Assets of a deceased passing to a beneficiary under a “deed of arrangement”

The key CGT principle that applies on the death of a taxpayer is that there will be no CGT liability when an asset of the deceased ultimately passes to a beneficiary of the estate under the will.

Of course, the beneficiary will then be subject to CGT on any subsequent dealing with the asset.

However, an executor of the estate will generally be subject to CGT if they deal with an asset other than by passing it on to a beneficiary (e.g. if an executor exercises a “power of sale” to sell the asset to a third party).

In short, there will no CGT liability if an asset of the deceased “passes” to the executor and then onto a beneficiary (or directly to a beneficiary) in accordance with the terms of the deceased’s will.

Importantly, there will also be no CGT liability where an asset of the deceased “passes” to a beneficiary under a codicil of the deceased or under the laws of intestacy or where the will is varied by a court order.

Interestingly, this rule that there will be no CGT liability where an asset of the deceased “passes” to a beneficiary also applies where an asset passes to a beneficiary under a “deed of arrangement” that is entered into by beneficiaries to alter interest in the assets of the estate – provided that any consideration under the arrangement consists only of entitlement to assets under the estate and nothing else.

However, the Commissioner takes the view in Taxation Ruling TR 2006/14 that such a “deed of arrangement” must be entered into in circumstances when a court might consider an application to vary the deceased’s will under family provision laws.

That is, the Commissioner takes the view that the deed must be made to settle a claim made by a person eligible to make an application for family provision. In addition, the deed must be entered into within the relevant timeframes for the making of an application to a court.

In other words, according to the Commissioner – as a bare minimum – the deed of arrangement mechanism can only apply where a person could have bought a family provision application in respect of the estate. (And this will depend on the relevant state laws that apply to family provision matters.)

Finally, where a deed is entered into which does not meet the Commissioner’s requirements for an eligible “deed of arrangement”, then the CGT liability will arise to the estate itself. This is because such a deed would have been entered into during the period of administration when no-one was entitled.

So, if you find yourself in this type of situation in respect of a deceased estate of which you are a beneficiary or executor, make an appointment to see us.