Edited version of private advice

Authorisation Number: 1051852023172

Date of advice: 16 June 2021

Ruling

Subject: Deceased estate

Question 1

Did CGT event A1 happen to the Estate when the Trustee sold the Real Property and the Share Portfolio of the Estate?

Answer

Yes.

The disposal of these assets by the Trustee of the Estate clearly constitute A1 events for the Estate under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Is any capital gain or loss arising from the sale of the Real Property disregarded by the Trustee given it was acquired by the Deceased prior to 20 September 1985?

Answer

No.

Under section 128-15 of the ITAA 1997 the Trustee is deemed to have acquired the Real Property on the Deceased's date of death, including for the purpose of the CGT discount (section 115-30 of the ITAA 1997). Section 128-15 of the ITAA 1997 also provides that the first element of the cost base of the Real Property for the Trustee is its market value on the Deceased's date of death. Any capital gain or loss that arises is included in the calculation of the net income of the Estate as per section 95 of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 3

Is the capital gain arising from the sale of the Main Residence disregarded by the Trustee?

Answer

Yes.

The requirements for the exemption provided by section 118-195 of the ITAA 1997 have been met as:

•                    The Trustee owned the dwelling as the trustee of a deceased estate;

•                    The dwelling was the Deceased's main residence just before their death and was not then being used for the purpose of producing assessable income; and

•                    The Trustee's ownership interest ended within two years of the Deceased's death.

Question 4

Does CGT event K3 happen to the Deceased in respect of the Real Property, the Deceased's Shares or the Reinvested Shares (which are transferred from the Estate to the Charitable Trust)?

Answer

No, unless some of the Deceased's Shares are transferred to the Charitable Trust and in that case CGT event K3 happens to those shares.

CGT event K3 will happen under section 104-215 of the ITAA 1997 if a CGT asset owned by the deceased just before their death passes to a beneficiary of their estate who is an exempt entity. K3 does not happen to the Real Property or the Deceased's Shares that are sold by the Estate as these CGT assets did not pass to the Charitable Trust. K3 will not happen to the Reinvested Shares as they were not owned by the deceased prior to their death.

However, K3 will happen to any of the Deceased's Shares that are transferred to the Charitable Trust as it is an exempt entity. In that situation K3 will happen when the Deceased's Shares 'pass' to the Charitable Trust. Paragraph 4 of TD 2004/3 states that 'it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary'.

Question 5

During the administration of the Estate, can the Charitable Trust be made presently entitled to the income of the Estate?

Answer

Yes.

Taxation Ruling IT 2650 states that 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 pay or provide for debts of the estate. In such a situation, the executor may exercise their discretion to pay some of the income to the beneficiaries and if that occurs the beneficiaries will be considered to be presently entitled to the amounts actually paid to them. Therefore, in the present case, where the Trustee determines that income of the Estate is not required to provide for debts and consequently pays income to the Charitable Trust, the Charitable Trust will be presently entitled to that income.

Question 6

To the extent that the Charitable Trust was not made presently entitled to income of the Estate for the year ended 30 June 20XX, is the Trustee assessed under section 99 of the ITAA 1936?

Answer

Yes.

Having regard to the factors set out in subsection 99A(3) of the ITAA 1936, the Commissioner considers it unreasonable to assess the Trustee under section 99A of the ITAA 1936 with respect to the income of the Estate for the year ended 30 June 20XX that no beneficiary was presently entitled to. Therefore, the Trustee will be assessed under section 99 of the ITAA 1936 on that income.

Question 7

Where the Trustee makes the Charitable Trust presently entitled to the net income of the Estate, do the specific anti-avoidance provisions in section 100AA or 100AB of the ITAA 1936 apply?

Answer

No.

Section 100AA of the ITAA 1936 will not apply as the requirement that written notification or payment be made to the beneficiary within two months of the end of the income year was met for the year ended 30 June 20XX and will be met for the year ending 30 June 20XX. Section 100AB of the ITAA 1936 is not applicable as the Charitable Trust was the sole remaining beneficiary of the Estate after the specific bequests were paid in the year ended 30 June 20XX.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away during the year ended 30 June 20XX.

The executor of the Deceased obtained probate of the Deceased's Will (the 'Probate') on XX/XX/20XX.

The executor and trustee of the Estate is Y (the 'Trustee').

For convenience, references to the 'Estate' are references to the trustee of the Estate.

Under clause X of the Will of the Deceased, after specific testamentary bequests (provided for by clause X of the Will) and testamentary expenses, funeral expenses, duties and taxes have been satisfied, the executor is directed to hold the residuary estate under a Charitable Trust.

The trustee of the Charitable Trust is also Y.

For convenience, references to the 'Charitable Trust' are references to the trustee of the Charitable Trust.

Other than the beneficiaries in clause X of the Will, there are no other beneficiaries other than the Charitable Trust as per clause X of the Will.

The Estate is currently still in the process of administration.

