Edited version of private advice

Authorisation Number: 1052060306649

Date of advice: 12 December 2022

Ruling

Subject: CGT - deceased estate

Question 1

Will you be taken to have acquired the shares appropriated to you under the Will on the date of death of the Deceased under subsection 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. However, for the purposes of the working out if you have a discount capital gain when you dispose of the shares, you will be treated as having acquired any shares that are not pre-CGT assets on the date the Deceased acquired the shares.

Question 2

Will your cost base of the shares appropriated to you under the Will be modified by item 1 of the table in subsection 128-15(4) of the ITAA 1997 where adequate records are maintained to identify the shares that were acquired by the Deceased on or after 20 September 1985 and such shares are identified on such appropriation?

Answer

Yes.

Question 3

Will the cost base of the shares appropriated to you under the Will be modified by item 4 of the table in subsection 128-15(4) of the ITAA 1997 where adequate records are maintained to identify the shares that were acquired by the Deceased before 20 September 1985 and such shares are identified on such appropriation?

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

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 (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.

Proposed Completion of Administration of Estate

The Estate has been partly administered as described.

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.

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 1936 (ITAA 1936).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 115-30(1)

Income Tax Assessment Act 1997 Subsection 121-20(1)

Income Tax Assessment Act 1997 Division 128

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

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

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Section 149-10

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 you be taken to have acquired the shares appropriated to you under the Will on the date of death of the Deceased under subsection 128-15(2) of the ITAA 1997?

Summary

Yes. However, for the purposes of the working out if you have a discount capital gain when you dispose of the shares, you will be treated as having acquired any shares that are not pre-CGT assets on the date the Deceased acquired the shares.

Detailed reasoning

Division 128 sets out what happens when a CGT asset passes to you as a beneficiary of a deceased estate.

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.

The beneficiary will be taken to acquire the asset that passes to them on the date the deceased died (subsection 128-15(2)).

In addition, there are special rules for the time of acquisition when working out whether you are entitled to a discount capital gain in Subdivision 115-A in respect of a CGT event that happens to the shares after they are appropriated to you. For these purposes, item 4 of the table in subsection 115-30(1) treats you as acquiring shares, provided they are not pre-CGT assets of the deceased immediately before their death, that pass to you as a beneficiary of their estate when the deceased acquired them.

Pre-CGT assets are assets acquired before 20 September 1985 (section 149-10).

The assets will pass to you in accordance with section 128-20 when the Executors appropriate the shares in specie to you.

You will be taken to acquire the shares on the date the Deceased died under subsection 128-15(2)).

However, for the purposes of the working out if you have a discount capital gain when you dispose of the shares, you will be treated as having acquired any shares that are not pre-CGT assets on the date the Deceased acquired the shares (item 4 of the table in subsection 115-30(1)).

Question 2

Will your cost base of the shares appropriated to you under the Will be modified by Item 1 of the table in subsection 128-15(4) of the ITAA 1997 where adequate records are maintained to identify the shares acquired by the Deceased on or after 20 September 1985?

Summary

Yes.

Detailed reasoning

Subsection 128-15(4) sets out the modifications to the cost base and reduced cost base of CGT assets that pass to you as a beneficiary of a deceased estate.

Item 1 of the table in subsection 128-15(4) provides that the cost base or reduced cost base of shares that pass to you as a beneficiary of a deceased estate that they acquired on or after 20 September 1985 will be the deceased's cost base of the shares on the date they died.

CGT Determination 33 TD 33: Capital Gains: How do you identify individual shares within a holding of identical shares? states:

1. Where a disposal of shares occurs and those shares are able to be individually distinguished e.g. by reference to share numbers or other distinctive rights or obligations attached to them, those shares are identifiable; their date of acquisition and cost base will be a matter of fact.

2. However, on the disposal of shares which form part of a holding of identical shares i.e. of the same class and in the same company, which are acquired over a period of time, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of.

3. In these circumstances, the taxpayer will need to decide which particular shares are being disposed of. Taxpayers in this situation will need to keep adequate records of the transaction so that the decision can be supported should the income tax return be subject to Tax Office scrutiny at a later date.

Subsection 121-20(1) states that you must keep records of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss from a CGT event.

Subsection 121-25(2) sets out that you must retain the records until the end of 5 years after it becomes certain that no CGT event, or no further CGT event, can happen such that the records could reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss from the event.

The Executors have records that identify the company the share is in, the date of acquisition, quantity, and cost of each share acquired by the deceased. Accordingly, they have sufficient records to determine when the shares were acquired by the Deceased.

The shares appropriated to you will be identified on appropriation.

Where sufficient records are maintained by you to evidence which of these shares have been appropriated to you by the Executors, your cost base of any share that was acquired by the Deceased on or after 20 September 1985 will be modified by item 1 of the table in subsection 128-15(4) to be the Deceased's cost base on the date they died.

Generally, you will need to retain these records and any other relevant records in working out whether you make a capital gain or a capital loss on the shares for five years after it becomes certain no other CGT event will happen to in the shares, or you have applied all capital losses relevant to the shares.

Question 3

Will the cost base of the shares appropriated to you under the Will be modified by item 4 of the table in subsection 128-15(4) of the ITAA 1997 where adequate records are maintained to identify the shares that were acquired by the Deceased before 20 September 1985 and such shares are identified on such appropriation?

Summary

Yes.

Detailed reasoning

Subsection 128-15(4) sets out the modifications to the cost base and reduced cost base of CGT assets that pass to you as a beneficiary of a deceased estate.

Item 4 of the table in subsection 128-15(4) provides that the cost base or reduced cost base of shares that pass to you as a beneficiary of a deceased estate that they acquired before 20 September 1985 will be the market value of the shares on the date they died.

As explained above, the Executors have records that identify the company in which the share is in, the date of acquisition, quantity, and cost of each share acquired by the deceased. Accordingly, they have sufficient records to determine when the shares were acquired by the Deceased.

The shares appropriated to you will be identified on appropriation.

Where sufficient records are maintained by you to evidence which of these shares have been appropriated to you by the Executors, your cost base of any share that was acquired by the deceased before 20 September 1985 will be modified by Item 4 of the table in subsection 128-15(4) to be the market value of the share on the date the Deceased died.

Generally, you will need to retain these records, and any other records relevant to working out whether you make a capital gain or a capital loss on the shares, for five years after it becomes certain no other CGT event will happen to the shares or you have applied all capital losses relevant to the shares.