Edited version of private advice

Authorisation Number: 1052372947674

Date of advice: 21 March 2025

Ruling

Subject: CGT - deceased estate

Question 1

Does the proposed transfer of the deceased's real property interests to beneficiaries of the deceased estate pursuant to the Deed of Family Arrangement pass to those beneficiaries within the meaning of paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) so that any capital gain the legal personal representative of Antonio's deceased estate makes is disregarded?

Answer 1

Yes.

Section 128-15 of the ITAA 1997 provides that any capital gain or loss a legal personal representative makes if a CGT asset passes to a beneficiary of a deceased estate is disregarded.

Subsection 128-20(1) of the ITAA 1997 states that a CGT asset passes to a beneficiary of a deceased estate under a deed of arrangement if:

(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.

Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests explains that for the purposes of paragraph 128-20(1)(d) of the ITAA 1997 a 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.

Further, a taxpayer is not required to commence legal proceedings in order to establish, for the purposes of paragraph 128-20(1)(d) of the ITAA 1997, 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.

In this case, a Deed of Family Arrangement will be entered into by the legal personal representative of the estate and beneficiaries under the will prior to the administration of the deceased estate being completed. Further, any consideration given by the beneficiaries for the respective assets will consist only of the variation or waiver of a claim to one or more other CGT assets that form part of the estate.

Consequently, any capital gain the legal personal representative of the deceased estate makes on the transfer of the deceased's real property interests to the beneficiaries of the estate will be disregarded.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased and their spouse (executor of the deceased estate) each held a 50% interest (as tenants in common) in various real properties.

At the time of their death, the deceased also held a one third interest (as tenant in common) in another real property.

The will provides that the deceased's real property interests are to be divided into equal parts and transferred equally to certain testamentary trusts for the respective benefit of the spouse and adult children of the deceased.

The beneficiaries of the estate disagree as to how the deceased's real property interests should be bequeathed under the will. In particular, given the diversity of the property portfolio and other factors, there are concerns that co-ownership of real property interests via the testamentary trusts is impractical, administratively onerous, and complicated.

Accordingly, the executor and beneficiaries have been seeking legal advice in respect of the merits of entering into a deed of family arrangement to vary the terms of the will. This includes consideration as to whether the beneficiaries could own the properties personally (rather than via the testamentary trusts) as well as whether each of them could be bequeathed the whole of the deceased's 50% interest in one or more of the properties (rather than as co-owners).

The executor and beneficiaries have since agreed to vary the terms of the will pursuant to a proposed Deed of Family Arrangement (DOFA).

The terms of the DOFA provide, among other things, that certain properties will be distributed to specified beneficiaries of the estate.

The DOFA also provides that the parties release each other from all claims whatsoever which they might have but for the terms of the settlement under the DOFA in respect of any injury, loss, cost, or expense of any kind suffered in any way connected with the facts or circumstances giving rise to the deceased's will, the administration of the deceased estate, or the negotiations relating to the settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20