Edited version of private advice

Authorisation Number: 1052013712466

Date of advice: 29 July 2022

Ruling

Subject: CGT - deceased estate - assets passing to exempt entities

Question

Is any capital gain or loss made when capital gains tax event K3 occurs disregarded?

Answer

Yes.

In this case, capital gains tax event K3 will occur due to certain of the Deceased's assets passing from the Deceased Estate to the exempt entities, being Organisation A and Organisation B.

In accordance with 118-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997), any capital gain or loss made from the transfer of the Deceased's assets in accordance with the Deceased's Will to Organisation A and Organisation B will be disregarded as the Deceased would have been entitled to a deduction under section 30-15 of the ITAA 1997 if the assets had been gifted during their lifetime.

This ruling applies for the following periods:

Income year ended 30 June 20XX.

Income year ended 30 June 20XX.

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

The Deceased passed away after 20 September 1985 and had owned shares in a significant number of companies just before they passed away.

The Deceased's Will provided that the residue of the Deceased Estate would be distributed equally to three residual beneficiaries, which included Organisation A, Organisation B and another specified residual beneficiary.

Organisation A and Organisation B are both:

•         exempt entities under section 50-1 of the ITAA 1997; and

•         endorsed deductible gift recipients (DGRs) covered by Item 1 of the table in section 30-15 of the ITAA 1997.

Probate of the Deceased Estate was granted several months after the Deceased had passed away.

Assets will be appropriated from Deceased Estate to each of the residual beneficiaries, with the market value of the distributed assets to each being an equal third of the total market value of the residue assets of the Deceased Estate. It is anticipated that the residual assets will be appropriated as follows to the residual beneficiaries:

•         distributions to both Organisation A and Organisation B will consist entirely of shares dependant on the value of the shares; and

•         distribution to the other residual beneficiary will consist mainly of cash, with some shares, dependant on the value of the residual assets.

The appropriation of an equal third share of the residue of the Deceased Estate's assets to Organisation A and Organisation B will occur during the period covered by this ruling in accordance with the Deceased's Will.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Section 118-60

Income Tax Assessment Act 1997 Section 128-10

Reasons for decision

Capital gains tax - asset passing to a tax-advantaged entity

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.

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 as defined in subsection 995-1(1) of the ITAA 1997.

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.

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 of the ITAA 1997. 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 deductible 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 situation

CGT event K3 will happen in this case when the Deceased's assets pass from the Deceased Estate to Organisation A and Organisation B, who are both exempt entities and DGRs. The time of the CGT event was just before the Deceased passed away.

The Deceased would have been entitled to a deduction for the gift of their assets to Organisation A and Organisation B had a gift been made to either of them during their lifetime.

Therefore, any capital gains or losses made from CGT event K3 happening are disregarded when the Deceased's assets pass to Organisation A and Organisation B in accordance with the Deceased's Will under subsection 118-60(1) of the ITAA 1997.