Edited version of private ruling

Authorisation Number: 1011816413365

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Does the Commissioner have the discretion to extend the two year period exemption when disposing of your ownership interest in the deceased's properties?

Answer

No.

Question 2

Will the presently entitled beneficiaries be subject to capital gains tax (CGT) from the disposal of the properties?

Answer

Yes.

Question 3

Does the main residence exemption apply?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011.

The scheme commenced on

1 July 2008.

Relevant facts

The deceased passed away in 2008.

The deceased's partner passed away in 20XX.

There are several beneficiaries entitled to a proportional interest in the deceased estate.

The beneficiaries will be presently entitled to the net income of the estate by 30 June 2011.

The deceased owned two properties.

Property A was the main residence of the deceased and property B was an investment property.

Property A was put on the market in 20XX.

Contracts for property A were formally exchanged in 2010.

Settlement of property A occurred in 2011.

Property B was put on the market in 20XX.

Property B remains unsold in 2011.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(1)

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 115-215

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Sale of the deceased's properties

You disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling if:

One of the conditions 1 or 2 below is met, and the dwelling passed to you as beneficiary or trustee of a deceased estate, and just before the date the deceased died it was their main residence and was not being used to produce income.

Condition 1

You disposed of your ownership interest within two years of the person's death - that is, if the dwelling was sold under a contract and settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two-year period.

Or

Condition 2

From the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

a person who was the spouse of the deceased immediately before the deceased's death. (but not a spouse who was permanently separated from the deceased)

an individual who had a right to occupy the home under the deceased's will, or

you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

In this case, you disposed of property A more than two years after the deceased's death. As a result you will not be able to disregard any capital gain or capital loss made on the sale of property A. The Commissioner does not have the discretion to extend the two year period exemption when disposing of your ownership interest in an inherited property.

Please note: This private ruling relates to the application of the current law. A recent change has been announced in the budget that may change the current law. The proposed change will give the Commissioner the discretion to extend the two year period exemption when disposing of an inherited property.

Ownership period:

You have legal ownership of a dwelling or land from the date of settlement of the contract of purchase (unless you have a right to occupy it at an earlier time) or from the date of the deceased's death until the date of settlement of the contract for the sale of the property. This period is called your ownership period.

In this case, your ownership period for property A commenced in 2008 upon the deceased's death and ended on the date of settlement of the contract on the sale of property A in 2011. The Commissioner does not have the discretion to change the ownership period to end on the date the contracts are formally exchanged, rather than the settlement date of the contract for the sale of the property.

Main residence:

The main residence exemption allows a taxpayer to disregard a capital gain or loss that is made from a CGT event happening to a dwelling that is the taxpayer's main residence.

For a taxpayer to qualify for a full exemption from capital gains tax:

· the taxpayer must be an individual

· the dwelling must have been the taxpayer's home, and

· the dwelling was the taxpayer's main residence for the entire ownership period

· the dwelling was not acquired as a beneficiary or trustee of a deceased estate.

In this case the main residence exemption will not apply as you did not live in the property at any time during your ownership period and the property passed to you as trustee of a deceased estate.

Capital gains tax - presently entitled beneficiaries

Where a resident beneficiary of a trust estate who is not under a legal disability is presently entitled to a share of the income of the trust estate, section 97 of the Income Tax Assessment Act (ITAA) 1936 operates to include in the assessable income of the beneficiary, their share of the net income of the trust. This income must be included as assessable income, by the beneficiary, in the year of income in which it was received or entitled to be received.

Where no beneficiary is presently entitled, sections 99 and 99A of the ITAA 1936 will apply to assess the trustee on the net income of the trust.

Net income is defined as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less allowable deductions. Where an asset is sold by the trust any capital gain is included in the net income of the trust.

Where a beneficiary is presently entitled to a capital gain on the disposal of a CGT asset and is not under a legal disability, their share of a capital gain realised on the sale will be assessed to the beneficiary due to the operation of section 115-215 of the ITAA 1997 and section 97 of the ITAA 1936.

In this case the beneficiaries will be presently entitled to the proceeds from the sale of property A. The beneficiaries will include their share of the capital gain realised on the sale of property A in their individual tax returns as assessable income in the year in which the income is received or entitled to be received. The deceased estate trust will not be assessed on the capital gain realised on the sale of property A, as the capital gain will be assessable income for the individual beneficiaries.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).