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Edited version of your written advice
Authorisation Number: 1012991695177
Date of advice: 1 April 2016
Ruling
Subject: Capital gains tax liabilities of the Executor of the deceased estate
Question 1
Was the taxpayer liable for CGT on the sale in the relevant income year, of the house that they let someone else live in?
Answer
Yes
Question 2
Does the Commissioner view the liability of the capital gains tax from the relevant income year as that of the Trustee of the deceased estate?
Answer
Yes
Question 3
Should the Trustee of the deceased estate lodge an income tax return for the taxpayer (deceased) to include the capital gain and any other assessable income for the year ended 30 June 200X?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 200X
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
The scheme has commenced
Relevant facts
The taxpayers signed a contract to purchase a house.
The title is registered in the name of the taxpayers as tenants in common.
The money to purchase the property came from the company.
The money was shown as a loan to the taxpayers in the company accounts.
The property was used by relatives of the taxpayers to live in.
The taxpayers never occupied the property as their main residence.
All expenses in relation to the property were paid for by the company and claimed as tax deductions in the company.
The property was sold and the sale amount was deposited in an account in the company name but notated as "loan from others".
The taxpayers died. No tax return was lodged for the year the property was sold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-10
Income Tax Assessment Act 1997 Section 118-130
Taxation Administration Act 1953 Schedule 1, Section 260-140
Reasons for decision
The Property is a CGT asset that was purchased post September 1985 by the taxpayers as tenants in common. When the first taxpayer died, the title in the Property passed to the other taxpayer. There was no CGT event at this time. A capital gain or loss can only arise if a CGT event happens. In this case CGT event A1, the disposal of a CGT asset has occurred when the Property was sold by the taxpayer.
The sale of the Property will be subject to capital gains unless an exemption applies. You have argued that the sale of the Property may attract the main residence exemption because the relatives should be viewed as having an "ownership interest", as they lived in the Property as their main residence.
Section 118-110 of the ITAA 1997 applies to provide an exemption where you, an individual, make a capital gain on the sale of a dwelling that was your main residence throughout your ownership period. It is the taxpayer who owned the house and has made a capital gain on the sale of the house. It has not been their main residence. The relatives may have had the right to occupy the Property, but they have not disposed of the property and they have not made a capital gain on the sale of the property, so there is no application of the main residence exemption.
As no main residence exemption can be applied to the Property, capital gains tax will be payable with regards to the disposal.
Where you have owned a property and not used it to derive assessable income, you may be able to include your costs of ownership in the property's cost base, which would reduce any capital gains tax liability on the sale of the property. In your case you have stated that all the expenses in relation to the Property have been paid by the Company and have been claimed as deductions. On this basis, it is considered that these amounts could not be included in the cost base as they were not incurred by the individual owner and they have incorrectly been claimed as deductions.
Because the property was held for a period in excess of 12 months by the taxpayer, the 50% general discount will be applicable to calculate the net capital gain.
Obligations of the executor
The tax obligations of executors are set out in the Taxation Administration Act 1953 Schedule 1, Section 260-140, which operates as follows.
(1) In respect of the deceased person's outstanding tax-related liabilities, the Commissioner may deal with the trustee of the deceased person's estate as if the deceased person were still alive and the trustee were that person. That is, the trustee stands in the deceased person's shoes, the Commissioner may treat the trustee as a living person charged with the relevant tax-related liabilities, and the Commissioner has the full range of remedies available to him for the recovery of the liabilities (s 260-140(2)).
(2) The trustee is obliged to lodge any tax returns and provide any other information that the deceased person was or would have been liable to lodge or provide if he or she were still living. The Commissioner does not specifically have to request such returns or information before the liability arises. The Commissioner, however, has the power to request any additional returns or further information relating to the deceased's tax-related liabilities (s 260-140(3)).
(3) The trustee is required, in his or her capacity as representative of the deceased, to discharge the deceased's outstanding tax-related liabilities, including any penalty or GIC (s 260-140(3)(c)).
(4) The Commissioner may raise a default assessment against the trustee in respect of the deceased estate if a particular tax-related liability of the deceased requires a process of assessment to fix the liability, but the trustee has failed to provide returns or other information, as required by the Commissioner, to enable the assessment to be made (s 260-140(4)).
(5) If a default assessment is raised in this way, the trustee has the standard rights of objection to the assessment, as set out in Pt IVC (s 260-140(5), (6)).
Because the income tax return for the relevant year has not been lodged, there is a requirement for the executor to lodge the return and meet the resultant income tax liabilities, including the capital gain. There are no timeframe restrictions that may have applied, if we were amending the returns, as no assessment has previously issued for the relevant year.
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