Edited version of private advice

Authorisation Number: 1051797119791

Date of advice: 19 January 2021

Ruling

Subject: Capital gains tax

Question

Will the capital gain you made on the disposal of the property be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Your relative passed away before 20 September 1985 (the deceased).

The deceased left a property (the property) to you in her Will.

ABC Executors were the executors of the deceased's estate (the executors)

The deceased's Will stated that you needed to divorce your spouse in order for the property to be transferred to you out of the deceased's estate.

Your children Child A and Child B were named as beneficiaries of the property if you passed away before you divorced your spouse.

Under the provisions of the deceased's Will the property and other assets were held separately on trust by the Executors of the deceased's estate until the conditions in the deceased Will could be met.

As stated in a letter from your solicitor (acting for you and your spouse) to Child A and Child B:

'One of the effects of the Will, is that a trust has been established whereby excessive management fees are payable for what is in reality, a comparatively small, straight forward estate.'

The deceased's Will stated the following

•         that you would have free use and enjoyment of the property until the conditions of the Will have been met; and that

•         you are responsible for the payment of "all rates and taxes assessed in respect thereof the keeping of the home unit and other improvements in good order and condition and insured in the name of my trustees".

Just after capital gains tax was introduced you were advised by your solicitor that a letter (the letter) had been sent to Child A and Child B regarding the transfer of the property to you and cessation of the trust.

The Letter stated the following:

•         The terms set out in the Will of the deceased for the property and other assets;

•         That there are excessive management fees associated with keeping the trust for such a small straight forward estate;

•         That with the consent of the Child A and Child B the trust can be reorganised to vest the property absolutely in your name, bringing the trust to an end and saving on expenses;

•         It can only be done with Child A and Child B consent; and

•         That in the event of consent given by Child A and Child B the solicitor is instructed that your and your spouse's Wills will be reorganised to ensure that Child A and Child B don't lose any benefit in the event that you predeceased your spouse while still married.

The minutes to the yearly Strata Meeting, held approximately 12 months after capital gains tax was introduced, for the property have been supplied under the heading "Minutes of Extraordinary General Meeting of the Corporation (the Strata Meeting).

You are named in the minutes of the Strata Meeting several times indicating you were at the previous year's Strata Meeting.

The responsibilities relating to the property that you took on after the death of the deceased involved:

•         Attending Strata Meetings

•         Payment of Strata Fees

•         Paying Insurances, Rates and Taxes (as stipulated in the deceased's Will)

•         Letting the Unit and organising rental agreements

•         Collecting the rent

•         All upkeep and repairs to the Unit (as stipulated in the deceased's Will)

You received rental income from the property from the date of death of the deceased.

The year after capital gains tax was introduced a Family Agreement was reached between the following:

•         You;

•         Child A;

•         Child B; and

•         The Executors.

Approximately 12 months after the Family Agreement was reached the property was transferred to you from the trust created under the Will.

A long time later you sold the property for a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 128-20

Reasons for decision

Summary

For capital gains tax (CGT) purposes, you are considered to have acquired the property after 20 September 1985. As such, the capital gain you made when you disposed of the property is taxable under the CGT provisions.

Detailed reasoning

CGT event A1

CGT event A1 happens if an entity disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997), such as when an asset is transferred from one entity to another by way of sale or gift.

If the asset is disposed of under a contract, CGT event A1 happens when the contract is entered into, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

A capital gain you make is disregarded if you acquired the asset before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997).

If an asset is acquired as a result of most CGT events happening the asset is acquired when the disposal contract is entered into or, if none, when the disposing entity stops being the asset's owner (subsection 109-5(2) of the ITAA 1997).

However, there is an exception if a CGT asset was owned by a person who died and the asset passes to a beneficiary of their Estate. Then the beneficiary acquires the CGT asset at the date of death of the former owner.

The deceased acquired the property and passed away prior to 20 September 1985 and left the property to you in her Will. You will have acquired the property before 20 September 1985 only if it has passed to you.

Section 128-20 of the ITAA 1997 - has the CGT asset passed to you

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

(a) under a will, or that will as varied by a court order, or

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

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

The Commissioner has stated the requirements for a valid deed of arrangement at paragraphs 209 to 223 of Taxation Ruling 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14).

Specifically, it states at paragraph 212:

... the deed must be made to settle a claim made by a person eligible to make an application for family provision and be entered into within the relevant timeframes for the making of an application to a court.

The relevant law in your State limits the persons eligible to make a family provisions claim to persons such as:

(a) the spouse of the deceased person;

(b) a person who has been divorced from the deceased person;

(c) a child of the deceased person;

(d) a child of a spouse or domestic partner of the deceased person being a child who was maintained wholly or partly or who was legally entitled to be maintained wholly or partly by the deceased person immediately before his death;

(e) a child of the child of the deceased person;

(f) a parent of the deceased person who satisfies the court that he cared for, or contributed to the maintenance of, the deceased person during his lifetime;

(g) a brother or sister of the deceased person who satisfies the court that he cared for, or contributed to the maintenance of, the deceased person

Example 4 in Taxation Ruling TR 2006/14 examines an instance where the deceased's asset will not pass even though there is a family agreement because administration of the deceased estate had been completed.

Application to your case

The deceased passed away before 20 September 1985 owning the property. A testamentary trust was created by a provision in the Will giving you free use and enjoyment of the property until the conditions of the Will were met.

You were advised by your solicitor that excessive management fees applied to the testamentary trust and that you should consider winding up the trust under a family agreement.

A Deed of Family Arrangement was drawn up transferring the property to you after 1985.

The Deed of Family Arrangement was made after the asset had been transferred to the testamentary trust under the provisions in the Will.

You are not a person entitled to make a family provisions claim under the relevant law of your State. Therefore, the Deed of Family Arrangement was not entered into to settle a claim to participate in the estate.

The property has not passed to you because you did not become the owner of it in any of the ways outlined in section 128-20 of the ITAA 1997.

You didn't acquire the property at the date the deceased passed away because it didn't pass to you. Instead, your acquisition date is determined according to the ordinary principles of subsection 109-5(2) of the ITAA 1997. That will give you an acquisition date after 1985.

As the date the property was transferred to you was after 19 September 1985 any capital gain or capital loss made on the sale of the property will not be disregarded under section 104-10 of the ITAA 97 and the capital gains tax provisions will apply.