Edited version of private advice

Authorisation number: 1052222692157

Date of advice: 3 May 2024

Ruling

Subject: CGT - deceased estate

Question 1

Is the deceased Estate a fixed trust under section 272-5 of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Has a Capital Gains Tax (CGT) event occurred in the sale of the share portfolio, if so which CGT event?

Answer

No, not for the Trustee. The sole Beneficiary in their capacity as an individual has had CGT event A1 occur.

Question 3

Can the non-resident Beneficiary, Trustee and the Estate disregard the capital gain that is made as a result of a CGT event happening?

Answer

Yes. The sole Beneficiary in their capacity as an individual who was a beneficiary of the deceased estate will have the capital gain disregarded.

This private ruling applies for the following period:

Year ending 01 July 20XX

Year ending 30 June 20XX

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

By virtue of not preceding the Deceased, the deceased's spouse is both the Executor and sole Beneficiary of the Estate, subject to clause [X] of the Deceased's Will.

The Deceased passed away DOD.

The Deceased at all material times was an Australian Resident for tax purposes.

The Beneficiary/Executor was not an Australian Resident for tax purposes at the time of the Deceased's death and this residency status has remained the same since that time.

The Deceased left a Will which directed all assets of the estate to the Beneficiary.

The Deceased until passing owned a share portfolio, which formed part of the Estate.

During both the 20XX and 20XX financial years, the share portfolio assets were sold by the Beneficiary prior to the estate being administered in two tranches:

Probate had been granted on xx/xx/xxxx and the shares were sold after probate was granted.

The share portfolio that the deceased held did not consist of a 10% interest in any of the entities invested in.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 272-5 of Schedule 2F

Income Tax Assessment Act 1936 section 272-65 of Schedule 2F

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

Income Tax Assessment Act 1997 section 104-215(3)

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

Income Tax Assessment Act 1997 section 855-10

Further issues for consideration

We have limited our private ruling to the questions raised in your application. There may be related issues that you should consider, including:

In relation to the deceased individual:

A K3 CGT event occurred just before the deceased passed away under section 104-215(3) of the ITAA 1997. The non-resident beneficiary triggers this K3 CGT event in relation to the share portfolios that are not taxable Australian property. The K3 event applied to the deceased taxpayer, and not to the trustee or beneficiary of the deceased estate. The 'date of death' individual tax return for the deceased is required to declare this K3 CGT event as they are an Australian resident taxpayer with a non-resident beneficiary.

You may apply for another private ruling for the deceased taxpayer on this matter.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for THE TRUSTEE of the Estate.

This is to explain how we reached our decision. This is not part of the private ruling.

Issue - Capital Gains Tax - Fixed Trust

Question 1

Is the deceased Estate a fixed trust under section 272-5 of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection of the Income Tax Assessment Act 1997 (ITAA 1997)?

The ATO Interpretative Decision ATO ID 2006/279 - Income tax: Trust losses - fixed entitlement - beneficiaries of a deceased estates provides the ATO's view that a deceased estate in which the beneficiaries have fixed entitlements to the income and capital of the estate can be regarded as a fixed trust.

The beneficiary was named in the Will as the sole beneficiary and the will "directed all assets of the estate" to them.

The Commissioner is satisfied that in your case, the beneficiary does have fixed entitlements to the income and capital of the estate.

As the Beneficiary has a fixed entitlement to all the income and capital, the Estate is a fixed trust under section 272-65 of Schedule 2F of the ITAA 1936.

Question 2

Has a Capital Gains Tax (CGT) event occurred in the sale of the share portfolio, if so which CGT event?

There is no CGT event for the rulee Trustee in this case as the individual selling the shares was acting in their capacity as beneficiary when the shares were sold.

It is the ATO's view in Tax Determination 2004/3 (TD 2004/3) Income tax: capital gains: does and asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate? Which states that:

"An asset will 'pass' to the beneficiary of a deceased estate when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee (whether or not the asset is later transmitted or transferred to the beneficiary)".

As the individual Beneficiary was the sole beneficiary of the deceased estate, the assets of the deceased estate could not pass by being transmitted or transferred. The assets of the estate passed when the beneficiary became absolutely entitled to them. As noted in IT 2622, entitlement cannot occur until probate has been granted.

Taxation Ruling Income Tax: present entitlement during the stages of administration of deceased estates, (IT 2622) at paragraph 4 where it notes:

"Even though a will may provide beneficiaries with absolute and indefeasible interests in the capital or income of an estate, under State laws those interests cannot crystallize until probate has been granted. "

Section 106-50 of the ITAA 1997 confirms that the absolutely entitled beneficiary owns the asset and not the Trustee of the trust, and any capital gain or loss from the sale is made by that individual not the trustee.

Where all liabilities are able to be provided for so that distribution can be made the absolute entitlement rule can apply. In this case this had occurred by the time that the shares were sold.

Accordingly, at time of sale, the shares had passed to the sole beneficiary so that on sale the sole beneficiary was selling the shares in their individual capacity.

Question 3

Can the non-resident Beneficiary, Trustee and the Estate disregard the capital gain that is made as a result of a CGT event happening?

As the beneficiary is the person to which event A1 applies, as a non-resident, section 855-10 can apply to disregard any CGT event arising.