Edited version of private advice

Authorisation Number: 1051520313585

Date of advice: 22 May 2019

Ruling

Subject: Deceased estate and shares held

Question 1

Will the shares in Company B be deemed to be held by the deceased at their date of death?

Answer

No

Question 2

If question 1 is yes can the capital gain on the transfer of the shares from the trustee to the beneficiaries be disregarded?

Answer

Not Applicable

Question 3

Did a Capital Gains Tax (CGT) event E5 occur?

Answer

No

Question 4

Did a CGT event E7 occur on the date when the shares in Company B were transferred to the beneficiaries?

Answer

Yes

Question 5

Are any of the rollover provisions available to the trustee when the shares in Company B are transferred to the beneficiaries to end their capital interest in the trust?

Answer

No

Question 6

Did a CGT event E7 occur when the other listed shares purchased by the trustees of the deceased's estate were transferred to the beneficiaries?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Before the deceased passed away the deceased purchased shares in Company A.

Sometime after the deceased purchased shares in Company A the deceased passed away.

The Deceased's Will stated that a portion of the Deceased's estate was to be held on trust for the Deceased's three grandchildren up until the youngest turned XX.

The Deceased's Will stated that the relative were entitled to an equal share of the trust income distributed from the portion held for them.

The Deceased's Will stated once the youngest relative turned XX the portion of the Deceased's estate that was held on trust for the relatives is to be distributed to all of them as tenants in common in equal shares.

A few years after the deceased passed away Company A was takeover by Company B.

Scrip for scrip rollover relief was chosen by the trustee of the Deceased's estate in relation to Company B shares.

Sometime later the trustees of the Deceased's estate purchased shares in other listed (listed shares) companies in the name of the trust.

A short time later the youngest relative turned XX.

The day after the youngest relative turned XX all (Company B and other listed companies) shares were transferred to all of the relatives.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 Subsection 104-85(1)

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that when a person dies, a capital gain or capital loss from a capital gains tax (CGT) event happening to a CGT asset the person owned just before death is disregarded (section 128-10 of the ITAA 1997).

Where an asset passes to a beneficiary of a deceased estate within the meaning of section 128-20 of the ITAA 1997, the beneficiary will be taken to have acquired the asset on the date of the deceased's death. However, it is important to note that these rules only apply to an asset that was owned by the deceased prior to their death.

In your circumstances the deceased purchased Company A shares prior to their death. After the deceased passed away Company B took over Company A and allocated Company A shareholders Company B shares according to their takeover agreement. This takeover and allocation of different shares resulted in the deceased's estate owning different assets to the deceased had prior to his death.

In your case as the Company B shares are different asset compared to Company A shares it is considered that the deceased did not own the same asset prior to his death, as a result section 128 of the ITAA 1997 does not apply. As a consequence of this takeover there are no provisions available to the Commissioner to enable Company B shares to be considered to be owned by the deceased prior to his death.

Absolutely entitled beneficiaries - the Commissioner's view

The Commissioner's view about the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' is contained in Draft Taxation Ruling TR 2004/D25 and refined in the Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242.

Paragraphs 9 and 10 of Draft Taxation Ruling TR 2004/D25 state:

9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust.

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Further, paragraphs 21 to 25 of Draft Taxation Ruling TR 2004/D25 state:

One beneficiary with all the interests in a trust asset

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (see Explanation paragraphs 76 to 79).

More than one beneficiary with interests in a trust asset

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

·         the assets are fungible;

·         the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

·         there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. See Explanation paragraphs 80-126.

The explanation to Draft Taxation Ruling TR 2004/D25 begins at paragraph 29 and begins a discussion of the key factors at paragraph 69.

Paragraphs 80 to 82 of Draft Taxation Ruling TR 2004/D25 state:

More than one beneficiary with interests in a trust asset

80. It is evident from the preceding discussion that a beneficiary will have difficulty in establishing that they are absolutely entitled to a trust asset for CGT purposes if one or more other beneficiaries also have an interest in the asset. In the UK capital gains legislation, this problem is addressed, at least in part, by making direct reference to 'two or more persons who are or would be jointly so entitled'. There is no such reference in the Australian CGT provisions and the circumstances in which such a beneficiary may be considered absolutely entitled under those provisions are therefore very limited.

81. The fact that under the rule in Saunders v. Vautier multiple beneficiaries may together terminate the trust is of no assistance to such beneficiaries wanting to establish absolute entitlement for the purposes of the Australian CGT provisions. As already discussed, those provisions require a single beneficiary to be absolutely entitled to the whole of a trust asset, whereas the entitlement of a beneficiary who shares their interest with others will generally be to a share of each trust asset.

82. It is also true that equity may permit a beneficiary who has an interest in trust assets along with one or more others to have that interest satisfied by a distribution to the beneficiary of entire assets (provided the assets are readily divisible and the distribution can be made without prejudice to the other beneficiaries). While a beneficiary's ability to have their interest satisfied is necessary in order to establish absolute entitlement for CGT purposes, it is not, of itself, sufficient. This is because it is not possible for the beneficiary, prior to the distribution or sale, to show that they are entitled to any particular assets.

Further, paragraphs 84 to 87 of Draft Taxation Ruling TR 2004/D25 state:

84. A beneficiary with a vested and indefeasible interest in trust assets where one or more others also have an interest in those assets will nonetheless be considered absolutely entitled to a specific number of the trust's assets if the three factors listed below are also present.

85. First, the assets must be fungible, at least to the extent to which a person would reasonably be expected to be indifferent to the replacement of any one asset with another.

86. Secondly, it must be the case that equity would permit the beneficiary to have their interest in all those assets satisfied by a distribution or allocation in their favour of a specific number of them.

87. Thirdly, there must be a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to a specific number of the trust's assets.

And, paragraph 107 of Draft Taxation Ruling TR 2004/D25 states:

107. So where there is, on trust, a group of fungible assets (an asset class) and the assets are conveniently divisible between the beneficiaries, and there is no prejudice to other interest holders, a beneficiary may be able to demand a certain number of those assets in satisfaction of their partial interest in each and every asset within that class.

And finally, paragraph 117 of Draft Taxation Ruling TR 2004/D25 states:

117. As discussed, the ability of a beneficiary to demand a number of trust assets in satisfaction of their interest, and the obligation of the trustee to meet that demand, is necessary, but not sufficient, to establish absolute entitlement for CGT purposes. There must also be a clear understanding on the part of all the relevant parties that, despite the shared interests, a specific number of assets of a clearly defined asset class are held for each beneficiary to the exclusion of the other beneficiaries.

In your case the deceased's Will states that the shares in the deceased's estate are to be distributed to the beneficiaries as tenants in common once the youngest relative turns XX.

As outlined in paragraph 24 of ITAA 97 if there are multiple beneficiaries with a claim to the deceased's estates assets each beneficiary must have a specific entitlement against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them.

As the Will states the beneficiaries are tenants in common, the beneficiaries are not entitled to direct the trustee to distribute a specific asset or number of assets to them, as a result CGT E5 does not happen when the youngest relative turns XX.

The trustee of the deceased's estate does however make a disposal of Company B shares, and other listed shares purchased by the trustee of the deceased's estate, to the beneficiaries.

The relevant CGT event happens on the date of transfer of the assets from the trustee to the beneficiaries, rather than on the date the youngest relative turns XX. Therefore CGT event E7 will happen on the date the assets or transferred from the trustee to the beneficiaries.

As there is a CGT event, the trust will realise a capital gain or capital loss. There are no provisions available to the Commissioner to grant any CGT rollover relief in this circumstance.