Edited version of private advice

Authorisation Number: 4120076217892

Date of advice: 17 October 2019

Ruling

Subject: CGT - testamentary trusts

Question 1

Will the Commissioner treat the trustees of the Testamentary Trusts in the same way as legal personal representatives (LPRs) for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3), in accordance with Law Administration Practice Statement PS LA 2003/12?

Answer

Yes

Question 2

Will the Commissioner confirm that he will apply the ATO practice as set out in PS LA 2003/12 to the Trustees of the Testamentary Trusts, and disregard any capital gain that may arise in relation to the proposed transfers of interests in the Share Portfolio between the Testamentary Trusts?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

22 April 20XX

Relevant facts and circumstances

The deceased died in 20XX leaving a Will dated in 20XX.

Probate was granted and the Executors of the Estate are the original trustees of the Testamentary Trusts.

Clause 11(d) of the Will directed the Executors to hold the residuary estate on trust to be divided into two equal parts to form two Testamentary Trusts.

The relevant assets which fell within the residuary of the estate were acquired by after 19 September 1985 and transferred to the Estate at the time of death. Notably the relevant assets include listed shares (the share portfolio).

The Executors chose to administer the Estate on the basis that the share portfolio be held on behalf of the Testamentary Trusts as tenants in common rather than dividing ownership of specific shares between them, and a Deed of Variation to each Testamentary Trust was executed in 2018. Consequently, the share portfolio has been held in the Estate's name but has been accounted for on the basis of a tax law partnership between the two Testamentary Trusts.

The 50% interest is further evidenced by the Special Purpose Financial Report for the Estate for the 2018 income year which shows in the notes that the assets of the Estate have been divided equally for the benefit of the Testamentary Trusts.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Reasons for decision

Summary

The Commissioner accepts that, for the purposes of Division 128 the trustees of each of the two testamentary trusts are treated as legal personal representatives.

Detailed reasoning

Section 128-15 of the ITAA 1997 states:

128-15(1) This section sets out what happens if a CGT asset you owned just before dying:

a)    devolves to your *legal personal representative; or

b)    *passes to a beneficiary in your estate.

128-15(2) The *legal personal representative, or beneficiary, is taken to have *acquired the asset on the day you died.

Special rule for legal personal representative

128-15(3) Any *capital gain or *capital loss the *legal personal representative makes if the asset *passes to a beneficiary in your estate is disregarded.

The following terms are defined terms in section 995-1 of the ITAA 1997:

*legal personal representative means:

a.    an executor or administrator of an estate of an individual who has died; or

b.    a trustee of an estate of an individual who is under a legal disability; or

c.    a person who holds a general power of attorney that was granted by another person.

*passes: a CGT asset passes to a beneficiary in an individual's estate in the way described in section 128-20.

Section 128-20 deals with an asset passes to a beneficiary, and states:

128-20(1) A CGT asset passes to a beneficiary in your 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 legal personal representative)

128-20(2) A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your legal personal representative transfers it under a power of sale.

Law Administration Practice Statement 2003/12 (PS LA 2003/12) deals with the capital gains treatment of the trustee of a testamentary trust. It provides:

1.    This practice statement confirms the Commissioner's longstanding 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).

2.    Broadly stated, the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

3.    The cost base and reduced cost base of the asset in the hands of the beneficiary is calculated in the same way as it would have been if the asset had passed to them from the deceased's legal personal representative.

If the deceased acquired the asset before 20 September 1985 (that is, pre-CGT) the acquisition cost will be equal to the market value at the date of the deceased's death. If the deceased acquired the asset on or after 20 September 1985, the beneficiary's acquisition cost will be determined in accordance with items 1, 2, 3 or 3A of the table in subsection 128-15(4) of the ITAA 1997.

According to the will of the deceased person, two individuals were named as executors of the estate. A number of specific bequests were provided for in the will including:

Shares in the corporate trustee of a Trust, which were to be held by one of the Trustees during the lifetime of the other Trustee, and after her death, to be distributed to the deceased's children in equal shares.

The residue of the estate, after payment of all debts, funeral and testamentary expenses etc, to be held by the executors and to be divided into two equal parts and each part to be held upon trust in the names of the two Testamentary Trusts. The executors of the will were named as the trustees of both testamentary trusts

Based on the definition of legal personal representative in section 995-1 of the ITAA 1997, the application of section 128-15 of the ITAA 1997 and the administrative practice as set out in Practice Statement PS LA 2003/12, the Commissioner accepts that, for the purposes of Division 128 the trustees of each of the two testamentary trusts are treated as legal personal representatives.

The Commissioner further accepts that it is open to the trustees of the two testamentary trusts to hold the residual estate as to 50% each to each beneficiary as tenants in common.

Question 2

Summary

The Commissioner will disregard any capital gain or loss may arise on the transfer of interests in the Share Portfolio between the two Testamentary Trusts.

Detailed Reasoning

As outlined in the answer to Question 1, the Commissioner accepts that it is open to the trustees of the two testamentary trusts to hold the residual estate as to 50% each to each beneficiary as tenants in common.

Under these circumstances the Commissioner confirms that the ATO practice as set out in PS LA 2003/12 will apply, and consequently he will disregard any capital gain or loss that may arise on the transfer of interests in the Share Portfolio between the Testamentary Trusts. A capital gain or loss will not arise until the individual beneficiary disposes of the transferred asset/s.