Edited version of private advice

Authorisation Number: 1051877699798

Date of advice: 19 October 2021

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Will subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard a capital gain or loss that the legal personal representative (LPR) of Beneficiary A's estate makes from the passing of assets to beneficiaries in that estate if the assets originated in Individual X's estate?

Answer

No

Question 2

Does the LPR of Beneficiary A's estate acquire the assets that pass from Individual X's estate for their market value?

Answer

No

Question 3

Is Beneficiary C specifically entitled to the capital gain from the capital gains tax (CGT) event happening to the Property?

Answer

No

This ruling applies for the following period periods:

Year ending 30 June 2018

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Individual X passed away in 20XX. They were survived by their two children, Beneficiary A and Beneficiary B. Assets in Individual X's estate were acquired after 20 September 1985.

Beneficiary A and Beneficiary B were named beneficiaries in Individual X's Will to share in their estate equally.

Beneficiary A passed away, prior to the completion of the administration of Individual X's estate.

After providing for specific gifts, Beneficiary A's Will left their residuary estate to Beneficiary B, Beneficiary C, Beneficiary D and Beneficiary E in equal shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 128-15

Income Tax Assessment Act 1997 - section 128-20

Income Tax Assessment Act 1997 - section 104-10

Income Tax Assessment Act 1997 - section 115-228

Reasons for decision

Assets transferred to Beneficiary A's estate's beneficiaries originating from Individual X's estate

Division 128 of the ITAA 1997 deals with CGT consequences that arise from a deceased estate. Any capital gain or loss made by a trustee of a deceased estate (or LPR) is disregarded under section 128-15 of the ITAA 1997 if a CGT asset owned by the deceased just before dying passes to a beneficiary in accordance with section 128-20.

In this case, Beneficiary A did not become the owner of assets from Individual X's estate before they passed away. The Division 128 rollover is limited to only the assets which were owned by the deceased before death. As a result, any capital gain or capital loss that Beneficiary A's LPR realises on transfer of assets that originated from Individual X's estate cannot be disregarded. CGT event A1 will happen when these assets are transferred.

Cost base rules for assets received from Individual X's estate

As Individual X owned the assets immediately prior to their death, any capital gain or capital loss that may accrue as a result of the transfer of the assets from Individual X's LPR to Beneficiary A's LPR can be disregarded under section 128-15 as the assets have passed according to section 128-20. As a result, the cost base rules in Division 128 can apply. The table in subsection 128-15(4) provides at Item 1, for assets that the deceased had acquired on or after 20 September 1985, the first element of the asset's cost base is the cost base of the asset on the date of death.

The Property capital gain

Section 115-228 of the ITAA 1997 sets out when a beneficiary will be regarded as specifically entitled to a trust capital gain (either in whole or in part). To be specifically entitled to the whole gain, one requirement is that the beneficiary must have received, or can reasonably expect to receive, in accordance with the terms of the trust, all of the financial benefit referable to the capital gain (paragraphs (a) and (b) of the definition of 'share of net financial benefit' in subsection 115-228(1) of the ITAA 1997). Another requirement is that the financial benefit be recorded, again in accordance with the terms of the trust, in the accounts or records of the trust in its character as referable to the capital gain (paragraph (c) of the definition).

ATO ID 2013/33 Income Tax: Capital gains tax: specifically entitled provides an example of when a trustee of a trust makes a capital gain by reason of CGT event E5 when a beneficiary becomes absolutely entitled to an asset of the trust, the beneficiary can be specifically entitled to the gain and assessed on it. In this instance, the Will provided the beneficiary absolute entitlement to an asset. This was sufficient to meet the description of a record of the trust in which is recorded the financial benefit that the beneficiary is expected to receive.

Paragraph 13 of TR 2004/D25Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides a beneficiary of a deceased estate prior to the completion of its administration does not have an interest in the trust assets, hence the beneficiary cannot be absolutely entitled.

Beneficiary A's Will does not provide Beneficiary C with an absolute entitlement to any particular asset. Beneficiary A's Will would not be sufficient to meet the record requirement of paragraph 115-228(1)(c) of the ITAA 1997. Accordingly, Beneficiary C will not be specifically entitled to the capital gain made by Beneficiary A's estate from the CGT event occurring to the Property.

As a result, CGT event E5 does not arise in relation to the transfer of the Property. CGT event E7 also cannot apply as there was no disposal of the asset to the beneficiary in satisfaction of their interest in the trust capital.