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Edited version of private ruling

Authorisation Number: 1011606715058

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Ruling

Subject: Capital gains tax (CGT) - Deceased estate - Do the assets pass to beneficiaries

1. Will you have a capital gains liability due to the surrender of the spouse's life interest in the property?

No.

2. Will any capital gain or capital loss you make due to the transfer of Lot 1 to the children be disregarded?

Yes.

3. Will any capital gain or capital loss you make due to the transfer of Lot 2 to the spouse be disregarded?

No.

This ruling applies for the following period<s>:

2010-11 income year

The scheme commences on:

1 July 2005

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.

The deceased was the sole registered proprietor of a property that was their main residence.

The property comprises less than two hectares of land upon which is erected a residential home.

The deceased died some five years ago and probate of their Will was granted to their spouse.

Pursuant to this Will, the deceased granted to their spouse a life interest in the property and upon the spouse's death the property was to be transferred to two children equally as the remaindermen.

The spouse continues to reside in the property and has done so since their marriage to the deceased.

The spouse and the children have negotiated to end the life tenancy on conditions that will see the property subdivided into two Lots. Lot 1 would comprise the existing dwelling and some land. Lot 2 would be the remaining land on which a new dwelling is to be constructed.

They have negotiated this agreement (which is evidenced in a Deed of Family Arrangement) within the time that a court would be likely to entertain an application for family provision, or an extension of time in which to make such an application.

You, as Executrix, will transfer Lot 1 to the children as tenants in common.

You, as Executrix, will transfer Lot 2 to the spouse in their individual capacity.

The spouse will pay a specified amount by bank cheque to the children.

The spouse will be allowed to continue to reside in the existing dwelling until the new dwelling on Lot 2 is constructed.

The spouse will construct a new dwelling on Lot 2 in accordance with the proposed Deed of Family Arrangement. They will then commence to reside in this new dwelling.

The children will then sell Lot 1 within the next year.

Certain documents are to be read with and form part of the description of the scheme for the purpose of this ruling. They include:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20.

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

Summary

You will not have a capital gains liability due to the surrender of the spouse's life interest in the property.

Detailed reasoning

You can only make a capital gain or a capital loss if a CGT event happens. The gain or loss is made at the time of the event.

A CGT event may happen due to the surrender of the spouse's life interest in the property, but this will not be relevant to your ownership of the property. The spouse's life interest in the property is a different asset to your ownership interest in it.

You will not make a capital gain or a capital loss due to the surrender of the spouse's life interest in the property because no CGT event happens to the asset you own.

Question 2

Summary

Any capital gain or capital loss you make due to the transfer of Lot 1 to the children will be disregarded.

Detailed reasoning

You can only make a capital gain or a capital loss if a CGT event happens. The gain or loss is made at the time of the event.

CGT event A1 will happen when you transfer Lot 1 to the children.

Any capital gain or capital loss you make will be disregarded if Lot 1 passes to the children. This is part of the same-asset roll-over that also passes your capital gains tax liability onto them as beneficiaries

For an asset to pass to a beneficiary, it must be owned by the deceased when they died, devolve to you due to their death and the beneficiary becomes the owner of the asset as a result of one of the following:

We accept that the proposed Deed of Family Arrangement meets the conditions outlined in paragraphs 33 to 37 and 209 to 223 of Taxation Ruling TR 2006/14.

As the only consideration that the children will give is the waiver under the Deed of Family Arrangement, we accept that Lot 1 will pass to them as beneficiaries of the deceased's estate.

Consequently, any capital gain or capital loss you make will be disregarded as Lot 1 will be passing to the children.

Question 3

Summary

Any capital gain or capital loss you make due to the transfer of Lot 2 to the spouse will not be disregarded.

Detailed reasoning

You can only make a capital gain or a capital loss if a CGT event happens. The gain or loss is made at the time of the event.

CGT event A1 will happen when you transfer Lot 2 to the spouse.

Any capital gain or capital loss you make will be disregarded if Lot 2 passes to the spouse. This is part of the same-asset roll-over that also passes your capital gains tax liability onto them as beneficiaries

For an asset to pass to a beneficiary, it must be owned by the deceased when they died, devolve to you due to their death and the beneficiary becomes the owner of the asset as a result of one of the following:

We accept that the proposed Deed of Family Arrangement meets the conditions outlined in paragraphs 33 to 37 and 209 to 223 of Taxation Ruling TR 2006/14.

However, the spouse is required under the Deed of Family Arrangement to pay a specified amount to the children.

As the spouse is required to pay consideration under the Deed of Family Arrangement, we cannot accept that Lot 2 will pass to the spouse as a beneficiary of the deceased's estate.

Consequently, any capital gain or capital loss you make will not be disregarded as Lot 2 will not be passing to the spouse.

Note: The main residence exemption cannot apply to the transfer of Lot 2 to the spouse because there isn't a dwelling on it.

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