Edited version of private advice

Authorisation Number: 1052040261501

Date of advice: 12 October 2022

Ruling

Subject: CGT- deceased estate

Question 1

When shares owned by the deceased just prior to his death pass to a foreign resident remainder beneficiary, following the death of a life tenant in 20YY, does section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) enable the date of death income tax assessment of the deceased lodged DD MM YYYY to be amended?

Answer 1

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

In the year ended 30 June 20YY

Relevant facts and circumstances

1.            The deceased was an Australian resident for tax purposes and died on DD MM YYYY.

2.            You have provided with your ruling application a copy of the deceased's last will and testament signed on DD MM YYYY.

3.            Probate was granted on DD MM YYYY by the relevant Court in Australia.

4.            A date of death return was required to be lodged for the deceased and was received by the ATO on DD MM YYYY, a date more than X years ago.

5.            The deceased's will created life and remainder interests in certain assets of the estate which included a share portfolio. The shares were all acquired post 20 September 1985.

6.            The deceased's will prescribed that the spouse of the deceased was provided a life interest in shares owned by the deceased at the time of their death and that upon the spouse's death the shares were to be divided between a number of beneficiaries.

7.            The spouse of the deceased died over X years after the deceased died.

8.            One beneficiary is a tax resident of a country that is not Australia.

9.            In accordance with the terms of the deceased's will, shares which were owned by the deceased at the time of their death were transferred to the beneficiaries on DD MM YYYY (over X years after the death of the deceased).

Relevant legislative provisions

Income Tax Assessment Act 1936, section 170

Income Tax Assessment Act 1997, section 104-215

Income Tax Assessment Act 1997, section 128-20

Income Tax Assessment Act 1997, section 855-15

Taxation Administration Act 1953, subdivision 260-E

Reasons for decision

Summary

Where a CGT asset that is not taxable Australian property, which formed part of a deceased person's estate and under the estate was enjoyed as a life interest which came to an end on the death of a life tenant, passes to a remainder beneficiary who is a foreign resident and CGT event K3 happens, the remainder beneficiary is taken to have acquired the asset when the deceased original owner died, not when the life tenant died.

The trustee of the estate must include any resulting capital gain in the date of death return of the deceased original owner, however where the period of review for the date of death return has passed, there are no circumstances that meet any of the criteria laid out in section 170 of the ITAA 1936 to allow additional time for the prior year return to be amended.

Following the death of a taxpayer a final income tax return (date of death tax return) is generally required to be lodged for the deceased for the period from the beginning of the relevant income year to the date of death of the taxpayer (Taxation Administration Act 1953 Subdivision 260-E). The date of death return is lodged by the executor or the administrator of the deceased's estate.

The deceased died on DD MM YYYY. Probate of the deceased's will was granted on DD MM YYYY. A date of death return was required to be lodged for the deceased and was received by the ATO on DD MM YYYY.

CGT event K3

Section 104-215 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

CGT event K3

Asset passing to a tax-advantaged entity: CGT event K3

(1)          CGT event K3 happens if you die and a *CGT asset you owned just before dying *passes to a beneficiary in your estate who (when the asset passes):

(a)          is an *exempt entity; or

(b)          is the trustee of a *complying superannuation entity; or

(c)          is a foreign resident.

(2)          If the asset passes to a beneficiary who is a foreign resident, CGT event K3 happens only if:

(a)          you were an Australian resident just before dying; and

(b)          the asset (in the hands of the beneficiary) is not *taxable Australian property.

(3)          The time of the event is just before you die.

(4)          A capital gain is made if the *market value of the asset on the day you died is more than the asset's *cost base. A capital loss is made if that market value is less than the asset's *reduced cost base.

Note: The trustee of the estate must include in the date of death return any net capital gain for the income year when you died.

Exception

(5)          A *capital gain or *capital loss is disregarded if you *acquired the asset before 20 September 1985.

Note: There is also an exception for certain philanthropic testamentary gifts: see section118-60

That is, in these circumstances CGT event K3 happens if a CGT asset the deceased owned just before dying passes to a beneficiary of their estate who, when the asset passes, is a foreign resident. The deceased must have been an Australian resident just before dying and the asset must not be taxable Australian property.

Beneficiary a foreign resident and deceased an Australian resident

One of the beneficiaries of the deceased estate is a foreign resident. They were a foreign resident at the time of the deceased's death and at the time the shares were transferred to them.

The deceased was an Australian resident just before their death.

Meaning of asset "passing to a beneficiary"

Section 128-20 of the ITAA 1997 states that a CGT asset passes to a beneficiary if the beneficiary becomes the owner of the asset in a range of circumstances including under a will or a will varied by a court order. The foreign resident beneficiary became the owner of the shares under the deceased's will.

Taxable Australian property

Section 855-15 of the ITAA 1997 sets out the five categories of CGT assets that are taxable Australian property. The shares in the hands of the foreign resident beneficiary are not taxable Australian property.

Time of event - just before the deceased dies

As specified by subsection 104-215(3) of the ITAA 1997 CGT event K3 happens just before the deceased dies. As such, CGT event K3 applies to the deceased rather than the estate and a capital gain or loss is returned in the deceased taxpayer's date of death return where applicable.

Although the time of CGT event K3 happens just before the death of the original asset owner, the requirements of subsection 104-215(1) of the ITAA 1997 are tested when the asset passes to the beneficiary. In this case that is when the life interest ends following the death of the deceased's spouse.

The date of death return of the deceased was lodged in YYYY and as such, the time frame during which the return can be amended has passed. There are no circumstances that meet any of the criteria set out in section 170 of the Income Tax Assessment Act 1936 (ITAA 1936) that allow the date of death return to be amended outside of the period of review.

Other relevant comments

Where a taxpayer wishes to amend an income tax return outside of the allowable time frame for self-amendment the taxpayer must lodge an objection against the assessment and a request for an extension of time to lodge the objection.

The Commissioner will first consider the request for an extension of time and if the request is accepted, will then consider the objection.

Further information about how the Commissioner considers requests to treat out of time objections as if they were lodged in time can be found in ATO PS LA 2003/7 How to treat a request to lodge a late objection (ATO PSLA 2003/7).

In addition, general information about the amendment and objection process can be found on ato.gov.au, especially by searching QC 33882 and QC 33803.