Edited version of private advice

Authorisation Number: 1052377387509

Date of advice: 9 April 2025

Ruling

Subject: Deceased estate

Question 1

Pursuant to the Income Tax Assessment Act 1997 (ITAA 1997) and Law Administration Practice Statement PSLA 2003/12 - Capital Gains Tax Treatment of the Trustee of a Testamentary Trust" (PSLA 2003/12) will all capital gains or losses be disregarded on the passing of the properties in the deceased's estate:

a.            From the deceased to the legal personal representative (LPR) per the terms of the Will?

Answer

Yes. Income Tax Assessment Act 1997 (ITAA 1997) Section 128-15 (1) (a) and (3) deal with the transfer of assets upon death such that when a property is passed from a deceased person to their LPR, capital gains and losses are generally disregarded for tax purposes.

PSLA 2003/12 outlines the Australian Taxation Office's (ATO) administrative practice regarding the capital gains tax (CGT) treatment of the trustee of a testamentary trust. It ensures that theATO treats the trustee of a testamentary trust in the same way as the LPR for CGT purposes.

b.            From the LPR of the deceased's estate to the trustee of the testamentary trust per the terms of the Will?

Answer

Yes. ITAA 1997 Section 128-15 (3) applies when assets are transferred from the LPR of a deceased estate to the trustee of a testamentary trust. Capital gains and losses are generally disregarded when properties are passed from the LPR (such as an executor) to the trustee of a testamentary trust.

c.             The in-specie transfer from the trustee of the testamentary trust to the beneficiary of the testamentary trust per the terms of the Will?

Answer

Yes. ITAA 1997 Section 128-15 (1) (b) and (3) applies such that when the LPR transfers the asset to a beneficiary (including the trustee of a testamentary trust), any capital gain or loss is also disregarded.

d.            From the trustee of the testamentary trust, will the trustee be treated in the same way as the LPR at the time when an in-specie distribution of the properties is made to the beneficiary from the testamentary trust?

Answer

Yes. The operation of PS LA 2003/12 ensures that the trustee of the testamentary trust will be treated in the same way as the LPR for the purposes of ITAA 1997, section 128-15(3), at the time when an in-specie distribution of the properties is made to the beneficiary from the testamentary trust. Any capital gain or capital loss made by the trustee when the asset passes to a beneficiary is disregarded.

Question 2

When the trustee transferred the properties to the beneficiary, is the beneficiary taken to have acquired the properties on the date the deceased passed away?

Answer

Yes, when a trustee of a testamentary trust transfers properties to a beneficiary, section 128-15(2), the beneficiary is generally taken to have acquired the properties on the date of death of the deceased.

Question 3

When the trustee transferred the properties to the beneficiary, is the beneficiary's cost base of the properties the market value of the properties on the date the deceased passed away?

Answer

Yes, when a trustee of a testamentary trust transfers properties to a beneficiary, the beneficiary's cost base for the properties is generally the market value at the date of death of the deceased pursuant to section 128-15 (4) (1).

This ruling applies for the following period:

30 June 202X

The scheme commenced on:

01 July 202X

Relevant facts and circumstances

Person A was executor and trustee for the estate of the deceased who passed away in 20XX.

The deceased inherited two properties before 20 September 1985 (pre-CGT) which were included in their will.

The properties were used for business purposes before being destroyed by arson.

The properties were not redeveloped nor were any improvements made and were then demolished following the deceased's death, becoming vacant land.

The deceased never lived in the premises and resided in their own home prior to moving into a nursing home two years before their death.

The deceased made their last will and testament on XX XXX 20XX (the Will).

Due to a family matter, probate for the deceased's estate was not granted until several years later.

The Will (at clause 2a) provided that the whole of the estate of the deceased was to be held by Person A as testamentary trustee on trust to establish a fund and distribute the capital and net income and to the deceased's children, grandchildren and great grandchildren.

A Deed of Settlement and Release was the result of a dispute between Person A and Person B that ended in a mediation agreement in 20XX.

Persons A and B were the only surviving children of the deceased.

Person A as trustee transferred the certificates of titles of the properties to Person B.

An auction was held with no bids and periods of inactivity occurred due to lack of interest by business or tenants.

In 202X, Person B sold the properties.

