Edited version of your written advice

Authorisation Number: 1013058407112

Date of advice: 29 July 2016

Ruling

Subject: Capital Gains Tax - Deceased Estate - Equitable Life Interest

Question 1

Will there be any income tax or capital gains tax liability that will accrue to the legal personal representative (LPR) of taxpayer 1's estate in respect to the estate's 50% interest in the property as a result of:

1. the surrender of the equitable life interest by the spouse of the deceased (taxpayer 2) in the property, and

2. the subsequent sale of the property by the LPR

Answer

There will be no income tax consequences for the LPR when taxpayer 2 surrendered their equitable life interest in the property, nor when the LPR later sold the property.

This ruling applies for the following periods:

1 July 20WW to 30 June 20XX

The scheme commences on:

1 July 20WW

Relevant facts and circumstances

The applicant is the legal personal representative ('LPR') of the estate of taxpayer 1. Taxpayer 1 died in 20VV.

The deceased's principal place of residence ('the property') was held as tenants in common in equal shares with their spouse, taxpayer 2.

The property was purchased in 20UU.

In their will, taxpayer 1 gave taxpayer 2 and equitable life interest in their 50% share of the property. The LPR, holds the deceased 50% share in the property in trust for the remainder owners.

Taxpayer 2 resided in the property as their principal place of residence at all times since the property was acquired and prior to and following taxpayer 1's death.

The property has never been used for income producing purposes.

Due to health reasons, taxpayer 2 vacated the property in 20XX and has surrendered their equitable life interest in the property.

The property was sold by the LPR later in 20XX.

Relevant legislative provisions

Section 128-15 of the Income Tax Assessment Act 1997

Section 128-20 of the Income Tax Assessment Act 1997

Reasons for decision

Taxation Ruling TR 2006/14 capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests ('TR 2006/14') states the following:

18. If the trust is created as a result of the death of an individual, the trustee acquires the original asset at the date of the deceased's death: subsection 128-15(2). The trustee's acquisition cost is determined under subsection 128-15(4).

19. … A dwelling that was the deceased's main residence just before they died … is acquired for market value at the date of death. …

The LPR is taken to have acquired the deceased's 50% interest in the property on the date of taxpayer 1's death, which was in 20VV, at the proportionate market value of the property at that time.

Surrender of equitable life interest

If a life interest owner surrenders their interest, CGT event A1 happens (paragraph 66 TR 2006/14). On the day that taxpayer 2 surrendered their equitable life interest in the property, the remainder owners become entitled to have the deceased 50% interest in the property transferred to them.

Transfer of 50% interest in property to the remainder owners

Taxation Determination TD 2004/3 (TD 2004/3) relates to the question, does an asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997) if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate?

This question is relevant in determining when an interest in property passes to the remainder owners.

Paragraph 4 of TD 2004/3 states:

While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, we consider that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes 'passing' dependent upon the acquisition of legal ownership.

In relation to the LPR, the passing of the interest in the property occurs when taxpayer 2 surrendered their equitable life interest in the property, rather than when the property is later sold. The remainder owners become absolutely entitled to the property against the LPR at that point, even though legal ownership may not have passed. The beneficiaries would have had the power to direct the LPR to sell the property at that time.

CGT event E7

Paragraph 59 of TR 2006/14 states that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) distributes an asset to a remainder owner in satisfaction of their interest in the trust capital.

The exception will apply if, as part of the administration of a deceased estate, an asset the deceased owned when they died passes to a beneficiary in accordance with section 128-20 of the ITAA 1997 (paragraph 79 of TR 2006/14).

According to paragraph 202 of TR 2006/14, Division 128 applies to the passing of an asset from a deceased individual's LPR to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death).

Paragraph 203 of TR 2006/14 provides guidance on the expression 'a trust to which Division 128 applies'. It states that it should be interpreted as a deceased estate to the extent that it is a trust over an asset originally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 of the ITAA 1997.

Under section 128-20 of the ITAA 1997, a CGT asset passes to a beneficiary of an estate if, relevantly, the beneficiary becomes the owner of the asset under the will or it is appropriated to the beneficiary by the LPR in satisfaction of some other interest or share in the estate.

In relation to CGT event E7, paragraph 204 of TR 2006/14 states that the exception applies if subsection 128-15(3) of the ITAA 1997 applies to relieve any capital gain or capital loss that arises (or would apply in that way if there were a capital gain or capital loss) when an asset passes from the deceased's LPR to a beneficiary in their estate.

Subsection 128-15(3) of the ITAA 1997 states:

Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

In this instance, subsection 128-15(3) of the ITAA 1997 would apply to disregard any capital gain or capital loss the LPR made when the property passed to the remainder owners of the deceased estate. This occurred when taxpayer 2 surrendered their equitable life interest in the property, and not at the time the LPR sold the property on behalf of taxpayer 2 and the remainder owners.

While this provision applies to LPRs, paragraph 205 of TR 2016/4 states that in certain circumstances the Commissioner treats the trustee of a testamentary trust in the same way as he treats a LPR in relation to the passing of an asset of the deceased to a beneficiary.

Thus, the LPR, would disregard the capital gain made as a result of passing the deceased 50% interest in the property to the remainder owners under subsection 128-15(3) of the ITAA 1997.

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