Edited version of private advice

Authorisation Number: 5010078388551

Date of advice: 28 February 2022

Ruling

Subject: CGT implications of a transfer of interest in property to a beneficiary upon the beneficiary reaching the age of 18

Question 1

Will the transfer of the property at the vesting date for the trust trigger a CGT event?

Answer

Yes.

Question 2

If yes, will the CGT event be disregarded on the basis the same beneficiary continues to be the beneficial owner even though there is a change in the legal ownership?

Answer

Any capital gain or loss made by the legal personal representative will be disregarded pursuant to section 128-15 of the Income Tax Assessment Act 1997. There are no CGT implications for the beneficiary until they dispose of their interest in the CGT asset.

Question 3

Alternatively, if capital gains will apply on the transfer of the property from the trustee to the beneficiaries, please advise how the capital gains are to be calculated and whether the beneficiaries would be presently entitled to the capital gains?

Answer

This is not applicable due to the response to Question 2. However, for completeness we have provided information regarding cost base in relation to inherited assets.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

The deceased acquired a property pre-CGT. The property was the deceased's main residence until they entered a rental agreement in 20XX.

The deceased passed away in 20XX, leaving a will.

The assets of the deceased's estate comprised the property and approximately $XXX,XXX in cash. The deceased left the property to the children of a relative, including the beneficiary, as tenants in common in equal shares and upon each child attaining 18 years of age.

The executor, in the capacity of legal personal representative of the deceased, registered themselves on the title as sole proprietor. In 20XX, a deed of retirement and appointment of trustee was signed between the executor and a new trustee.

Three minor trusts were created to manage the beneficiaries' interests in the property. The new trustee registered the title as sole proprietor.

The property has been managed by an external real estate agent and continues to generate rental income. The rental income is distributed to the trusts. The property expenses are also split between the trusts. The rental income and expenses are disclosed in their respective trust tax returns.

The beneficiary will attain the age of 18 years in 20XX and become entitled to receive their interest in the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Question one

Will the transfer of the property at the vesting date for the trust trigger a CGT event?

Summary

Yes. Interest in a CGT asset passes when a beneficiary becomes the owner of the asset pursuant to a will.

Detailed reasoning

CGT event A1 will occur when the ownership of the Property is transferred under the will.

Question two

If yes, will the CGT event be disregarded on the basis the same beneficiary continues to be the beneficial owner even though there is a change in the legal ownership?

Summary

The CGT event is disregarded due to the operation of section 128-15.

Detailed reasoning

PSLA 2003/12 confirms the Commissioner's administrative approach that treats a trustee of a testamentary trust as a legal personal representative for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3).

Any capital gain or loss made by a legal personal representative when the asset passes to a beneficiary of the deceased estate is disregarded under subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) (unless CGT event K3 in section 104-215 of the ITAA 1997 happens as a result of the asset passing to a tax-advantaged beneficiary). Therefore, any capital gain or loss made by the trustee upon the transfer of the interest in the property is disregarded.

It is the ATO's practice 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). Therefore, there is no CGT consequence for the beneficiary at the time the interest is transferred to them.

Question three

Alternatively, if capital gains will apply on the transfer of the property from the trustee to the beneficiaries, please advise how the capital gains are to be calculated and whether the beneficiaries would be presently entitled to the capital gains?

Summary

As discussed at question two, any capital gain or loss made by the trustee will be disregarded and there is no taxing point in relation to the beneficiary at this time.

However, the beneficiary will need to consider the capital gains implications if they choose to dispose of the property at a later time. In particular, the application of section 118-195 of the ITAA 1997 in relation to disregarding capital gains or losses in relation to property acquired under a deceased estate.

As the property has been used for income producing purposes and more than two years has already passed since the deceased's date of death, an extension would have to be approved by the Commissioner for the beneficiary to disregard any capital gain.

Pursuant to section 128-15(2) of the ITAA 1997, the beneficiary will be taken to have obtained their interest in the property at the date of death of the deceased.

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.

Because 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 death of the deceased.