The total area of the properties is less than 2 hectares.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Question 1

Pursuant to the Income Tax Assessment Act 1997 (ITAA 1997) and Law Administration Practice Statement PSLA 2003/12 - Capital Gains Tax Treatment of the Trustee of a Testamentary Trust" (PSLA 2003/12) will all capital gains or losses be disregarded on the passing of the properties in the deceased's estate:

a.            From the deceased to the legal personal representative (LPR) per the terms of the Will?

Summary

Section 128-15 of the ITAA 1997 sets out what happens to a capital gains tax (CGT) asset that a decedent taxpayer owned just before their death that devolves to their LPR or passes to a beneficiary in their estate.

Detailed reasoning

The capital gains tax provisions that deal with the effect of death are located in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

When a person dies, the assets that make up their estate can:

             i.       pass directly to a beneficiary (or beneficiaries), or

             ii.       pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).

A legal personal representative can be either:

•                     the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will)

•                     an administrator appointed to wind up the estate if the person does not leave a will.

The term 'legal personal representative' is defined in subsection 995-1(1) of the ITAA 977 and includes an executor or administrator of an estate of an individual who has died.

Section 128-10 of the ITAA 1997 states that when you die, a capital gain or loss from a CGT event that results for a CGT asset you owned just before dying is disregarded. This means that although the passing of the asset from the deceased person to their beneficiary or legal representative is an effective disposal, it does not trigger CGT event A1. It does not mean that there are no CGT implications of the asset passing to the beneficiary or legal representative.

Section 128-15 of the ITAA 1997 provides for what happens to the CGT asset in the hands of the legal personal representative or beneficiary when someone dies and passes a CGT asset they owned to a beneficiary in their estate.

Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your LPR or passes to a beneficiary in your estate, the LPR, or beneficiary, is taken to have acquired the asset on the day you died.

Subsection 128-15(4) states that for assets the deceased acquired after 20 September 1985 (other than trading stock or a dwelling used as a main residence), the first element of the asset's cost base or reduced cost base in the hands of the legal representative is the deceased's cost base or reduced cost base on the date of death (item 1 of the table in subsection 128-15(4) of the ITAA 1997). That is, the legal representative inherits the deceased's cost base or reduced cost base.

b.            From the LPR of the deceased's estate to the trustee of the testamentary trust per the terms of the Will?

Summary

Section 128-15(3) of the ITAA 1997 applies when assets are transferred from the LPR of a deceased estate to the trustee of a testamentary trust. Capital gains and losses are generally disregarded when properties are passed from the LPR (such as an executor) to the trustee of a testamentary trust.

Detailed reasoning

Disregarding the capital gain or loss at the point of transfer acts to simplify the tax administration for estates and acts to reduce the burden on the LPR, ensuring that beneficiaries receive assets without immediate capital gains tax implications.

The primary purpose of section 128-15(3) is to ensure that the transfer of a CGT asset from the LPR through to a beneficiary does not trigger a CGT event and avoid unnecessary tax complications during the administration of a deceased estate.

In relation to trusts, PS LA 2003/12 extends the application of section 128-15(3) to the testamentary trust. The same rules apply, meaning any capital gain or loss made by the LPR when the asset passes to the trustee is disregarded.

c.            the in-specie transfer from the trustee of the testamentary trust to the beneficiary of the testamentary trust per the terms of the Will?

Summary

ITAA 1997 Section 128-15 (1) (b) and (3) applies such that when the LPR transfers the asset to a beneficiary (including the trustee of a testamentary trust), any capital gain or loss is disregarded.

The beneficiary is taken to have acquired the asset on the day the deceased person died. The cost base of the asset for the beneficiary is generally the market value of the asset at the date of death, ensuring that the beneficiary's future CGT calculations are based on this value

Detailed reasoning

Capital gains and losses will generally be disregarded on the in-specie transfer from the trustee of the testamentary trust to the beneficiary of the testamentary trust, per the terms of the Will.

PS LA 2003/12 confirms the Commissioner's long-standing administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3).

•                     The beneficiary is taken to have acquired the asset on the day the deceased person died

•                     Any capital gain or loss made by the trustee when the asset passes to a beneficiary is disregarded

•                     The trustee does not need to account for CGT on the transfer

•                     The cost base and reduced cost base of the asset for the beneficiary are generally the market value of the asset at the date of death of the deceased

•                     Any capital gain or loss made by the trustee when the asset passes to a beneficiary is disregarded

d.            From the trustee of the testamentary trust, will he be treated in the same way as LPR at the time when an in-specie distribution of the properties is made to the beneficiary from the Testamentary Trust?

