 33.33% interest in the Properties held by each Testamentary Trust.
Prior to transferring the Properties, the Executors received incorrect and incomplete legal advice as to the administration of the Estate and powers in the Will. They received advice from advisors indicating that, despite their preferred intention to hold a whole property instead of a one third interest in each property, that this could not be done.
The Will contains an appropriation power which allows interests in the Properties to be distributed amongst the beneficiaries to allow each beneficiary to hold sole ownership of a particular Property, rather than a one third interest in the Property.
Under the Will, the testamentary trusts are made beneficiaries of each other.
Proposed Transactions
The proposal is that there will be a transfer of interests in Properties A, B and C between the Testamentary Trusts. Also, Property X will be divided into separate assets then the one third interests in the new separate assets will be transferred between the Testamentary Trusts so that each owns entire assets rather than fractional interests.
The purpose of the proposed transactions is to enable each Testamentary Trust to have sole ownership (that is, a 100% interest) of titles in the Properties, to give effect to the parties’ original intention of having each Testamentary Trust owning whole titles rather than a fractional interest in each title.
There will be no monetary or non-monetary consideration that will be paid or provided by any Testamentary Trust for the receipt of real property interests from another Testamentary Trust.
The values of the interests in the Properties held by each of the Testamentary Trusts on completion of the Transactions will be approximately equal.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 128-15(3)
Reasons for decision
All the legislative references that follow are to the Income Tax Assessment Act 1997.
Division 128 deals with the CGT consequences when the owner of a CGT asset dies.
Generally, any capital gain or capital loss from a CGT event that results for an asset owned by a person just before their death is disregarded (section 128-10).
Section 128-15 sets out the CGT consequences for a CGT asset owned by a deceased person just before dying that:
(a) devolves to a legal personal representative; or
(b) passes to a beneficiary of that person’s estate.
The term ‘legal personal representative’ is defined in subsection 995-1(1) and relevantly includes, ‘an executor or administrator of an estate of an individual who has died…’
Section 128-20 defines when a ‘CGT asset passes to a beneficiary’ in a person’s estate. This will relevantly happen if the person becomes the owner under the deceased’s will (paragraph 128-20(1)(a)).
Subsection 128-20(2) provides that a CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your legal personal representative transfers it under a power of sale.
Subsection 128-15(3) provides that any capital gain or capital loss the legal personal representative makes if the asset ‘passes to a beneficiary in your estate’ (as defined in section 128-20) is disregarded.
Effect of Practice Statement PS LA 2003/12
Law Administration Practice Statement PS LA 2003/12 confirms that:
…the Commissioner will not depart from the ATO's long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3). (Paragraph 2)
For PS LA 2003/12 to apply, the trust in question must be a testamentary trust. In the present case, the trusts are testamentary trusts as they were created under the terms of the Will.
PS LA 2003/12 also confirms the Commissioner’s longstanding administrative practice of not recognising any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).
The present situation is similar to that in Example 2 of PS LA 2003/12. In that example, the beneficiaries of the testamentary trust included the trustees of other trusts and the trustee of the testamentary trust validly transferred some of the deceased’s assets to one of those trustees. The practice statement states that the Commissioner accepts that the transfer would not result in a CGT event happening to the trustee of the testamentary trust if the trustee of the other trust agrees that their acquisition cost for the assets is equal to the cost base for the trustee of the testamentary trust.
In the present case, each of the three Testamentary Trusts is a beneficiary of each of the other Testamentary Trusts. The proposed transfers of the deceased’s assets between the Testamentary Trusts are therefore from a testamentary trust to a beneficiary of the testamentary trust which is in line with PS LA 2003/12.
After the proposed transfer of interests in the Properties between the Testamentary Trusts, each property will be solely owned by a Testamentary Trust. The end result will be an equal distribution of value of the deceased’s assets being given to the beneficiaries. This will be in accordance with the Will.
The Properties are not being disposed of to third parties. The individuals involved are all family members of the deceased who are beneficiaries under the Will and the Testamentary Trusts involved were all created under the Will. CGT event K3 will not apply as none of the parties involved are non-residents or exempt entities.
It is accepted that PS LA 2003/12 would apply to the proposed transfers of interests in Properties A, B and C between the Testamentary Trusts.
The division of Property X into separate properties would not in itself constitute a CGT event (subsection 112-25(1)). The subsequent transfer of interests in Property X between the Testamentary Trusts would constitute CGT events but it is accepted that PS LA 2003/12 would apply to these transfers.
As PS LA 2003/12 applies to all the proposed transfers of interests in the Properties between the Testamentary Trusts, any capital gain that may arise from these transfers can be disregarded if the recipient of the transferred interest agrees that their acquisition cost for the interest is equal to the interest’s cost base for the Trustee of the Testamentary Trust that transferred it.