Edited version of private advice

Authorisation Number: 1051596052200

Date of advice: 17 October 2019

Ruling

Subject: CGT - deceased estate

Question 1

Does the deed of agreement between the remainder beneficiaries in 20XX satisfy section 128-20(d) ITAA 1997 to have the asset pass to a beneficiary of the estate under the will?

Answer

Yes

Question 2

Will the transfer of the property from the trust estate to A attract CGT event E7 in the trust estate?

Answer

No.

Question 3

If CGT E7 is triggered in the trust estate, what is the acquisition cost and purchase date to be used in the capital gain/loss calculation?

Answer

CGT event E7 will not be triggered.

Question 4

Do the remainder beneficiaries (apart from A) trigger a CGT event upon them each receiving the agreed sum from A in return for taking the farm?

Answer

No.

Question 5

If so, what is the acquisition cost and purchase date of the asset to be used in their capital gain/loss calculation?

Answer

N/A.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died on DDMMYY leaving a will.

In the deceased's will, the deceased instructed the executors to divide the residuary estate into six equal shares. Two of the six shares were to be held in trust for his spouse. Following the death of his spouse, the two shares were to be added equally to the remaining four shares.

One of the remaining four shares in trust were to be held by the executors for each of the four individual beneficiaries.

The spouse died on DDMMYY.

Following the spouse's death, the four beneficiaries agreed that one of the assets to be part the residuary estate, which was a property, should go to only one of the beneficiaries, A, rather than being split as part of the residuary estate, and A will pay the other beneficiaries the difference between the value of the property and A's entitlement to the deceased estate.

A deed of arrangement has been drafted to reflect this.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-85

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),(4) and (5).

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

Question 1

Paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset passes to a beneficiary of the deceased estate if the beneficiary becomes the owner of the asset:

(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 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 estate.

Paragraph 36 of Taxation Ruling TR 2006/14 'Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests' sets out the requirements of a deed of arrangement which will satisfy paragraph 128(1)(d) of the ITAA97. It must be entered into prior to the administration of the estate being completed, unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entertained their application for family provision, or an extension of time in which to make such an application.

In your case, you have indicated the proposed deed will be entered into and signed by all parties prior to the transfer of all the assets of the estate to the beneficiaries.

The requirement in subsection 128-20(1)(d)(ii) of the ITAA 1997 has also been met. Money paid by A to the other beneficiaries relates only to the variation of his claim to the property, which formed part of the estate.

We consider that under these circumstances the deed will satisfy paragraph 128-20(1)(d) of the ITAA 1997.

Question 2

As noted in question 1, the asset will be considered to have passed to A under the deed of arrangement under paragraph 128-20(d) of the ITAA 1997.

Division 128 of the ITAA 1997 sets out special CGT rules for deceased estates.

Under Division 128 of the ITAA 1997, when a person dies, a capital gain from a CGT event is disregarded if it relates to an asset the person owned just before dying.

Under subsection 128-15(3) of the ITAA 1997 any capital gain or loss the trustee of the estate makes if the asset passes to a beneficiary in the estate is also disregarded.

As a result, the capital gains relating to the CGT events on the transfer of the property from the deceased to the trustee of the deceased estate, and the trustee of the deceased estate to A, are both disregarded on the basis that Division 128 of the ITAA 1997 applies.

Question 3

As set out above, CGT event E7 will not be triggered in the trust estate as a result of Division 128 of the ITAA 1997.

A would acquire his interest in the land at the cost base and reduced cost base of the land based on subsections 128-15(4) and (5) of the ITAA 1997.

Question 4

TR 2006/14 (at paragraph 34) identifies that if a deed of arrangement varies the terms of a deceased's will, the intended owners of interests in the (original) will are treated as if they have not been bequeathed the relevant asset.

Under the deceased's will, the remainder beneficiaries were granted an interest in the property. The variation in the deed of arrangement will mean the beneficiaries do not have an interest in the property.

The money paid by A under the terms of the deed of arrangement will be treated as having passed directly to the beneficiaries under the deceased's will, rather than as consideration for their interest in the property. As a result, there will be no CGT event for the beneficiaries (other than A) from receiving money under the will relating to the deed of arrangement.

Question 5

There is no acquisition cost or purchase date of the money received by the beneficiaries (other than A) from the deceased estate relating to the variation in the deed of arrangement and no capital gain/loss calculation is required.

As a result of the deed of arrangement, the beneficiaries (other than A) will not be treated as if they have been bequeathed an interest in the property. The beneficiaries will be bequeathed an interest in cash. As a result, no acquisition cost or purchase date is required.