Answer

Yes. The operation of PS LA 2003/12 ensures that the trustee of the testamentary trust will be treated in the same way as the LPR for the purposes of ITAA 1997, section 128-15(3), at the time when an in-specie distribution of the properties is made to the beneficiary from the testamentary trust. Any capital gain or capital loss made by the trustee when the asset passes to a beneficiary is disregarded.

Division 128 ITAA 1997 deals with the CGT consequences when a person dies. Under this division, certain CGT events are disregarded if they relate to assets owned by the deceased just before their death.

CGT events related to Division 128:

1.            CGT Event E5: This event occurs when a beneficiary becomes absolutely entitled to a CGT asset of a trust (excluding unit trusts or trusts to which Division 128 applies) as against the trustee

2.            CGT Event E7: This event happens if the trustee of a trust (excluding unit trusts or trusts to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest in the trust capital

Division 128 ITAA 1997 acts to disregard capital gains or losses when assets pass from a deceased estate to beneficiaries.

Capital gains and losses will be disregarded on the in-specie transfer from the trustee of the testamentary trust to the beneficiary of the testamentary trust, per the terms of the Will.

Question 2

When the trustee transferred the properties to the beneficiary, is the beneficiary taken to have acquired the properties on the date the deceased passed away?

Summary

When a trustee of a testamentary trust transfers properties to a beneficiary, the beneficiary is generally taken to have acquired the properties on the date of death of the deceased.

Specifically, Section 128-15 of the ITAA 1997 states that the cost base of the asset for the beneficiary is the same as it was for the deceased, and the acquisition date is the date of death.

This means that for CGT purposes, the beneficiary is considered to have acquired the asset at the time of the deceased's death, and the cost base is the market value at that time.

Detailed reasoning

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a decedent's estate if the beneficiary becomes the owner of the asset:

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

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

(c)       because it is appropriated to the beneficiary by your LPR 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 your 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 your estate.

(It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your LPR.)

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.

Relevantly, item 4 of the table in subsection 128-15(4) of the ITAA 1997 provides that where the decedent acquired the asset before 20 September 1985, noting that the acquisition date by the decedent was in 1946, pre 20 September1985, the first element of the acquirer's cost base - the acquisition cost - is the market value for the asset on the day they died.

This provision ensures that the cost base for the beneficiary is reset to the market value at the date of death, which is particularly relevant for assets acquired before the introduction of CGT on 20 September 1985.

When the estate of a decedent is administered and a testamentary trust is created under the will over the assets of the decedent and the trustee holds the assets on behalf of the beneficiaries of the will, CGT event E1 in section 104-55 of the ITAA 1997 happens at the time the trust is created.

In this case the trustee acquires the original asset from the LPR at the date of the testator's death pursuant to subsection128-15(2) of the ITAA 1997. The trustee's acquisition cost is determined under subsection 128-15 of the ITAA 1997.

Question 3

When the trustee transferred the properties to the beneficiary, is the beneficiary's cost base of the properties the market value of the properties at the date the deceased passed away?

Summary

Yes, when a trustee of a testamentary trust transfers properties to a beneficiary, the beneficiary's cost base for the properties is generally the market value at the date of death of the deceased.

Pursuant to 128-20 of the ITAA 1997, an asset passes to a beneficiary in a decedent's estate if the beneficiary becomes the owner of the asset or under a deed of arrangement.

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your LPR.

Detailed reasoning

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.

When the estate of a decedent is administered and a testamentary trust is created under the will over the assets of the decedent and the trustee holds the assets on behalf of the beneficiaries of the will, CGT event E1 in section 104-55 of the ITAA 1997 happens at the time the trust is created.

In this case the trustee acquires the original asset from the LPR at the date of the testator's death: subsection 128-15(2) of the ITAA 1997. The Trustee's acquisition cost is determined under subsection 128-15 of the ITAA 1997.

Section 128-15 of the ITAA 1997 sets out what happens to a CGT asset that a decedent taxpayer owned just before their death that devolves to their legal personal representative or passes to a beneficiary in their estate.

The term 'legal personal representative' is defined in subsection 995-1(1) of the ITAA 977 and includes an executor or administrator of an estate of an individual who has died.

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

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a decedent's estate if the beneficiary becomes the owner of the asset:

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

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

(c)       because it is appropriated to the beneficiary by your 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 your 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 your estate.

(It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your LPR.)