Edited version of your written advice

Authorisation Number: 1013139542527

Date of advice: 15 December 2016

Ruling

Subject: Capital gains tax

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Question 1

Are you assessable for capital gains on the sale of the property?

Answer

Yes.

Question 2

Are you entitled to a full main residence exemption?

Answer

No.

Relevant facts and circumstances

In 19XX you purchased the property as joint tenants with your spouse.

In 20XX you separated from your spouse and moved out of the property.

In 20XX a property settlement was effected in the Relevant Court and the property was transferred to your spouse.

In 20XX your spouse passed away, leaving the property to you under the will.

In 20XX probate was granted and the property was transferred to you.

The property was your spouse's main residence until the date of death.

In 20XX your child moved into the property.

In 20XX Relevant Court proceedings commenced relating to your child's occupation of the property.

In 20XX your child filed a claim seeking a provision to be made in their favour pursuant to the Succession Act 2006 from your spouse's deceased estate.

In 20XX your other children filed a claim seeking a provision to be made in their favour pursuant to the Succession Act 2006 from your spouse's deceased estate.

In 20XX the property was sold.

In 20XX all parties involved entered into a Settlement agreement. The terms of the settlement agreement regarding the sale proceeds are to be applied as follows:

a) All costs and expenses of sale including payment of agent's commission, conveyancing costs, valuer's fees and auction expenses;

b) Usual adjustments on settlement relating to the sale, including payment of statutory charges such as council rates, water rates and land tax;

c) Payment of accountant's costs for preparing a final Estate tax return;

d) Payment of capital gains tax in respect of the disposal of the property including costs of obtaining any valuation/s for the purpose of assessing any capital gains tax;

e) Payment to you as reimbursement of Estate expenses, the amount specified

f) Payment to you in reimbursement of any reasonable expenses incurred in preparing the property for sale.

g) From the balance remaining, specified percentage amounts allocated to the children.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Question 1

When considering the disposal of your interest in the property, the most important element in the application of the capital gains tax (CGT) provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. Generally, the owner of the property is the person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

Where the legal and beneficial ownership of an asset is different, a trust situation occurs. Section 106-50 of the Income Tax Assessment 1997 (ITAA 1997) explains that where an individual becomes absolutely entitled to a CGT asset of a trust and the trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.

Trusts may be of three kinds:

● Express,

● Resulting or Implied, or

● Constructive

Express Trusts

An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. Where an express trust is created in relation to property, it is evidenced in writing.

Constructive Trusts

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

Resulting or Implied Trusts

A resulting trust, sometimes called an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications:

● cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and

● cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money.

In your case, when the property was transferred to you under your spouse's will you became the legal and beneficial owner. Although your child occupied the property, there was no trust situation created. Additionally, as per the terms of the settlement agreement, CGT is to be paid from the sale proceeds before any amounts are distributed. As the legal and beneficial owner, you are assessable on the capital gains from the sale of the property.

Question 2

Full main residence exemption

Section 118-195 of the ITAA 1997 establishes that he executor (or beneficiary) will be entitled to a full main residence exemption where the:

● deceased acquired dwelling prior to 20 September 1985; OR

● deceased acquired dwelling after 20 September 1985 and it was their main residence just prior to their death

AND

● you (either the executor or beneficiary) disposed of the ownership interest within 2 years of the deceased's date of death) OR

● from the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

● a person who was the spouse of the deceased immediately before the deceased's death

● an individual who had a right to occupy the home under the deceased's will

● you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

In your case, you did not dispose of your ownership interest within 2 years, nor did the property become your main residence. You are not entitled to a full main residence exemption.

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