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Ruling
Subject: Capital gains tax - deceased estate
Question and answer
Will The Trustee for the Estate be entitled to disregard any capital gain or loss made on the sale of the trust property?
Yes.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
The property was acquired by the deceased and their spouse prior to September 1985 and was held as tenants in common.
The property was used as the couple's main residence until the deceased died a number of years ago.
The deceased's spouse had a life tenancy in the property and used it as their main residence until they moved into an aged care facility. This property was not used for income producing purposes between its purchase and when the life tenant moved into the aged care facility.
For the period the spouse was in the aged care facility they were treating the property as their main residence under the 6 year absence rule.
The property was rented out for less than 6 years.
The property was sold in the income year.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Subsection 104-85(1)
Income Tax Assessment Act 1997 Subsection 104-75(1)
Income Tax Assessment Act 1997 Subsection 128-15(3)
Reasons for decision
Division 128 deals with the effect of death. Subsection 128-15(3) of the ITAA 1997 states that any capital gain or loss the legal personal representative passes to a beneficiary in your estate is disregarded.
The trustee of a trust is treated the same way that a legal personal representative is treated for the purpose of Division 128 of the ITAA 1997. Any capital gain or loss that arises to the trustee of the trust is therefore disregarded when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under the deceased's will.
It is noted that capital gains tax may apply, however, to any other transfer or sale of an asset by the trustee of the trust. For example, it would apply where the asset was disposed of to someone other than a beneficiary who has not been named in the will.
Special rules apply to the disposal of a deceased's dwelling by either the trustee of the deceased's estate or by a beneficiary and are set down in section 118-195 of the ITAA 1997.
Section 118-195 of the ITAA 1997 states that a capital gain or capital loss you make from a capital gains tax event in relation to a dwelling is disregarded if:
· The deceased acquired the dwelling before 20 September 1985; and
· The dwelling was from the date of the deceased's death until your ownership interest ends the main residence of the spouse of the deceased immediately before the death (except a spouse who was living permanently separated) or an individual who has the right to occupy the dwelling under the deceased's will.
As the deceased's spouse was both the spouse at the time of their death and an individual with the right to occupy the house as a life tenant under the will, a capital gain or loss will be disregarded if the property remains the deceased's spouse's main residence until the trustee disposes of the property.
There is no requirement in section 118-195 of the ITAA 1997 that the spouse of the deceased actually reside in the property in the period between the date of the deceased's death and the date that the trustee's ownership interest ends. The requirement is that the dwelling be the main residence of the spouse of the deceased and continues to be so for the relevant period. It is the status of the dwelling as a main residence that is relevant.
Subsection 118-145(1) of the ITAA 1997 provides that if a dwelling that was a person's main residence ceases to be their main residence, they may choose to continue to treat it as their main residence. If the dwelling is used for income producing purposes, there is a six year time limit for which the person can continue to treat the dwelling as their main residence (subsection 118-145(2) of the ITAA 1997). However, if this choice is made, no other dwelling can be treated as that person's main residence during that period (subsection 118-145(4) of the ITAA 1997).
The deceased's spouse was living in the property as their main residence up until the time of the deceased's death and continued to remain in the property until they went into an aged care facility. The property was rented out for a period of less than 6 years. For that period the property is the deceased's spouse's main residence.
The deceased's spouse chose to continue to treat the property as their main residence using the absence rule provided in section 118-145 of the ITAA 1997 for the period they were in the aged care facility until the property was sold.
Subsection 118-190(1) of the ITAA 1997 states if a dwelling that was a person's main residence is used to produce assessable income, and any interest claimed on a loan taken out to acquire the dwelling is tax deductible, then they cannot fully disregard any capital or loss that happens in relation to their ownership interest. However, subsection 118-190(3) of the ITAA 1997 allows that taxpayer to ignore any income producing use of their main residence under section 118-145 of the ITAA 1997, provided any part of the dwelling was not used for income production just before it last ceased to be their main residence.
After the deceased's spouse moved into the aged care facility, the dwelling became a rental property. However, as it was not used to produce assessable income prior to this date and the deceased's spouse elected it as their main residence, they are entitled to apply the absence rule as detailed in section 118-145 of the ITAA 1997 and subsection 118-190(1) of the ITAA 1997 will not apply.
The property then remains the deceased's spouse's main residence for the trustee's period of ownership, and accordingly, any capital gain or loss made on its disposal by the trustee may be disregarded.
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