Edited version of private advice

Authorisation Number: 1052043060166

Date of advice: 10 January 2023

Ruling

Subject: CGT - shares

Question 1

Does the Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the pre-CGT shares that were acquired by the deceased and passes to the legal personal representative (LPR)?

Answer

Yes.

Question 2

Does the Division 128 of the ITAA 1997 apply to the post-CGT bonus shares acquired by the deceased before 30 June 1987?

Answer

Yes.

Question 3

Does the Division 128 of the ITAA 1997 apply to the post-CGT bonus shares acquired by the deceased after 30 June 1987?

Answer

Yes.

Question 4

Does the Division 128 of the ITAA 1997 apply to the post-CGT bonus shares issued in respect of the existing shares but acquired by the LPR?

Answer

No.

Question 5

Does the Division 128 of the ITAA 1997 apply to the post-CGT shares acquired by the LPR after the date of death as a share purchase plan from existing shares?

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 left behind a Probate of Will and Inventory of Property at the date of death.

The deceased's spouse had a life interest in the Estate.

From July XXXX - January YYYY, the income of the Estate has been distributed wholly to the spouse.

The legal personal representative (LPR) has confirmed the bonus shares issued did not constitute a dividend or assessable income.

The LPR acquired shares with the view to increasing the share portfolio in order to derive additional dividend income.

Some residuary beneficiaries live in Australia; one residuary beneficiary resides in foreign country.

None of the residuary beneficiaries are Trustees of the Estate or otherwise have control or influence in how the Estate is managed.

The Estate did not receive any shares as a result of a dividend reinvestment plan (DRP).

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Subdivision 130-A

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 104-215

Income Tax (Transitional Provisions) Act 1997 Section 130-20

Reasons for decision

Division 128 - Effect of death

Division 128 of the ITAA 1997 explains the rules that apply when a taxpayer dies and a CGT asset owned just before death devolves to the taxpayer's legal personal representative (LPR) or passes to a beneficiary in the estate. It also contains rules about what happens when a joint tenant dies.

The general rule is that, when a taxpayer dies, a capital gain or capital loss from a CGT event that results for a CGT asset owned by the taxpayer just before dying is disregarded (Section 128-10).

There is an exception to this rule if the CGT asset passes to a beneficiary in the taxpayer's estate who is:

•         an exempt entity,

•         the trustee of a complying superannuation entity,

•         or a foreign resident (Section 104-215: CGT event K3).

If a CGT asset owned by the taxpayer just before dying:

(a)  devolves to the taxpayer's LPR, or

(b)  passes to a beneficiary in the taxpayer's estate,

the LPR, or beneficiary, is taken to have acquired the asset on the day the taxpayer died.

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (Section 128-15).

The table in subsection 128-15(4) sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the LPR or beneficiary. A beneficiary can include in the cost base or reduced cost base of the asset any expenditure that the LPR would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

Bonus shares

Subdivision 130-A of the ITAA 1997 sets out CGT rules for bonus shares.

Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company. If a taxpayer disposes of bonus shares received on or after 20 September 1985, the taxpayer may make a capital gain. The taxpayer may also have to modify the cost base and reduced cost base of existing shares in the company if the taxpayer receives bonus shares.

The cost base and reduced cost base of bonus shares depend on whether the bonus shares are assessable as a dividend. A flow chart in section 130-15 sets out the acquisition time and cost base of bonus shares.

Subsection 130-20(3) of the ITAA 1997 applies where none of the bonus shares are a dividend (or taken to be a dividend).

The table in subsection 130-20(3) provides that:

(a)  if the original shares were acquired on or after 20 September 1985 - the taxpayer is taken to have acquired the bonus shares when the original shares were acquired and the first element of the cost base and reduced cost base for the original shares is apportioned in a reasonable way over both the original and bonus shares, or

(b)  if the original shares were acquired before 20 September 1985 and the taxpayer paid an amount for the bonus shares - the taxpayer is taken to have acquired the bonus shares when the liability to pay the amount arose and the first element of the cost base and reduced cost base for the bonus shares includes their market value just before that time. If the bonus shares were fully paid (or they are partly paid but no amount has been paid since their issue), the taxpayer is taken to have acquired the bonus shares when the original shares were acquired and any capital gain or capital loss made from the bonus shares is disregarded.

Section 130-20 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that if the bonus shares are issued on or before 30 June 1987, subsection 130-20(2) of the ITAA 1997 does not apply. Instead, the taxpayer must work out the cost base and reduced cost base of the bonus shares under s 130-20(3) of the ITAA 1997, regardless of whether any part of the amount owed to the taxpayer by the company is a dividend.

Taxation Determination TD 2000/11 Income tax: capital gains: how are the date of acquisition and the acquisition cost of bonus shares determined if the bonus shares are issued in relation to shares held by a deceased person at the date of their death and the bonus shares are issued after the date of death? states thatDivision 128 does not apply to the acquisition of the bonus shares, because they were not CGT assets the deceased owned just before dying and therefore did not form part of the estate of the deceased.

Application to your circumstances

Pre-CGT shares that were acquired by the deceased and passes to the LPR

Pre-CGT shares acquired by the deceased become post-CGT shares with a market value cost base at the date of the death.

Pursuant to section 128-15 of the ITAA 1997, any capital gain or loss subsequently realised on transfer of the shares to the LPR, or the relevant Australian resident beneficiary of the estate is disregarded.

Post-CGT bonus shares issued in respect of the existing shares acquired by the deceased

Pursuant to section 130-20 of the ITTPA 1997, where bonus shares are issued before 30 June 1987, the cost base is determined under section 130-20(3) of the ITAA 1997.

As most of the bonus issue shares relates to original shares acquired pre-CGT, item 3 of section 130-20(3) applies to treat the bonus shares to be acquired when the original shares were acquired, and any capital gain or loss made from the bonus shares is disregarded.

These bonus shares then become post-CGT assets with a market value cost base at the date of the death.

When these post-CGT bonus issue shares devolved to the LPR, any capital gain or loss is disregarded.

When the LPR makes the distribution to the Australian resident beneficiaries, any capital gain or loss subsequently realised on transfer of the shares is disregarded.

Bonus issue shares acquired after 30 June 1987 are not subject to section 130-20 of the ITTPA 1997, Division 128 rules operate to treat these bonus issue shares as being within the scope of section 128-15(3) because it was acquired and owned by the deceased.

Post-CGT bonus shares issued in respect of the existing shares but acquired by the LPR

TD 2000/11 confirms that Division 128 does not apply to the acquisition of the bonus shares by the LPR, because they were not CGT assets the deceased owned just before dying and therefore did not form part of the estate of the deceased.

When the LPR makes a distribution to the Australian resident beneficiaries, CGT event E7 - Disposal to a beneficiary to end capital interest happens, the capital gain should be calculated pursuant to section 104-85, being the market value of the shares at the date of the distribution less the tax cost base.

Post-CGT shares acquired by the LPR after the date of death

Division 128 does not apply to the post-CGT shares acquired by the LPR after the date of death as these additional shares are not CGT assets of the deceased.