Edited version of private advice

Authorisation Number: 1051882520739

Date of advice: 16 August 2021

Ruling

Subject: CGT - deceased estate - inherited shares

Question 1

Did a capital gains tax event occur when you transferred the Shares to your relative under Section 104-10 of the ITAA 1997?

Answer: Yes. Capital gains tax event A1 occurred when you transferred the shares.

Question 2

Is the cost base of the shares you inherited the amount paid by the Deceased to acquire the shares?

Answer: No. The cost base of the Shares will be their market value on date the Deceased passed away in accordance with item 3A of the table at subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

This ruling applies for the following period

Income year ending 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

Your parents, Person A and Person B, owned and operated a foreign private company (the Company) that was located in Company X, which had commenced trading prior to 20 September 1985.

The Company operated a business (Business 1).

After a significant period of time. Company X issued new shares and Person A received some of the newly issued shares.

Person A (the Deceased) passed away and the shares in Company X were transferred to their estate.

A portion of the Company X shares (the Shares) were transferred to you from the Deceased's estate with the remaining shares previously held by the Deceased in Company X being transferred to the other beneficiaries of the Deceased's estate in equal shares.

You received dividends in relation to the Shares in several income years that you reported as foreign income.

In Country X a company can only sell a business if the shareholders are physically present in Company X.

You could not be in Company X and to facilitate the sale of the business by the Company you transferred the Shares to your relative (Person C) in exchange for a representative share of the sale proceeds for Business 1.

There was no written agreement or documentation in relation to the transfer of the Shares to your relative.

An agreement for the sale of Business 1 was entered into between Person C and other parties and Business 1 was sold.

Following the sale of Business 1 you received a payment, being a portion of the sales proceeds received on the sale of Business 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Capital gains tax and inherited assets from foreign residents

You may make a capital gain or a capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when the ownership in a CGT asset is disposed of to another entity under section 104-10 of the ITAA 1997.

You will make a capital gain if the capital proceeds are greater than the cost base of the CGT asset or will make a capital loss if the capital proceeds are less than the cost base of the CGT asset.

The term capital proceeds is defined in section 116-20 of the ITAA 1997 as the total of:

•         the money you have received, or are entitled to receive, in respect of the event happening; and

•         the market value of any other property you have received, or entitled to receive, in. respect of the event happening (worked out as at the time of the event).

Subsection 128-15(3) of the ITAA 1997 states any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

A legal personal representative includes an executor or administrator of an estate of an individual who has died. The trustee of a testamentary trust is treated in the same manner as the trustee of a deceased estate or LPR for the purposes of applying Division 128 of the ITAA 1997.

If you acquire an asset owned by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the day the person died under subsection 128-15(2) of the ITAA 1997.

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost based of the CGT asset in the hands of the legal personal representative or beneficiary.

If a foreign resident bequeaths a CGT asset which is not taxable Australian property just prior to their passing as defined in section 855-15 of the ITAA 1997 to a resident beneficiary, the beneficiary will be subject to CGT if a CGT event later happens to the inherited CGT asset, such as when the CGT asset is disposed of by the beneficiary.

In that situation the cost base and reduced cost base of the inherited CGT asset is its market value when the person died under item 3A of the table in subsection 128-15(4) of the ITAA 1997.

Application to your situation

The Deceased passed away and you inherited the Shares, which were post-CGT assets. Any capital gain or capital loss made when the Shares passed from the Deceased's estate to you was disregarded.

For CGT purposes you are viewed as having acquired the Shares on the date the Deceased passed away.

You transferred the Shares to Person C and it is viewed that CGT event A1 occurred when the transfer occurred and you disposed of your ownership interest in the Shares when the CGT event occurred.

The Shares were transferred with the expectation that you would receive a representative share of the sale proceeds from the sale of Business 1 by the Company. You received a portion of the Business 1 sale proceeds and that amount is viewed as the capital proceeds you received from the CGT event A1 occurring on the basis that it is the best estimate you have of the market value of your shares.

The cost base of the Shares is the market value of the Shares on the date the Deceased passed away.

You made a capital gain as a result of your disposal of the Shares if your portion the sale proceeds of Business 1, being the capital proceeds, are greater than the cost base of the Shares. Alternatively, you will make a capital loss if the reduced cost base of the Shares is greater than the capital proceeds.

Note: Further information on how to determine market values can be viewed on our web site ato.gov.au by searching for the following web page:

•         Determining market value for tax purposes (Quick Code (QC) number QC 21245)

Links provided on web page about who may undertake the market valuation and the valuation methods that can be used.

Note: If the conditions contained in Division 115 of the ITAA 1997 are met, any capital gain can be reduced by the 50% CGT discount.