Edited version of private advice

Authorisation Number: 1052057304002

Date of advice: 12 December 2022

Ruling

Subject: CGT - shares

Question 1

Will any capital gain or loss made on the appropriation of the shares in specie to the B and C Share and to the D Share be disregarded under subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will CGT Event K3 in Section 104-215 of the ITAA 1997 happen on the appropriation of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust?

Answer

No.

Question 3

Will any capital gain or loss made on the appropriation of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust be disregarded under subsection 128-15(3) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the executors (Executors) of the estate (Estate) of the late Person A (Deceased).

The Deceased died on XX XXX 20XX and probate of their last will and testament dated XX XXX 20XX (Will) was granted on XX XXX 20XX to the Executors.

The primary assets of the estate at death were:

•         the Deceased's residence

•         cash/term deposits

•         a portfolio of listed securities

The portfolio of listed shares included shares acquired prior to 20 September 1985 and shares acquired after that date, including some bonus shares in respect of pre 20 September 1985. Records exist that enable each acquisition of shares to be identified, including the date of acquisition and their respective cost bases.

The Will

The Deceased's residence and contents are bequeathed to Person B and Person C (as tenants in common). This devise has been given effect and the residence has been transferred to them.

Person D is bequeathed a pecuniary legacy of a sum equal to the value of the residence at the date of death of the Deceased, which has been paid.

The balance of the estate is to be applied as follows:

•         the payment of debts, funeral and testamentary expenses of the estate; and

•         the division of the residue into three equal parts and one of such equal parts to be applied as follows:

-       one to Person B and Person C (B and C Share)

-       one to Person D (D Share), and

-       one to such charitable bodies (Charitable Share) and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as the trustees shall by deed appoint, provided that one of the charitable bodies to benefit is Charity A (the trusts herein described as the Charitable Trust).

The Will provides as follows:

I direct that my trustees may exercise any powers given them at law and without limitation may in their absolute discretion:

•         sell, call in and convert any property into money or postpone the sale calling in and conversion or retain any properly in the same state of investment without being responsible for loss

•         make loans to beneficiaries or others, secure or unsecured, with or without interest and on whatever terms

•         borrow money and secure loans howsoever on any property

•         without the consent of a beneficiary partition or appropriate any property in or towards the satisfaction of a legacy or share of any beneficiary and determine the value of the property however they deem appropriate

•         invest or hold any asset as if they were beneficially entitled absolutely, and

•         purchase any properly from the estate at fair market value.

Administration to date

The Estate has been partly administered as described.

Income tax returns as follows have been lodged.

Proposed Completion of Administration of Estate

The Executors propose to complete the administration of the Estate as follows:

•         pay all outstanding liabilities including tax

•         to the extent necessary, realise such assets as may be required to pay such liabilities and tax

•         appropriate one third of the shares in specie to the B and C Share

•         appropriate one third of the shares in specie to the D Share, and

•         appropriate one third of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

The Executors are considering how the various parcels of shares will be allocated amongst the respective parts or shares.

Proposed conduct of the Charitable Trust

Once the shares are vested in the Executors as trustees of the Charitable Trust, they contemplate realising them over time and appointing and paying various cash amounts amongst a number of charitable bodies.

Accordingly, the Charitable Share may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. It is anticipated that many of those charities will be deductible gift recipients (DGRs). It is therefore anticipated that capital, capital gains and income will be distributed over this period amongst such charities.

It is expected the Charitable Trust will make capital gains on the disposal of the shares and will also receive income from investments, including dividends, interest income and managed fund distributions.

Other facts

The Estate, the Charitable Trust and the individual beneficiaries of the Estate are Australian residents for tax purposes.

Person B, Person C and Person D are not under a legal disability for the purposes of Division 6 of the Income Tax Assessment Act (ITAA 1936).

The Deed(s) of appointment will be used only to appoint beneficiaries. They will not be used to specify any additional terms or powers for the Charitable Trust.

The allocation and appropriation of shares is validly made in accordance with the Will.

The Charitable Trust will not be registered with the Australian Charities and Not-for-profits Commission Act 2012.

The Charitable Trust will not be endorsed as exempt from income tax under Subdivision 50-B of ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 30-15

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 Section 50-52

Income Tax Assessment Act 1997 Subdivision 50-B

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Paragraph 104-215(1)(a)

Income Tax Assessment Act 1997 Subsection 104-215(5)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Section 128-20(1)

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

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 1

Will any capital gain or loss made on the appropriation of the shares in specie to the B and C Share and D Share be disregarded under subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Detailed reasoning

Division 128 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative (LPR) or passes to a beneficiary in your estate.

