Edited version of private advice

Authorisation Number: 1051984014338

Date of advice: 26 May 2022

Ruling

Subject: Capital gains tax

Question 1

Are capital gains or losses that are made when shares owned by the deceased pass from the deceased estate to the beneficiary disregarded under subsection 118-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the beneficiary is a deductible gift recipient (DGR)?

Answer

Yes.

Question 2

Are capital gains or losses that are made when shares owned by the deceased pass from the deceased estate to the beneficiary disregarded under subsection 118-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the beneficiary named in the Will is not a deductible gift recipient and the beneficiary instructs the trustees of the deceased estate to transfer the shares directly to another fund?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died in a previous year.

The deceased bequeathed the residue of their estate to a number of charities named in the Will.

Of these beneficiaries, some are Deductible Gift Recipients in their own right, while others are not.

One recipient operates a foundation that is registered as a Deductible Gift Recipient.

Under the governing rules of the organisation, the foundation it operates was established to receive all gifts of money or property for the purpose of supporting the objects/purposes of the organisation.

The residue of the estate includes shares in several companies.

The trustee intends to transfer the shares from the Estate to the beneficiaries in settlement of their entitlement under the Will of the deceased.

The organisation has agreed to provide a direction in writing to the executors to transfer its entitlement to the shares to the foundation.

The trustee intends to act on this direction and transfer the entitlement of the organisation directly to the foundation.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-60(1)

Reasons for decision

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 in section 104-215 of the ITAA 1997 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that, when the asset passes, is an exempt entity. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death.

An exempt entity is one whose ordinary and statutory income is exempt from income tax because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997).

Therefore, CGT event K3 will happen in this case when the deceased's shares pass from the deceased estate to the beneficiaries, who is an exempt entity.

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.

As a number of beneficiaries are endorsed under section 30-15 of ITAA 1997 and the deceased would have been entitled to claim a deduction during his lifetime for a gift of in-specie shares, any CGT liability will be disregarded.

Other beneficiaries

In order for section 118-60 ITAA 1997 to apply any gifts or donations must be made directly to an endorsed DGR.

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.

Therefore, as there are beneficiaries who are not endorsed as a DGR, the deceased would not have been entitled to a deduction under section 30-15 of the ITAA 1997 for the gift had it been made during his lifetime and CGT event K3 will apply.