Edited version of private advice

Authorisation Number: 1051903572795

Date of advice: 2 December 2021

Ruling

Subject: CGT - deceased estate

Question

Is any capital gain or loss that the taxpayer makes due to the transfer of capital gains tax (CGT) assets to the Deductible Gift Recipient (DGR) disregarded?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

23 September 20XX

Relevant facts and circumstances

The deceased passed away on XX September 20XX.

The Deceased's will was dated XX March 20XX.

Probate was granted to an Executor of the Estate shortly after.

Specific bequests of cash and properties were left to named beneficiaries in the will.

The residuary beneficiary of the Deceased's Estate is endorsed as a DGR.

The following assets were owned by the Deceased just before dying:

[Specific information has been removed].

Certain of these CGT assets will be transferred to the DGR in accordance with the Deceased's will.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 30-15

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Section 118-60

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Detailed reasoning

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the general rules that apply where CGT assets pass to beneficiaries in a deceased estate.

However, these rules do not apply where a CGT asset the deceased owned just prior to their death passes to a tax advantaged or tax exempt entity. In such circumstances, CGT event K3 will occur in accordance with section 104-215 of the ITAA 1997. The time of the event is just before the deceased dies, which means that any resulting capital gain or capital loss is accounted for in the final income tax return lodged on behalf of the deceased.

A tax advantaged or tax exempt entity is one whose ordinary and statutory income is exempt from income tax.

Section 118-60 of the ITAA 1997 provides that a capital gain or capital loss made from a testamentary gift that would have been deductible under section 30-15 of the ITAA 1997 if it had not been a testamentary gift is disregarded.

Effectively, this means that if the deceased could have claimed a deduction for the gift had they not passed away, any capital gain or capital loss is disregarded.

The table in section 30-15 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.

Application to your circumstances

CGT event K3 happened just before the deceased passed away.

However, as the residuary beneficiary is a DGR, the deceased would have been entitled to a deduction for such gifts had they not been testamentary gifts.

Accordingly, any capital gain or capital loss made as a result of the in specie distribution of the residual assets to the DGR is disregarded pursuant to section 118-60 of the ITAA 1997.