The term 'legal personal representative' is defined in subsection 995-1(1) and includes an executor or administrator of an estate of an individual who has died.

When a person dies, any capital gain or loss made by them in respect of a CGT asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215).

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (paragraph 104-215(1)(a)).

An exempt entity means an entity whose ordinary and statutory income is exempt form income tax because of the Income Tax Assessments Acts (subsection 995-(1).

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (subsection 128-15(3)).

Section 128-20(1) provides that an asset is taken to have passed to a beneficiary when the beneficiary becomes the owner of the asset in any of the following circumstances:

•         under a Will or a Will varied by court order

•         by operation of intestacy law

•         by appropriation to a beneficiary

•         under a Deed or arrangement; or

•         by absolute entitlement.

The LPR or beneficiary is taken to have acquired the asset on the day the taxpayer died (subsection 128-15(2)).

You are the executor of the estate of the deceased and will meet the definition of a LPR as referred in subsection 128-15(3).

1)    The recipients of the B and C Share and the D Share are all resident individuals named as beneficiaries in the Will and are not exempt entities as defined in subsection 995-(1).

2)    The assets will pass to the individual beneficiaries in accordance with section 128-20 when you appropriate one third of the shares in specie to them.

3)    Accordingly, any capital gain or loss made by you as the LPR will be disregarded under subsection 128-15(3) when the shares pass from you to the individual beneficiaries in satisfaction of their respective shares.

Question 2

Will CGT Event K3 in Section 104-215 of the ITAA 1997 happen on the appropriation of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust?

Summary

No.

Detailed reasoning

CGT event K3 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes (paragraph 104-215(1)(a)).

A capital gain or capital loss that happens because of CGT event K3 is disregarded if the deceased acquired the asset before 20 September 1985 (subsection 104-215(5)).

A capital gain or loss made from a testamentary gift of property is also disregarded if the gift would have been deductible under section 30-15 had it not been a testamentary gift (subsection 118-60(1)).

For these purposes, an exempt entity includes an entity whose ordinary and statutory income is exempt because of Division 50 (subsection 995-1(1)).

A trust that is a registered charity will only be exempt if it is endorsed as such by the ATO under Subdivision 50-B (section 50-52).

An entity that is an ACNC type of entity is not exempt from income tax under Division 50 unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (section 50-47).

You will appropriate one third of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

The Charitable Trust will not be:

•         registered with the Australian Charities and Not-for-profits Commission Act 2012, or

•         be endorsed to be exempt from income tax under Subdivision 50-B.

Accordingly, the Charitable Trust won't be exempt from income tax under Division 50, and thus CGT event K3 will not happen when the shares pass in specie to the Charitable Trust.

Question 3

Will any capital gain or loss made on the appropriation of the shares in specie to the Charitable Trust be disregarded under subsection 128-15(3) of the ITAA 1997?

Summary

Yes.

Detailed reasoning

As mentioned above, Division 128 sets out what happens when you die and 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 capital loss the LPR makes if the asset passes to a beneficiary in the estate is disregarded (subsection 128-15(3)).

Law Administration Practice Statement 2003/12 (PS LA 2003/12) deals with the capital gains treatment of the trustee of a testamentary trust. It states:

1. What this practice statement is about

This practice statement confirms the Commissioner's longstanding administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3).

2. What is the effect of the practice for the trustee of a testamentary trust?

Broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

3. What is the effect of the practice for a beneficiary?

The cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased's legal personal representative.

A testamentary trust is a trust established under a valid will.

Clause 5(b)(iii) of the Will provides for the Charitable Share to be held 'upon trust for such charitable bodies and purposes within Australia in such shares and subject to such powers and provisions and generally in such manner as my trustee shall by deed appoint provided that one of the charitable bodies to benefit will be Cora Barclay Centre Incorporated...'

You will appropriate one third of the shares in specie to the Executors as trustees of the Charitable Share to be held by them as trustees of the Charitable Trust.

The Charitable Share may be maintained over several years until all of the funds are appointed and distributed to the chosen charities. Accordingly, the Charitable Trust is not a perpetual trust and is not the ultimate beneficiary of the Charitable Share.

The Charitable Trust is a trust established under the Will and accordingly is a testamentary trust to which the administrative practice outlined in PS LA 2003/12 would apply unless CGT event K3 applies.

As stated in the answer above, CGT event K3 will not happen when the shares pass in specie to the Charitable Trust.

In accordance with PS LA 2003/12 the trustee of the Charitable Trust will be treated in the same way as a legal personal representative for the purposes of Division 128 and the Commissioner will not recognise any taxing point in relation to assets when they pass to the Charitable Trust.