Edited version of private advice

Authorisation Number: 1051641208392

Date of advice: 9 March 2020

Ruling

Subject: Capital gains tax

Question

Can the Trustee apply the CGT Discount to the sale of the property?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

The Deceased passed away.

The Deceased had an investment property; the property was purchased in February 20XX.

According to probate, the administration of the Deceased estate was granted to a non-resident legal personal representative as the Trustee of the Estate.

All beneficiaries of the Estate are non-residents.

The investment property continued to be leased until 30 June 20XX.

The property was sold by the Trustee on X August 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 100-20(1)

Income Tax Assessment Act 1997 section 115-120

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

In order to have a capital gain or loss, a CGT event must occur (subsection 100-20(1) Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is disposal of an asset (CGT event A1). The disposal of the property by the trustee of the deceased estate will trigger CGT event A1, so that any net capital gain from this event will form part of the deceased estates income in the same income year that the event happened.

Section 128-10 of the ITAA 1997 states that when you die, a capital gain or loss from a CGT event that results for a CGT asset you owned just before dying is disregarded. This means that although the passing of the asset from the deceased person to their beneficiary or legal representative is an effective disposal, it does not trigger CGT event A1. It does not mean that there are no CGT implications of the asset passing to the beneficiary or legal representative.

Subsection 128-15(4) states that for assets the deceased acquired after 20 September 1985 (other than trading stock or a dwelling used as a main residence), the first element of the asset's cost base or reduced cost base in the hands of the legal representative is the deceased's cost base or reduced cost base on the date of death (item 1 of the table in subsection 128-15(4) of the ITAA 1997). That is, the legal representative inherits the deceased's cost base or reduced cost base.

In your case, upon the death of the deceased, the property transferred to the non-resident trustee. Under section 128-15 any capital gain or loss made on this transfer is disregarded. The property is now held by the non-resident trustee on behalf of the non-resident trust estate.

Section 115-120 of the ITAA 1997 was introduced legislation to remove the availability of the CGT discount for non-resident and temporary resident trusts.

If a trust, were a foreign resident trust on May 201X and they had acquired an asset prior to May 201X they were eligible to apply the CGT discount if they obtain a market valuation of their asset as at May 201X. This enabled a trust to claim the CGT discount for the period prior to the announcement of the new measure.

In this case the trustee of the trust did not acquire the asset prior to May 201X. The asset was acquired by the trustee of the trust on November 20XX. Therefore the trustee is not eligible to use the discount capital gain (50% discount) to reduce the capital gain made on the sale of the property.

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