Edited version of your private ruling

Authorisation Number: 1012547557991

Ruling

Subject: Deceased estate - Commissioner's discretion plus partial exemption

Questions and Answers:

1. Will the Commissioner exercise his discretion to extend the 2 year main residence exemption period under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) given the length of time that elapsed until an executor was appointed?

Yes.

2. As a result of the exercise of the above discretion, will all but X% of the capital gain (for which Beneficiary B and Beneficiary C are presently entitled) be exempt from capital gains tax (CGT)?

Yes.

3. Does X% of the capital gain from the sale of the property (for which Beneficiary B and Beneficiary C are presently entitled) qualify for a partial exemption from CGT under sections 118-200 and 118-205 of the ITAA 1997?

No.

4. Does the non-exempt capital gain to be calculated on the sale of the property have a cost base of X% of the market value of the property at 30 June 19YY and capital proceeds of X% of the sale price of the property (at 31 December 20YY)?

Yes.

5. Are you, as trustee, liable for tax under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936) on behalf of the estates?

No.

6. Does section 128-20 of the ITAA 1997 apply and, therefore, are the legal owners of the property that are not exempt from CGT (namely, Beneficiary B and Beneficiary C) liable to pay their share of tax under section 97 of the ITAA 1936?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Prior to 20 September 1985, the three late tenants in common acquired the property in equal shares.

The property was used by the late co-owners as their principal place of residence until their deaths.

Each tenant in common died many years apart and intestate.

The property has never been income producing, including during the administration of the estates.

As state trustee, you were appointed tow years after the death of the last co-owner.

The primary beneficiary used the property as their main residence for 2 years after the death of the last co-owner and was under legal disability.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200 

Income Tax Assessment Act 1997 Section 118-205 

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Reasons for decision

Commissioner's discretion

Section 118-195 of the ITAA 1997 provides a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the following table are satisfied.

The Explanatory Memorandum for the Tax Laws Amendment (2011 Measures No. 9) Act 2012 explains the Commissioner would be expected to exercise discretion (in sections 118-195 and 118-200) in situations such as where:

· the ownership of a dwelling or a will is challenged;

· the complexity of a deceased estate delays the completion of administration of the estate;

· a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or

· settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive.

In exercising this discretion, the Commissioner is expected to consider whether and to what extent the dwelling is used to produce assessable income and the period that the trustee or beneficiary held the ownership interest in the dwelling.

Application of Commissioner's discretion in your case

In your case, following the guidance in the Explanatory Memorandum, the Commissioner will exercise his discretion under section 185-195 of the ITAA 1997 on the grounds that, during the period of the estate's administration, the dwelling was not used to produce assessable income and the trustee and primary beneficiary did not hold their controlling and beneficial ownership interests in the dwelling for an excessive period of time.

Due to the intestacy of the deceased persons, you, the trustee, were belatedly appointed. However, you disposed of the property within 18 months of your appointment, which indicates the trustee promptly fulfilled their primary duty, namely, the disposal and distribution of estate assets.

Also, during the 3 year period from the date of death to the property's disposal, the primary beneficiary, used the property for 2 of those years as their main residence, which indicates the dwelling was not used for any purpose contrary to those listed in Column 3 of the table.

As for the other beneficiaries, despite the many years since they, by default, acquired their beneficial interests, they were unable to dispose of their (subsequent) minority ownership interests since they were not aware they held a beneficial interest until after the trustee was appointed.

Therefore the Commissioner will exercise his discretion under section 185-195 of the ITAA 1997 so it is applicable to all beneficiaries.

The exemption under section 118-195 will apply to all but X% of the capital gain (since no item in Column 2 is satisfied for X% of the capital gain).

No item in Column 2 is satisfied for X% of the capital gain because the deceased, a beneficiary of two original co-owners, acquired this portion interest after 20 September 1985 and the dwelling was not used as their main residence.

Partial exemption for deceased estate dwellings  

Where section 118-195 of the ITAA 1997 does not apply, section 118-200 of the ITAA 1997 may provide a partial exemption for deceased estate dwellings. You get only a partial exemption (or no exemption) if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate. You calculate your capital gain or capital loss using the formula:

Capital gain or capital loss amount x Non-main residence days
    Total days

where:

non-main residence days is the sum of:

if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(a) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

total days is:

(a) if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or

(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

However, you can adjust the formula by ignoring any non-main residence days and total days in the period from the deceased's death until your ownership interest ended, if:

(a) the deceased acquired the ownership interest on or after 20 September 1985; and

(b) your ownership interest ends within:

(i) 2 years of the deceased's death; or

(ii) a longer period allowed by the Commissioner; and

(c) you get a more favourable result by doing so.

