Edited version of private ruling

Authorisation Number: 1011599693883

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Ruling

Subject: Capital gains tax (CGT) - Deceased Estate

1. Is the transfer of the deceased's one third share of the dwelling to their child and child's spouse, a CGT event?

Yes.

2. Will the capital gain or loss made on the disposal of the dwelling be disregarded in full?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Sometime after 20 September 1985, the deceased purchased a one third share of the dwelling located as tenants in common with their child and child's spouse.

They all occupied the dwelling as their main residence.

The deceased moved out of the dwelling and into rental accommodation. Their child and child's spouse continued to reside in the dwelling.

A choice was made to continue to treat the dwelling as the deceased's main residence.

At no time did the deceased earn assessable income from the dwelling.

The deceased passed away.

Under the terms of the deceased Will, their child and their child's spouse have the option to purchase the deceased's interest in the dwelling. This money is to be paid into the Estate and each beneficiary will receive a share of that amount.

The transfer of the one third share of the dwelling will occur during the period in which this ruling applies.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-40(5)

Income Tax Assessment Act 1997 section 116-65

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 134-1.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Detailed reasoning

You make a capital gain or capital loss if a CGT event happens. The most common event occurs if you dispose of a CGT asset. This is called CGT event A1.

You dispose of a CGT asset if a change of ownership occurs from you to another entity. The time of the event occurs in the time that you enter into the contract for the disposal of the asset or if there is no contract when the change of ownership occurs.

In your case, CGT event A1 will occur when the deceased's one third share of the dwelling is purchased their child and their child's spouse, after exercising their option granted under the Will.

CGT event D2 happens if you grant an option to an entity. You make a capital gain if the capital proceeds from the grant of the option are more than the expenditure you incurred to grant it. A capital gain or loss you make from the grant of the option is disregarded if the option is exercised.

In the event that an option is later exercised, and as a result the asset that was the subject of the option is disposed of, the capital proceeds from the disposal includes any payment that the grantor of the option received for granting the option.

The deceased's share of the dwelling will pass as a result of the beneficiaries exercising their option to purchase the deceased's share of the dwelling. The proceeds from the sale, together with any capital gain made at the time the option was granted will then form part of the capital proceeds received for the sale of her share of the dwelling.

Question 2

Detailed reasoning

The provisions that relate to capital gains tax assets and the effects of death are found in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

Generally, when someone dies, a capital gain or capital loss from a CGT event that results for a CGT asset they owned just before dying is disregarded.

If a CGT asset a person owned just before dying:

· devolves to their legal personal representative, or

· passes to a beneficiary in their estate,

then the legal person representative, such as the executor of the estate, or the deceased's beneficiary, are taken to have acquired the asset on the day the person died. Any capital gain or loss that the executor of the estate makes if the asset passes to a beneficiary in the deceased's estate is disregarded.

According to section 128-20 of the ITAA 1997, a asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

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

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

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

A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your legal representative transfers it under a power of sale.

In your case, the deceased's one third share of the dwelling will not pass to a beneficiary in the estate under the terms of the Will, in the ways set out under section 128-20 of the ITAA 1997. Under the terms of the Will it will pass as a result of the beneficiaries exercising an option to purchase the deceased's one third share of the dwelling. As such, Division 128 of the ITAA 1997 does not apply in this situation and any capital gain or loss made on the disposal will not disregarded under these provisions.

Main residence exemption

Generally, you can disregard a capital gain or a capital loss you make on the sale of your main residence if;

· the property was your main residence for the whole of your ownership period

· you did not earn assessable income from the property while you lived there

· you did not choose to treat any other property as your main residence during any part of your ownership period, and

· the property is less than two hectares in size.

If a dwelling that was your main residence ceases to be your main residence, there are provisions that allow you to extend the main residence exemption beyond the period in which you are occupying the dwelling as your main residence. This means that you can choose to continue to treat it as your main residence after you move out. If you do not use any part of the dwelling to produce assessable income you can treat it as your main residence indefinitely. If you make this choice, you cannot treat any other dwelling as your main residence during this time.

In your case, the deceased occupied the dwelling as their main residence until they moved out into rented accommodation. A choice was made to continue to treat the dwelling as the deceased's main residence. As the deceased did not receive any assessable income from the dwelling after they moved out, the dwelling was considered to be their main residence for the entire time they owned the dwelling.

The provisions that set out the circumstances in which a full main residence exemption is available to the trustee of a deceased estate can be found in section 118-195 of the ITAA 1997.

Subsection 118-195(1) of the ITAA 1997 provides that an exemption is available in respect of a dwelling owned by a deceased person if:

· The deceased acquired the ownership interest on or after 20 September 1985

· The dwelling was the deceased's main residence just before the deceased's death and was not being used for the purpose of producing assessable income, and

· Your ownership interest in the dwelling ends within 2 years of the deceased's death.

In your case, the deceased's ownership interest was acquired sometime after 20 September 1985. It was their main residence just before they died and was not used to produce assessable income. You, as Trustee for the Estate of the deceased, plan to dispose of the one third share of the dwelling within two years of the deceased's death. Therefore, any capital gain or loss made on the disposal of the share of the dwelling will be disregarded.

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