Edited version of your written advice

Authorisation Number: 1051504493026

Date of advice: 9 April 2019

Ruling

Subject: Capital gains tax (CGT) and deceased estates

Question 1

Did CGT event K3 occur in relation to the foreign shares that were left to foreign resident beneficiaries, where those shares were sold by the Estate and the proceeds were distributed to the relevant foreign beneficiary?

Answer

No

Question 2

Are the relevant beneficiaries presently entitled to the capital gain made on the sale of the foreign shares which were sold by the Estate?

Answer

No

Question 3

Can the Trustee of the Estate disregard the CGT liability arising as a result of the sale of the foreign shares, to the extent the liability relates to the foreign resident beneficiary, pursuant to subsection 98(2A) of the Income Tax Assessment Act 1936 (ITAA 1936).

Answer

No

This ruling applies for the following period:

Year ending 30 June 2017

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.

At the time of their death, the deceased held foreign shares.

The deceased’s will stated that the foreign shares were to be distributed equally to a number of beneficiaries, some of whom were foreign residents.

The Trustee of the deceased’s estate (the Estate) provided the beneficiaries a choice as to whether they would like the shares transferred to them or alternatively whether they would like the Trustee to dispose of the shares and provide the net proceeds to the beneficiaries.

Some of the beneficiaries, one of whom was a foreign beneficiary, requested that the Trustee of the Estate dispose of their foreign shares and forward the net proceeds to them.

The Trustee of the Estate appointed a broker to manage and execute the sale of the relevant foreign shares. The sale occurred during the 2016-17 financial year.

The net proceeds from the sale of the foreign shares were distributed to the relevant beneficiaries at a date after 30 June 2017.

The remaining foreign resident beneficiaries requested that their shares be transferred directly to them.

The residue of the Estate was left as a life tenancy to the deceased’s spouse.

As at 30 June 2017, the residue of the Estate had not yet been determined.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 98(2A)

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-20

Reasons for decision

Question 1

When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event K3 in section 104-215 of the ITAA 1997 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that, when the asset passes, is a foreign resident. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death.

A CGT asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the ITAA 1997. This includes where the beneficiary becomes the owner of the asset under your will.

An asset may pass to a beneficiary within the meaning of section 128-20 of the ITAA 1997 if they become absolutely entitled to the asset as against the trustee (Taxation Determination TD 2004/3). However, 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 (Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694; [1964] 3 All ER 692).

In this case, in relation to the shares that were sold by the Estate and the proceeds were distributed to the relevant foreign beneficiary, CGT event K3 will not occur. The relevant beneficiary did not become the owner of the foreign shares and as the administration of the Estate was not complete, the relevant foreign beneficiary could not have been absolutely entitled to the foreign shares prior to their sale.

Question 2

Taxation Ruling IT 2622 deals with present entitlement during the stages of administration of deceased estates.

Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries.

Until the estate of a testator has been fully administered and the net residue ascertained, a 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).

During the intermediate stage of administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

In this case, some of the beneficiaries agreed for the Trustee of the Estate to dispose of the foreign shares. As at 30 June 2017 the residue of the Estate had not been ascertained; accordingly a beneficiary would only be presently entitled to a capital gain made by the Estate in the 2017 financial year to the extent that it had been paid to them. As the proceeds had not been paid to the relevant beneficiaries as at 30 June 2017, the relevant beneficiaries were not presently entitled to the capital gain made on the foreign shares sold by the Estate.

Question 3

Subsection 98(2A) of the ITAA 1936 applies where a foreign resident beneficiary is presently entitled to income of a trust estate. As the relevant foreign resident beneficiary is not presently entitled to the capital gain arising from the sale of the foreign shares, subsection 98(2A) of the ITAA 1936 does not apply.