Edited version of private advice

Authorisation Number: 1052147379724

Date of advice: 27 July 2023

Ruling

Subject: Effect of death - transfer of asset

Question 1

Will subsection 128-15(3) and paragraph 128-20(1)(a) of the Income Tax Assessment Act 1997 apply to the distribution of the Property by the Taxpayer to the deceased's spouse?

Answer

Yes.

Question 2

Assuming the answer to Question 1 is yes, is the contribution to the Taxpayer by the deceased's spouse considered taxable income of the Taxpayer?

Answer

No.

Question 3

Does section 102AG of the Income Tax Assessment Act 1936 apply to the payment to the Taxpayer?

Answer

No.

This ruling applies for the following period:

1 July 2023 to 30 June 2024

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

The deceased passed away during the income year.

The Taxpayer is the executor of the deceased estate.

The executors of the deceased estate obtained probate of the deceased's will.

The executors of the deceased estate were granted to the adult children of the deceased.

The adult children of the deceased are also the residual beneficiaries of the deceased estate.

All beneficiaries are over 18 years of age.

The will establishes a testamentary trust for each of the deceased's adult children and provides for the residuary of the deceased estate to be held equally between the newly created testamentary trusts.

The deceased's will created life interests in certain assets of the deceased estate which included the Property.

The deceased's spouse was granted a life interest in the Property.

After the deceased's spouse passing and in accordance of the will, the Property would become part of the residuary estate and divided equally between the adult children's testamentary trusts.

The deceased's spouse commenced legal proceedings to challenge the will, claiming further provision from the estate of the deceased for his proper maintenance and support, asserting his ownership claim over the Property.

The instigation of these proceedings led to settlement negotiations between the deceased's spouse and the beneficiaries.

A settlement agreement was proposed, where by:

• The beneficiaries consent to a family provision order whereby the Property is transferred to the deceased's spouse, and
• The deceased spouse makes a contribution to the deceased estate.

A court order was obtained that varied the will which transferred the Property to the deceased's spouse as well as making a payment to the estate.

The deceased estate is currently still in the process of administration to give effect to the will as varied by the court order.

The estate has no other substantial amounts of property such that the effect of the varied will is that the Property will pass to the deceased's spouse. The estate will then pass any remaining funds as cash bequeaths to the residual beneficiaries in equal amounts.

The residual beneficiaries remain unchanged.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1936 Section 102AC

Income Tax Assessment Act 1936 Section 102AG

Reasons for decision

Question 1

Summary

Any capital gain or loss made by the trustee of a deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997 if an asset of the estate passes to a beneficiary in accordance with section 128-20. An asset will 'pass' to a beneficiary if they become the owner of an asset under a will that is varied by a court order under paragraph 128-20(1)(a). In this case, the court made an order for the Property to be transferred to the deceased's spouse following the dispute with the Taxpayer. The transfer of the Property to the spouse under the court order means the property will be taken to have 'passed to a beneficiary' under subsection 128-20(1) when the transfers are affected. Therefore subsection 128-15(3) applies to disregard any capital gain or loss made by the Trustee of the Estate.

Detailed reasoning

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset.

CGT event A1 is the most common CGT event and is described under section 104-10 of the ITAA 1997. CGT event A1 occurs if there is a disposal or part disposal of a CGT asset.

Subsection 104-10(2) of the ITAA 1997 defines a disposal as:

You dispose of a CGT asset if the change in ownership occurs from you to another entity, whether because of some act or event or by operation of the law. However, a change in ownership does not occur if you stop being the legal owner if the asset but continue being the beneficial owner.

A capital gain is made if the capital proceeds from the disposal are more than the cost base of the asset. Conversely, a capital loss arises if the capital proceeds are less than the asset's reduced cost base.

Subsection 108-5(1) of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property.

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or passes to a beneficiary in a deceased estate.

Relevantly, LPR is defined in subsection 995-1(1) of the ITAA 1997 to mean an executor or administrator of an estate of an individual who has died.

Under section 128-10 of the ITAA 1997, when a person dies, any capital gain or loss from a CGT event that results from a CGT asset the person owned just before dying is disregarded.

Subsection 128-15(1) of the ITAA 1997 sets out what happens if a CGT asset you owned just before dying:

       (a)    devolves to your LPR; or

       (b)    passes to a beneficiary in your estate.

Subsection 128-15(2) of the ITAA 1997 provides that the LPR, or beneficiary, is taken to have acquired the asset on the day you died.

Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3) of the ITAA 1997.

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the LPR or beneficiary.

Under subsection 128-20(1) of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

       (a)    under a will, or that will as varied by a court order,

       (b)    by operation of an intestacy law, or such law as varied by a court order, or

       (c)    because it is appropriated to the beneficiary by the deceased legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate, or

       (d)    under a deed of arrangement if:

                    (i)     the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased 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.

In your circumstances, you have obtained a court order where the trustees and beneficiaries have agreed for the Property to be transferred to the deceased's spouse.

As a result of the transfer of the Property from the deceased estate to the spouse, CGT event A1 occurs due to a disposal of the asset as well as a change in ownership of the asset.

Any capital gain or capital loss the deceased estate makes when the asset passes to a beneficiary who is the spouse in your estate is disregarded under subsection 128-15(3) of the ITAA 1997. This provides that the trustee is subject to no tax when passing a CGT asset to a beneficiary of the trust.

The requirement of paragraph 128-20(1)(a) of the ITAA 1997 have been met as the asset, being the Property, passes to a beneficiary who is the deceased spouse, from the deceased estate as a result of the will being varied by a court order.

As the Property will be transferred to the deceased's spouse, pursuant to a court order, the Property will be considered to have passed to the spouse as a beneficiary of the deceased estate under paragraph 128-20(1)(a) of the ITAA 1997. Accordingly, any capital gain or capital loss that would otherwise arise will be disregarded under subsection 128-15(3).

Question 2

Summary

The contribution paid by the deceased's spouse to the Taxpayer will not be considered assessable income of the Taxpayer.

Detailed reasoning

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, and have an element of periodicity, recurrence or regularity.

The spouse acquired 100% ownership interest in the Property under a will that was varied by a court order on condition of making a payment to the Taxpayer. The payment made by the spouse under the terms of the court order will be treated as having passed directly to the beneficiaries under the deceased's will, rather than as consideration for their interest in the Property.

The transfer of the Property is capital in nature and does give rise to any ordinary income. Therefore, any amount received in relation to the transfer of the Property as a result of the will being varied by a court order is not ordinary income and not assessable to the Taxpayer pursuant to section 6-5 of the ITAA 1997.

Capital gains

Subsection 6-10(2) of the ITAA 1997 that's that amounts that are not ordinary income but are included in your assessable income by provisions about assessable income are called statutory income.

Section 102-20 of the ITAA 1997 states that you make a capital gain or loss if and only if a CGT event happens.

As discussed at Question 1, any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3) of the ITAA 1997.

The spouse acquired 100% ownership interest in the Property under a will that was varied by a court order on condition of making a payment to the Taxpayer. The payment made by the spouse under the terms of the court order will be treated as having passed to the Taxpayer to administer the deceased estate.

The Property passing to the spouse will pass without CGT consequences for the Taxpayer. The cash bequeath from the Taxpayer will pass in equal instalments to the three residual beneficiaries without CGT consequence for the Taxpayer.

There is no acquisition cost or purchase date of the money received by the beneficiaries (other than the spouse) from the deceased estate relating to the variation in the will as a result of a court order and no capital gain/loss calculation is required.

Therefore, any amount received in relation to the transfer of the Property as a result of the will being varied by a court order is not statutory income and not assessable to the Taxpayer pursuant to section 6-10 of the ITAA 1997.

Question 3

Summary

Section 102AG of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to the payment to the Taxpayer as this provision only applies to prescribed persons who receives a share as a beneficiary of the trust's net income that is excepted trust income.

Detailed reasoning

Division 6AA of the ITAA 1936 ensures that special rates of tax and a lower tax free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person.

Division 6AA of the ITAA 1936 will apply, where the beneficiary of a trust is a prescribed person, to so much of the beneficiary's share of the net income of the trust that is not excepted trust income.

Subsection 102AG(1) of the ITAA 1936 states:

Where a beneficiary of a trust estate is a prescribed person in relation to a year of income, this Division applies to so much of the share of the beneficiary of the net income of the trust estate of the year of income as, in the opinion of the Commissioner, is attributable to assessable income of the trust estate that is not, in relation to that beneficiary, excepted trust income.

A beneficiary will be a prescribed person under subsection 102AC(1) of the ITAA 1936 which states:

For the purposes of this Division, a person is a prescribed person in relation to a year of income if:

                  (a)        the person is less than 18 years of age on the last day of the year of income; and

                  (b)        the person is not an excepted person in relation to the year of income.