Edited version of private advice

Authorisation Number: 1051882210650

Date of advice: 02 September 2021

Ruling

Subject: Deceased estate - income tax - CGT - foreign pension

Issue 1 - Assessable income - Foreign pension

Question 1

Is the deceased's foreign pension from Country B assessable income in Australia?

Answer 1

Yes.

Issue 2 - Capital gains tax - Asset passing to tax-advantaged entity - CGT event K3

Question 2

Does a capital gains tax (CGT) event occur when the share portfolio is transferred to an exempt entity?

Answer 2

Yes. CGT event K3 happens if a CGT asset owned by a deceased person just before they died, passes to a beneficiary in the estate that, is an income tax exempt entity when the asset passes.

Question 3

Are capital gains or losses which arise under section 104-215 of the Income Tax Assessment Act 1997 (ITAA 1997) when an in specie parcel of shares owned by the deceased, are gifted under the terms of the will from the deceased estate, disregarded under subsection 118-60(1) of the ITAA 1997 if the beneficiary is endorsed under division 30 ITAA 1997 as a deductible gift recipient (DGR)?

Answer 3

Yes. As the deceased would have been entitled to a deduction for the gift of the shares to the DGR if that gift had been made prior to their death, any capital gain or capital loss made from the transfer of the shares to the tax-exempt entity will be disregarded by the deceased estate.

This ruling applies for the following periods:

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

The scheme commences on:

DDMMYYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased died on DDMMYYYY and was an Australian resident for taxation purposes.

Probate of the deceased's will dated DDMMYYYY was granted by the Supreme Court in the relevant Australian state or territory on DDMMYYYY.

The executors of the deceased's estate are Trustee 1 and Trustee 2.

The deceased resided in Australia prior to the date of death and had become an Australian citizen on DDMMYYYY. Their country of birth was in Country A.

A previous employer of the deceased was X.

The deceased was not a citizen or resident of Country B.

For approximately 15 years prior to the date of death in YYYY, the deceased had been receiving a monthly foreign pension from a Country B superannuation fund for their previous employment service.

The foreign pension amounts received have not yet been declared as assessable income in the deceased's Australian tax returns during the relevant years up until the date of death and the correct tax liability has not yet been ascertained and paid in full by the deceased or the deceased estate.

The estimated gross value of the deceased person's property (both real and personal) the relevant Australian state or territory is AUD$X.

The employer supplied a payment ledger showing the amounts of foreign pension received by the deceased from Country B in Australian dollars on a monthly basis during YYYY-YYYY valued at approximately AUD$X.

As at the date of this ruling application, the outstanding administration tasks of the estate include a share portfolio, which remains under external management pending resolution of capital gains tax issues which is the subject of this ruling.

The executors have paid three pecuniary legacies - each the sum of AUD$X as an interim income distribution after probate was granted, and as set out in the deceased's will. The deceased's sibling pre-deceased them, so that legacy failed.

The estate is therefore not yet fully administered by payment of, or provision for payment, of all the testamentary and funeral expenses, legacies, debts and tax liabilities. These provisions have not yet been paid or provided for in full while you sought the outcome of this ruling on the assessability of the foreign pension income, therefore the net income of the estate is not yet available for distribution to complete final administration.

Until such a time when all prior claims are met, the income of the residuary estate is the income of the executors and not of residuary beneficiaries.

Under clause 4 of the deceased's will, they bequeathed the residuary of their estate to be transferred by their executors to a testamentary trust where the trustee is required to hold the assets in a memorial fund, in perpetuity.

The deceased requested that the trustee of trust, pay and apply the net income therefrom, or such other amount that the trustee deems appropriate to a number of entities as residual beneficiaries as tenants in common in equal shares on an annual basis.

The trust has been endorsed by the Commissioner of Taxation under Subdivision 50-B of the ITAA 1997 as an entity exempt from income tax effective DDMMYYYY, on the basis that it is registered as a charity.

Assumptions

You advised us that the deceased held the share portfolio as a long term capital investment since approximately YYYY and represent assets held on capital account and not revenue account.

You also advised us that the deceased received the foreign pension income for approximately the last X years prior to YYYY and it is therefore assumed you will seek the complete income records from the previous employer to complete the relevant tax returns or submit objections to prior year lodgment requesting an extension of time for the Commissioner to calculate the final tax liability on this income, until the date of death.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Subdivision 50-B

Income Tax Assessment Act 1997 section 104-215

Income Tax Assessment Act 1997 section 118-60

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 995-1

International Tax Agreements Act 1953

Reasons for decision

Summary

The Australia/Country B double taxation agreement contains the rule generally common to most of Australia's double taxation agreements, that a pension or annuity shall be taxable only in the country of residence of the pension or annuity recipient.

