Edited version of private advice

Authorisation Number: 1051902559347

Date of advice: 13 January 2022

Ruling

Subject: CGT - deceased estates

Question 1

Will any capital gain or loss on the share of the Property which passed to Person A under the Deed of Arrangement be disregarded by the Executors (Trustee)?

Answer 1

Yes

Question 2

Will any capital gain or loss from the sale of the interest in the Property to Person A be disregarded by the Executors (Trustee)?

Answer 2

No

This ruling applies for the following periods:

Year ending 30 June XXXX

The scheme commences on:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Deceased died several years ago. The Deceased was an Australian tax resident.

The Deceased left a Will and named Child A and Child B as Executors and Trustees (Trustee) of their Estate.

Probate was granted to Child A and Child B a short time later.

Clause 3 of the Will provided that the residue of the Estate would be distributed to the Deceased's children in equal shares.

The main asset of the Estate was a property (the Property).

The Deceased and their late spouse acquired the Property as joint tenants several decades ago.

The Deceased's spouse died, and they acquired their ownership interest in the Property by survivorship.

As a result, the Deceased had a pre-CGT interest and a post-CGT interest in the Property.

Child C of the Deceased was dissatisfied with the way the Estate's assets had been willed and after a dispute, a Deed of Arrangement was agreed.

The Deed of Arrangement/ Deed of Settlement (Deed) is partly reproduced below:

Recitals to the Deed include:

•         The Will directs the Trustee to distribute the residuary estate to the children of the Deceased in equal shares.

•         Child C claims that they have contributed to the building up of the Estate and further claims that the Deceased failed to make adequate provision for their maintenance and support.

•         Child C has foreshadowed a claim against the Estate pursuant to the relevant legislative act (The Claim)

•         The current assets of The Estate are the farm property (The Property) and the balance of Estate funds held in a trust account.

By clause 2 of the Deed, the Property was transferred to Child C or their nominee as follows:

•         As to x share pursuant to a devise in the Will

•         As to x share in satisfaction of Child C's claim

•         As to x share acquired by Child C or their nominee from the Estate subject to payment by Child C to the Estate for an agreed amount

Child C will receive their interest in The Property in the following way:

•         x share pursuant to The Will

•         x share in satisfaction of their potential claim under the relevant legislative act pursuant to a Deed of Arrangement; and

•         x share acquired by Child C from the Estate subject to a payment by Child C to the Estate.

The Estate sold the pre-CGT interest in The Property to Child C and passed the post-CGT interest to Child C pursuant to the Deed of Arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Question 1

Summary

Any capital gain or loss on the share of The Property which passed to Child C under the Deed of Arrangement can be disregarded.

Detailed reasoning

Beneficiaries and CGT assets

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules that apply when an asset owned by a person just before they die, passes to their legal representative or to a beneficiary in a deceased estate

When assets the deceased owned just before they died are transferred to the Executor or Legal Personal Representative (LPR), any capital gains or losses are disregarded.

When a CGT asset you owned just before dying devolves to your LPR or passes to a beneficiary in your estate, any capital gain or loss the LPR makes on transfer of the asset to a beneficiary of the estate is disregarded.

An asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

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

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

(c) because it is appropriated to the beneficiary by your 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 your 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 your estate.

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your *legal personal representative.

Application to your circumstances

As the interest in the Property, comprising of x interest pursuant to the Will and x interest in satisfaction of Child C's claim passed to Child C as a beneficiary of the Deceased's estate, any capital gains or losses on disposal can be disregarded by the Trustee. The shares passed to a beneficiary in accordance with section 128-20 of the ITAA 1997.

The x interest passed under the Will and the x interest passed under a Deed of Arrangement to settle a claim to participate in the distribution of the Deceased's Estate. The only consideration provided by Child C was the waiver of any further claims on the Deceased's Estate.

Question 2

Summary

Any capital gain or loss made on the sale of the 3/6^th interest to Child C cannot be disregarded.

Detailed Reasoning

CGT assets and Deceased Estates

As referenced above, Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal representative or to a beneficiary in a deceased estate. A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LPR transfers it under a power of sale.

Application to your situation

As the 50% pre-CGT ownership interest in the Property was transferred under a power of sale, the asset does not pass to Child C as a beneficiary. Therefore, the Trustee is unable to disregard any capital gain or loss made on the disposal.