Edited version of private advice

Authorisation Number: 1052393410776

Date of advice: 20 May 2025

Ruling

Subject: Capital gains tax

Question 1

Will the Commissioner accept that s 99B (1) of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to the distribution of the Pre-Shares and the Post -CGT shares by the taxpayer to any of the Testamentary Trusts established under the Will?

Answer 1

Yes.

This advice 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 passed away on XX/XX/20XX.

The Deceased was a resident of Australia for tax purposes.

The executors of the estate are not residents of Australia for tax purposes.

Probate was granted by the Supreme court of XXXX on XX/XX/20XX.

The Deceased left a Will dated XX/XX/20XX with clauses:

a.              Clause XX (c) - (g) provides that the sum of $XXX is to be paid from the Estate of the Deceased to each of the five trustees of trusts to be established in accordance with the Will. (The Testamentary Trusts).

b.              Clause XX. (h) provides that the residue of the estate of the Deceased is to be paid to the Testamentary Trust as tenants in common in equal shares.

As of XX/XX/20XX (the application date), none of the payments referred above in Clause XX. (c) to (g) have been made.

The XXX Testamentary Trust have not yet been established. Once established, all the five trustees will be residents, therefore the testamentary trusts will be Australian resident trusts for tax purpose.

The residue of the Estate has not been and is not capable of being determined with precision. Consequently, no payments have been made to the Testamentary Trust pursuant to clause XX. (h) of the Will.

The Estate is substantial, consisting of XXXX, XXXXXX, following the sale of the Deceased main residence as well as XXXX that were wholly owned by the Deceased.

One of the sold companies is XXXXXXX incorporated in and therefore a resident of Australia for tax purposes. The Deceased purchased some of the shares in XXXXXX before 19 September 1985 (Pre-CGT shares).

The Deceased acquired some of the shares in XXXXXXX on the death of the spouse on XX/XX/19XX (Post-CGT shares). The deceased spouse acquired the those shares before 19 September 1985. At all relevant times the deceased spouse was a resident of Australia for tax purposes.

XXXXX was previously the owner of XXXX parcels of real estate in XXXXXXXX, both acquired before 19 September 1985 (Pre-CGT property). Both properties have been sold which resulted in capital gains for XXXXXXXXX. The real estate sale was considered a pre-CGT asset as per subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997). The change in ownership of XXXXXXXXX from the Deceased's spouse to the Deceased did not cause its pre-CGT assets to become post-CGT assets (as per subsections149-30(3) and 149-30(4) of the ITAA 1997).

All XXXXXX company shares that the Deceased owned form part of the deceased estate and will be transferred to the testamentary trusts under the will.

In the Financial Statements of XXXXXXX, the capital gains from the sale of the real estate are credited as 'Pre-CGT Profits Reserve'.

The Administration of the Estate of the Deceased has not yet been completed. This is because the deceased estate as plaintiff and the appellant has previously been party to litigation concerning a loan previously advanced by the Deceased and whether the loan could be recovered from the borrower (the defendant). The deceased estate was ultimately unsuccessful in that ligation and is consequently the subject of several adverse cost orders.

The costs in those proceedings have not been assessed and the deceased estate has made an offer to settle the cost orders, however the defendant has not yet responded to the settlement offer and has not otherwise sought to have the order enforced.

The deceased estate has determined that other assets of the estate (other than the shares in XXXXX) are sufficient to discharge the maximum possible amount payable to the defendant in respect of the cost's orders (the Costs Liability).

The deceased estate is considering establishing the Testamentary trusts and transferring the pre-CGT shares and the post-CGT shares to some or all of the five Testamentary Trust as an interim distribution. This would be pursuant to clause XX. (h) of the Will so that the costs liability does not continue to delay distribution of part the estate of the Deceased.

Assumption

It has been assumed that, at the time the payments pursuant to clause XXX. (h) of the Will are made, each of the Testamentary Trusts will have been established with at least on trustee that is a resident of Australia for tax purposes and that the executors will not be trustees of the Testamentary trusts.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Reasons for decision

Section 99B of the ITAA 1936 applies when money or another asset of a foreign trust is paid to you or applied for your benefit, and you are a beneficiary of the foreign trust. Trust assets can include cash, land, shares and other assets.

The amount or value of the asset is included in your assessable income in the income year that you receive it.

Trust assets paid to you or applied for your benefit can include:

•                Loans to you by the trustee directly or indirectly through another entity

•                Amounts paid by the trustee to a third party on your behalf

•                Amounts that are described as gifts from family members, but are sourced from the trust

•                Distributions paid to you or trust assets (such as shares) are transferred to you by the trustee.

This is an integrity measure, introduced to prevent or discourage taxpayers from using trusts property or receiving trust assets and not paying the right amount of tax. Section 99B of the ITAA 1936 was introduced to tax the receipt of trust income not previously subject to tax and later distributed to an Australian resident beneficiary. The tax liability is assessable for the resident beneficiary.

This receipt or the amount applied for the benefit of the beneficiary from the trust estate will include income distributions from both Australian and foreign sources. Section 99C of the ITAA 1936 outlines what is the meaning of paid or applied for the benefit.

The amount that is assessable is then reduced by the corpus as per section 99B(2)(a) of the ITAA 1936. Corpus is the amounts in the foreign trust that were in the deceased estate from the deceased on the date of death and does not represent earnings by the foreign trust. This is the amount that is capital used to settle deceased estate trust.

As a result, if the amount that is assessable is either already taxed or assessed or is part of the initial corpus, the payment will not be included as a payment or other asset or benefit that a taxpayer receives from a foreign trust.

Practical compliance guide PCG 2024/3 outlines the Commissioner's compliance approach to section 99B of the ITAA 1936. Paragraph 69 explains that the corpus of a non-resident deceased estate is typically comprised of the assets the deceased owned before their death. Section 99B may apply to distributions or benefits provided from the deceased estate where the estate has derived income and gains after the date of death.

One of the consequences of the complete administration of the deceased estate may be a creation of a testamentary trust under the Will.

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 (the executors or trustees of the estate) or to a beneficiary in a deceased estate.

Law Administration Practice Statement PS LA 2003/12 treats the testamentary trust in the same way as a legal personal representative for the purpose of section 128-15(3) of the ITAA 1997.The capital gain or capital loss on transfer of the asset from the legal personal representative to a beneficiary is disregarded. This will not apply if there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies.

In this case, the pre-CGT and post-CGT shares would be a distribution the foreign resident deceased estate to the resident Testamentary trust. However, the distribution would be from the corpus of the deceased estate.

Therefore, based on the information provided, there are no section 99B implications with the proposed distributions of the CGT assets from the foreign trust to the new resident testamentary trusts.