Detailed reasoning

Subsection 6-5(3) of the Income Tax Assessment Act (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Pensions are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income received by an Australian resident, it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Section X of the Agreements Act relates to the agreement between Australia and Country B.

Article X of the Country B Agreement states that subject to the provisions of paragraph x of Article X, any pension or annuity paid to a resident of one of the Contracting States shall be taxable only in that State, unless the individual is a citizen of Country B from which the foreign payments are made.

The deceased was not a citizen or resident of Country B and therefore the foreign pension in this case paid to a citizen of Australia shall be taxable only in Australia.

Therefore, the foreign pension paid to the deceased prior to the date of death should be declared as assessable income under section 6-5 of the ITAA 1997 in the relevant income years up to and including YYYY.

Therefore, in this case, the deceased estate has not yet reached the final stage of administration as the final distribution is yet to be ascertained once tax liabilities are provided for.

Summary

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in the estate that, is a tax-exempt entity when the asset passes.

Detailed reasoning

When a person dies, any capital gain or loss made by them in respect of a capital gains tax (CGT) asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the ITAA 1997).

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in the estate that, is an exempt entity when the asset passes (paragraph 104-215(1)(a) of the ITAA 1997).

The time of the event is just before the deceased died which means that any resulting capital gain or loss is accounted for in the final income tax return lodged on behalf of the deceased (referred to as the 'date of death' return) (subsection 104-215(3) of the ITAA 1997).

For these purposes, an exempt entity is an entity whose ordinary and statutory income is exempt because of subdivision 50-B of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997).

A trust that is a registered charity will only be exempt if it is endorsed as such by the ATO (section 50-52 of the ITAA 1997).

An asset passes to a beneficiary in an estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the ITAA 1997.

In these circumstances, it is considered that under the deceased's will the charitable trust recipient is a beneficiary of the deceased's estate. The trust is a 'purpose' trust in that the assets will be held by the trust in perpetuity and the income of the trust will be used for public charitable purposes. That is, there are no other persons to whom the assets of the trust will eventually pass. Therefore, the testamentary trust is the beneficiary.

ATO Interpretive Decision ATO ID 2004/458 Capital Gains Tax: CGT event K3 - assets pass to a tax exempt testamentary trust also confirms this decision reasoning (refer to Note 2: Any capital gain or loss made as a result of CGT event K3 happening may be disregarded if the testamentary trust is a deductible gift recipient: section 118-60 of the ITAA 1997).

Therefore, CGT event K3 will happen in this case when the deceased's property passes from the deceased estate to the beneficiary, who is a tax-exempt entity.

However, under subsection 118-60(1) of the ITAA 1997, a capital gain or loss made from a testamentary gift of property is disregarded if the gift would have been deductible under section 30-15 of the ITAA 1997 had it not been a testamentary gift.

Subsection 30-15(1) of the ITAA 1997 provides that entities can deduct a gift in the situations set out in the table in section 30-15. The table sets out who the recipient of the gift can be, the type of gift that can be made, how much can be deducted and any special conditions that apply.

Item 1 of the table sets out one of the situations in which a gift can be deducted. Under that item a gift of property must:

•                 be made to a DGR that is in Australia

•                 satisfy any gift conditions affecting the type of deductible gifts the recipient can receive, and

•                 be property that is covered by one of the listed gift types.

The gift types include property valued by the Commissioner at more than $5,000.

Therefore, as the residuary estate has been left to the Trust beneficiary on certain terms as set out in clause 4 of the will, and the entity has DGR endorsement date of effect on DDMMYYYY, the deceased would have been entitled to a deduction under section 30-15 of the ITAA 1997 for the gift had it been made during their lifetime.

If the only reason a gain or loss is not disregarded under subsection 118-60(1) of the ITAA 1997 is because the property has not been valued by the Commissioner at more than $5,000, then subsection 118-60(1A) of the ITAA 1997 states that, for the purposes of subsection 118-60(1) of the ITAA 1997, the property is taken to have been so valued.

Accordingly, any capital gains or losses made from CGT event K3 happening are disregarded under subsection 118-60(1) of the ITAA 1997 when the asset passes to the tax-exempt beneficiary.

Deceased estate tax returns may be necessary for income earned after the date of death.

Any tax liability arising from the disposal of the share portfolio by the trustees, may be assessable in the hands of the executors of the deceased estate under Division 6 of the Income Tax Assessment Act 1936 if that were to occur as when disposing of assets from an estate, the normal CGT rules apply to tax capital gains under CGT event A1.