Edited version of your written advice

Authorisation Number: 1013088356553

Date of advice: 13 September 2016

Ruling

Subject: Capital Gains Tax - deceased estate - life interest

Question 1:

Does X have a life interest in the estate of Y?

Answer:

Yes

Question 2:

Does X have a right to occupy the property?

Answer:

Yes

Question 3:

Is there a CGT event on the surrender of the life interest?

Answer:

Yes

Question 4:

Can the capital gain or loss made on the termination of your life interest be disregarded?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have provided a number of documents which form part of, and should be read in conjunction with, this private ruling;

• A copy of the will of the deceased dated XXXX.

• A Civil and Administration Tribunal Order dated XXXX

• Supreme Court order dated XXXX

• A copy of advice provided by QC dated XXXX

• A copy of the terms of Settlement document dated XXXX

Y (the deceased) owned a dwelling.

At some time during XXXX, X moved into the dwelling as a tenant.

The deceased prepared a will dated XXXX. In XXXX the deceased added a codicil to the will. The codicil allowed X a life interest in the dwelling.

In XXXX the deceased passed away. X continued to reside in the dwelling.

E was named executrix of the will.

In XXXX the Civil and Administration Tribunal Order was issued appointing AB as administrator for X. AB continued to administer the affairs of X until he/she passed away.

X continued to live in the dwelling until XXXX, when he/she was admitted to hospital, and then to an aged care facility in XXXX.

The executrix sold the dwelling in XXXX, with settlement occurring in XXXX. AB requested the executrix relinquish the interest of X prior to paying out the proceeds of the estate.

Charity Organisation JK was named as a beneficiary of the will of the deceased. Charity Organisation JK challenged the life interest.

In XXXX a summons was filed in the Supreme Court by the Executrix.

In XXXX Charity Organisation JK and AB reached an agreement (subject to the approval of the court) that X would relinquish all rights rising under the deceased's will and codicil in exchange for an amount of sum L.

In XXXX the Supreme Court issued an order to the effect that (among other things) X did have a life interest in the dwelling, and approved the agreement between Charity Organisation JK and AB.

Advice provided by QC in XXXX, provided a calculation of the cost base of the dwelling as an amount of sum M.

X passed away in XXXX.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 103-25.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 112-20.

Income Tax Assessment Act 1997 Section 116-30.

Income Tax Assessment Act 1997 Section 118-145.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for X.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can make a capital gain or a capital loss if and only if a CGT event happens to a CGT asset. A CGT asset can be a life interest and a CGT event can be the creation or termination of that life interest.

You make a capital gain if the capital proceeds from the surrender are more than the assets cost base. Alternatively, you can make a capital loss if the capital proceeds from the surrender are less than the reduced cost base.

Paragraph 66 of taxation ruling TR 2006/14 states:

If a life interest or remainder owner surrenders or releases their interest, CGT event A1 (in section 104-10 of the ITAA 1997) rather than CGT event C2 (in section 104-25 of the ITAA 1997) happens. The Commissioner considers that CGT event A1 is the applicable event, as there is a change of ownership of the interest from one party to the other, rather than a mere ending of it.

The main residence exemption

Your life interest is a right to occupy the dwelling and, as such, falls within the definition of an ownership interest in the dwelling, as outlined in section 118-130 of the ITAA 1997. As the dwelling in which you hold the ownership interest (life interest) is your main residence, the provisions of the ITAA 1997 dealing with exemption of the main residence from CGT must be considered.

Under section 118-110 of the ITAA 1997, any capital gain or loss that you made on a dwelling is disregarded provided that:

1. you are an individual;

2. the dwelling was your main residence (home) throughout your ownership period; and

3. the interest in the dwelling did not pass to you as a remainder beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

A life interest established by a will comes into existence only on the death of the person whose will establishes it. As the life interest does not form part of the deceased's property while alive, it does not form part of their estate. Therefore, section 118-110 of the ITAA 1997 can apply to a life interest in a property that was created under a will.

Section 118-110 of the ITAA 1997 has effect only when any of a number of specified CGT events happens to your ownership interest in your main residence. The list of eligible CGT events includes CGT event A1, so section 118-110 of the ITAA 1997 will have effect in this case.

Section 118-145 of the ITAA 1997 states that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence for up to 6 years if it is producing assessable income or indefinitely if not producing assessable income and you haven't chosen another dwelling as your main residence.

Your situation

In X's case, a life interest was conferred on X by the codicil in the will of the deceased. The life interest was further confirmed by the order of the Supreme Court in XXXX.

The dwelling was X's main residence from XXXX, up until the time he/she was admitted to an aged care facility in XXXX. His/her life interest in the dwelling commenced at the time of the deceased's death in XXXX.

X will make an absence choice to treat the property as his/her main residence from the time he/she was admitted to an aged care facility until the date of the sale of the property, which was settled in XXXX.

X's life interest is classed as an ownership interest in the dwelling in question.

As X is an individual, and the dwelling was his/her main residence throughout his/her ownership interest period, and X did not acquire his/her interest in the dwelling as a remainder beneficiary or trustee of a deceased estate, he/she is entitled to claim the main residence exemption.

Under section 118-110 of the ITAA 1997, the capital gain or capital loss made when CGT event A1 occurred on disposal of the ownership interest in the dwelling is disregarded for taxation purposes.

Therefore, the capital gain or capital loss that the deceased made on the termination of X's life interest in the dwelling is disregarded.

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