Edited version of private advice

Authorisation Number: 1052094501301

Date of advice: 16 March 2023

Ruling

Subject: Deceased estate - CGT - deed of family arrangement

Question 1

If you sign the Deed of Family Arrangement (the Deed), will it constitute a deed of arrangement for the purposes of section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Deed is being entered into by the beneficiaries to settle a claim to participate in the distribution of the estate, and any consideration given by a beneficiary for the asset consists only of the variation or waiver of a claim to one or more other CGT assets that form part of the estate. Accordingly, any CGT asset being passed to a beneficiary pursuant to the Deed will result in that beneficiary becoming the owner of the asset under a deed of arrangement pursuant to section 128-20(1)(d) of the ITAA 1997.

Question 2

Will the proposed transfer of XXX property (Property A) and other assets (Personal Effects) of the estate under the Deed give rise to a CGT liability for the executors or beneficiaries of the estate?

Answer

No. Subsection 128-15(3) of the ITAA1997 provides that where an asset passes to a beneficiary in one of the methods listed in section 128-20 of the ITAA 1997, the executor can disregard any capital gain or loss made on the passing of that asset. The beneficiaries can disregard any capital gain or loss pursuant to section 128-10 of the ITAA 1997.

Section 128-15 of the ITAA 1997 provides that the executor, or beneficiary is taken to have acquired Property A on the day the deceased died. Any capital gain or loss is disregarded where an asset passes from the legal personal representative to a beneficiary of a deceased estate.

For the Personal Effects, the executor or beneficiary is taken to have acquired the assets if the deceased acquired it on or after 20 September 1985, and it was a collectable or personal-use asset in the deceased hands when they died (subsection 128-15(6) of the ITAA 1997).

If a collectable or personal-use asset is sold, the normal CGT rules apply - that is, the asset is subject to CGT unless it was acquired for less than the thresholds for these types of assets. For more information refer to quick code QC 67993 on our website, What is a CGT asset?

If Property A is later sold the cost base may be relevant. The first element of the cost base and reduced cost base will be the market value of the asset on the day the deceased died (Item 4 in the table to subsection 128-15(4) of the ITAA 1997).

Question 3

Can the Executors disregard any capital gain or capital loss made on the sale of XXX (Property B) pursuant to section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Property B is exempt from CGT as it was sold within two years, and just before the deceased died, the property was his main residence and not being used to produce income. The conditions of section 118-195 of the ITAA 1997 have been satisfied and the Estate can disregard any capital gain or loss made from the sale of Property B.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

•  The Deceased died on XX/XX/20XX leaving a Will (the Will).

•  The Executors of the estate are XX and XX (the Executors).

•  The Will provides for the residue of the Estate to go to the Executors in equal shares (the Beneficiaries).

•  The Executors obtained probate of the estate on XX/XX/20XX.

•  The residue of the estate comprised of:

-  XX (Property A)

-  XX (Property B)

-  XX (the Personal Effects)

•  On XX/XX/20XX, the Executors signed a contract to sell Property B with settlement occurring on XX/XX/20XX.

•  Property B had been the Deceased's main residence as at the date of their death and had not been used for the purpose of producing assessable income.

•  Property B was situated on less than two hectares of land.

•  Property A was originally acquired by the Deceased and their late spouse as joint tenants on XX/XX/19XX. When the spouse passed away XX/XX/20XX, their interest vested in the Deceased as the surviving tenant.

•  The Beneficiaries are in dispute about how Property A and Personal Effects should be dealt with. To settle a claim to participate in the distribution of the estate, the Beneficiaries propose to enter a deed of family arrangement which will depart from the terms of the Will (the Deed).

•  No external consideration is being provided by either Beneficiary in compensation for entering the Deed.

•  The administration of the estate will not be complete as at the date of entering the Deed.

•  The Beneficiaries are Australian residents for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20