The assets of the Deceased

The CGT assets owned by the Deceased just before dying included:

a.            Commercial real estate - acquired by the Deceased prior to 20 September 1985 (the 'Real Property');

b.            Residential real estate - the Deceased's main residence acquired post 20 September 1985 (the 'Main Residence'), which was the Deceased's main residence just before the date of their death and was not then being used for the purpose of producing assessable income; and

c.            A portfolio of shares and units in publicly listed entities - acquired by the Deceased post 20 September 1985 (the 'Deceased's Shares').

At the date of death, the Real Property, Main Residence and the Deceased's Shares had unrealised capital gains and losses.

The Administration of the Estate - Rebalancing

During the administration process, the Trustee sold assets of the Estate, being the Real Property, Main Residence and some of the Deceased's Shares (in accordance with the power of sale provided to the Trustee under clause X of the Will) and dealt with the proceeds by acquiring replacement shares and other securities in the name of the Estate, as explained further below (the 'Reinvested Shares').

The Trustee's decision to sell the assets of the Estate was based on professional advice that was received from an Australian Financial Services (AFS) license holder acting independently and advising the Trustee. The intention in selling the assets of the Estate was:

a.            To 'rebalance' the assets of the Estate towards more appropriate shares and other securities;

b.            To 'tailor the portfolio of assets to match a risk profile that was appropriate to ensure sufficient capital is preserved to enable the Charitable Trust to continue 'in perpetuity'; and

c.            To ensure that the portfolio of assets would produce a reasonable income return to satisfy the Charitable Fund's liquidity requirements to enable the Charitable Trust to make ongoing distributions in furtherance of the Charitable Trust's purpose and activities (the 'Rebalancing').

Due to share market volatility, the professional advice was for the Rebalancing to be undertaken in an orderly and timely manner, during the administration of the Estate by the Trustee, rather than to be deferred until the Estate was fully administered (including satisfying any tax liabilities and obligations).

Over the course of the year of income ended 30 June 20XX, some cash proceeds from the realisation of the assets held by the Trustee were paid to the Charitable Trust and some of the Reinvested Shares were transferred to the Charitable Trust. This occurred only after professional advice had been received that it was prudent to do so, on the basis the Trustee had appropriately provisioned assets to satisfy the current and prospective liabilities of the Estate.

The Trustee (having obtained independent financial advice) considers that the portfolio will be sufficiently balanced by 30 June 20XX. The majority of the portfolio has already been transferred to the Charitable Trust.

The Administration of the Estate - expenses and liabilities

The Trustee has satisfied the specific testamentary bequests provided for in the Deceased's Will, the Deceased's funeral expenses and various minor administrative expenses. However, the Trustee is reserving funds on a conservative basis to provide for a number of unresolved and unascertained tax matters, including:

a.            All tax liabilities of the Deceased and the Estate to be ascertained and paid;

b.            Lodgements of the required income tax returns for the Deceased and the Estate are to be completed; and

c.            All other residual expenses (for example, tax agent fees) to be ascertained and paid.

The Trustee will also retain a certain amount for provision of unexpected liabilities as protection for the next X years.

The Administration of the Estate - year ended 30 June 20XX

During the 20XX income year:

a.            The testamentary bequests provided for in clause X of the Will were paid;

b.            The Estate derived some assessable income from the assets of the Deceased;

c.            The assessable income of the Estate was not paid to a beneficiary of the Estate;

d.            The Main Residence was sold 'on-market'.

The Administration of the Estate - year ended 30 June 20XX

During the 20XX income year and as part of the Rebalancing:

The Real Property was sold 'on-market'.

Part of the Deceased's Shares were sold 'on-market'.

The capital proceeds from the disposal of the above assets were partly:

a.            Transferred to the Charitable Trust in satisfaction of its present entitlement for the year ended 30 June 20XX;

b.            Used to acquire new shares in the name of the Deceased Estate (the 'Reinvested Shares');

c.            Retained in the Estate to attend to its current and prospective liabilities.

As the Reinvested Shares were acquired, they were transferred into the name of the Charitable Trust provided there were sufficient assets in the Estate to satisfy the Estate's current and prospective liabilities.

The Trustee made payment of the net income of the Estate for the year ended 30 June 20XX to the Charitable Trust as a presently entitled beneficiary before XX Month 20XX.

The Administration of the Estate - year ending 30 June 20XX

The Trustee intends to make the Charitable Trust presently entitled to the net income of the Estate for the year ending 30 June 20XX (which will be settled by way of payment on or before XX Month 20XX).

As discussed further above, the Trustee will retain some funds to provide for tax related liabilities and unexpected liabilities that may arise within the X year 'statute of limitations' period applicable in the State of Z. The Trustee's present intention is that the remaining assets in the Estate are to be transferred to the Charitable Trust on or before 30 June 20XX. Moreover, the Trustee also intends to have the grant strategy for the Charitable Trust finalised by 30 June 20XX.

The Tax Status of the Charitable Trust

The Charitable Trust is registered as a charity with the Australian Charities and not for Profits Commission (ACNC) and is endorsed as an income tax exempt charity, both with effect from XX/XX/20XX, but is not endorsed as a Deductible Gift Recipient.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 section 100AA

Income Tax Assessment Act 1936 section 100AB