You ignore any non-main residence days before the deceased's death if:

(a) the dwelling was the deceased's main residence just before the death; and

(b) the dwelling was not being used for the purpose of producing assessable income just before the death, or any use for that purpose just before the death was ignored because of subsection 118-190(3) or (3A).

Section 118-205 of the ITAA 1997 provides you must adjust the formula in subsection 118-200(2) if the ownership interest of the deceased individual referred to in section 118-200 (the most recently deceased) passed to the individual on or after 20 September 1985 as a beneficiary in a deceased estate (in the following manner):

Add to the component total days in the formula the fewer of:

(a) the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

(b) the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the dwelling was not the main residence of one or more of:

(a) an individual who owned the dwelling at the time of the individual's death; or

(b) an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c) an individual who had a right to occupy the dwelling under a will; or

(d) an individual to whom an ownership interest in the dwelling passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

Below is an example of the operation of the total days adjustment in subsection 118-205(2):

Maryanne bought a house on 1 August 1986. On her death, on 1 October 1990, her sister Andrea inherited the house. Andrea died on 1 September 1996 and her only beneficiary (her daughter Kathleen) inherited the house.

The house was sold by Kathleen on 1 October 1998. Between 1 September 1994 and 1 September 1998, the dwelling was rented out and therefore the full exemption does not apply to Kathleen's disposal.

The capital gain amount is $10,000.

Total days is 4,441, i.e.:

· under section 118-200, 2920 days (days between the acquisition by the deceased on 1 October 1990 and the sale by the beneficiary on 1 October 1998); and

· under section 118-205, 1521 days (the fewer of the days between 20 September 1985 and 1 October 1990 and between 1 August 1986 and 1 October 1990).

Application of sections 118-200 and 205 in your case

In your case, sections 118-200 and 118-205 of the ITAA 1997 will not provide any partial exemption to X% of the capital gain earned from the sale of the dwelling, for Beneficiary B and Beneficiary C are the presently entitled beneficiaries.

The capital gain amount is multiplied by non-main residence days divided by total days which equals the capital gain multiplied by 1.

Applying subsection 118-200(3) does not provide a better result, since both the numerator and dominator in the formula are the same.

Section 118-205 does not change the formula since the amount that is "fewer" is the days where the dwelling was acquired by a non-beneficiary, which is nil.

Calculating the capital gain in the non-exempt amount

Item 3 of subsection 128-15(4) of the ITAA 1997 provides, if a dwelling that was the main residence of the deceased person just before they died and was not then being used for the purpose of producing assessable income, the beneficiary who acquires that asset is taken to have acquired it at market value on the day the deceased person died.

Item 1 of subsection 128-15(4) of the ITAA 1997 provides, if a deceased person acquired an asset on or after 20 September 1985, the beneficiary who inherits that asset is taken to have acquired it at the cost base of the asset on the day of the deceased person's death.

In your case, the X% non-exempt share of the property was acquired by the deceased, after 20 September 1985, on the death of the 2nd co-owner, for which the dwelling was the 2nd co-owner's main residence. Therefore, under Item 3 of subsection 128-15(4), the deceased acquired the property at its market value, which was their CGT cost base.

Item 1 and 3 of subsection 128-15(4) of the ITAA 1997 provides, since the deceased acquired the share of the property after 20 September 1985 and since the deceased did not use the property as their main residence, their beneficiaries, Beneficiary B and Beneficiary C, acquired their share of the property at the deceased's cost base.

Therefore, the capital gain on the disposal of X% of the property is calculated using the property's market value on the date when the 2nd owner died as its cost based and it final sale price as its capital proceeds.

Entity liable to tax

Section 97 of the ITAA 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

Section 98 of the ITAA 1936 provides where a beneficiary of a trust estate who is under a legal disability is presently entitled to a share of the income of the trust estate, the trustee of the trust estate shall be assessed and liable to pay tax on the beneficiaries behalf.

The net income of the trust eased estate (and whether any beneficiary is presently entitled) is determined on the last day of each income year. This means that, on the last day of the income year, a beneficiary who is presently entitled will be assessed on their share of the net income for the whole of the income year.

In your case, Z% of the capital gain from the sale of the property is CGT exempt. Therefore, neither the relevant presently entitled beneficiaries (who are not under legal disability) nor the trustee (on behalf of Beneficiary D, who is under legal disability) must include their share of 86% of the capital gain in their respective income tax returns.

As for the non-exempt X% portion of the capital gain, the presently entitled beneficiaries, who are not under legal disability, namely, Beneficiary B and Beneficiary C, are to include this gain in their individual income tax returns.

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