Edited version of private advice

Authorisation Number: 1052065073278

Date of advice: 5 December 2022

Ruling

Subject: CGT - deceased estate - deed of family arrangement

Question

Would the proposed transfer of the property under the Deed of Family Arrangement give rise to a CGT liability for the trustee and a beneficiary of an Estate?

Answer

No

This ruling applies for the following period:

Financial Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Late XXX ('the deceased') passed away on XX 20XX leaving a Will ('the Will').

The Will appointed XXX as the sole executor and trustee, and provided for a property situated at XXX in the State of XXX ('the property') to be bequeathed to the deceased's three children in equal shares; XXX, XXX and XXX.

The beneficiaries have reached an agreement as to the fair share of the property and, rather than commence litigation, propose to enter into a Deed of Family Arrangement altering their rights and interests under the Will.

The Deed of Family Arrangement will result in XXX relinquishing their third interest share in the property to XXX and XXX.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Paragraph 128-20(1)(d)

Reasons for decision

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out special CGT rules for deceased estates.

Under Division 128 of the ITAA 1997 when a person dies a capital gain from a CGT event that results for a CGT asset the person owned just before dying is disregarded. The legal personal representative (or trustee of the estate) is taken to have acquired the asset on the day the deceased died. Under subsection 128-15(3) of the ITAA 1997 any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in the estate is disregarded.

Under paragraph 128-20(1)(d) of the ITAA 1997 a CGT asset passes to a beneficiary of the estate if the beneficiary becomes the owner of the asset under a Deed of Arrangement where:

(i)            the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate, and

(ii)           any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

A taxpayer is not required to commence legal proceedings in order to establish, for the purposes of paragraph 128-20(1)(d), that they have a claim to participate in the distribution of the assets of the estate. A claim may be established by a potential beneficiary communicating to the trustee their dissatisfaction with the will.

The Deed of Arrangement must be entered into prior to the administration of the estate being completed unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entertained their application for family provision, or an extension of time in which to make such an application.

As a result, the property will pass to a beneficiary and any capital gain that the trustee makes on the transfer is disregarded under subsection 128-15(3) of the ITAA 1997.