Edited version of private advice

Authorisation Number: 1051991240264

Date of advice: 30 June 2022

Ruling

Subject: CGT - deceased estates

Question

Will any capital gain or loss be disregarded when the property is transferred to the beneficiary of the deceased estate under the agreed deed of arrangement?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B are the Parents of Person C, Person D and Person E.

Since Autumn 19XX, the land has been held as tenants in common by the following parties:

•         50% interest held by Person A and Person B as joint tenants

•         50% interest held by Person E and their spouse as joint tenants

Person B passed away in Winter 20XX. Upon their passing, Person A acquired Person B's interest in the property.

Person A passed away in Spring 20XX.

The estate of Person A received Person A's 50% interest in the property.

The Supreme Court of South Australia issued a grant of probate on in Summer 20XX.

Person D and Person E are the trustees and executors of the estate of Person A.

In their Will, Person A left the estate equally to Person C, Person D and Person E as tenants in common.

The trustees, executors and beneficiaries of the estate have agreed the manner that they wish to distribute the estate. This is set out in a draft Deed of Family Arrangement.

The draft Deed varies Person A's Will so Person E receives the estate's interest in the property plus an equalising cash payment. Person C and Person D will receive a larger cash payment.

The parties agree that the current net assets of the estate of approximately $XXX,XXX available for distribution will be distributed in the following manner:

•         A monetary payment of approximately 33.3% of the total estate shall be distributed to Person C in their capacity as beneficiary

•         A monetary payment of approximately 33.3% of the total estate shall be distributed to Person D in their capacity as beneficiary

•         A monetary payment of approximately 0.8% of the total estate plus the 50% interest in the property held by the estate, which has been agreed by the parties to have a value of approximately 32.5% of the total estate, shall be distributed to Person E in their capacity as beneficiary

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15(3)

Income Tax Assessment Act 1997 section 128-20(1)(d)

Reasons for decision

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 a CGT asset you owned just before dying devolves to your Legal Personal Representative (LPR) or passes to a beneficiary in your estate, any capital gain or loss made on transfer of the asset to a beneficiary of the estate is disregarded.

Paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset passes to a beneficiary of the deceased estate if the beneficiary becomes the owner of an asset under a deed of arrangement if:

(i)            the beneficiary entered into the deed to settle a claim to participate in the distribution of the 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 the estate.

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your LPR.

The Commissioner has stated the requirements for a valid deed of arrangement at paragraphs 209 to 223 of Taxation Ruling 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14).

Paragraph 212 of TR 2006/14 states that the deed must be made to settle a claim made by a person eligible to make an application for family provision and be entered into within the relevant timeframes for the making of an application to a court.

The requirements of section 128-20 of the ITAA 1997 will be satisfied provided the draft Deed of Family Arrangement is executed in its current format. As such any capital gain or loss resulting from the transfer to the beneficiary will be disregarded.

It is important to note that this ruling will not be valid if changes are made to the draft Deed of Family Arrangement.