Edited version of private advice

Authorisation Number: 1051774412944

Date of advice: 12 November 2020

Ruling

Subject: Capital gains tax - deceased estates

Question 1

Does a capital gains tax (CGT) event happen to the asset owned by the Trust when Child Two relinquishes their right to reside in the property?

Answer

No.

Question 2

Can the Trust disregard any capital gain made when the asset is transferred to the remaindermen?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and their spouse, Person B, purchased a property as joint proprietors before 20 September 1985 (the dwelling).

Several years after 20 September 1985, Person B transferred their 50% ownership in the dwelling to Person A under natural love and affection.

The dwelling was Person A's main residence.

Person A passed away (the deceased).

Probate was granted to the State Trustees Ltd (STL).

The administration of the deceased's estate was completed within a year of the deceased's death.

The deceased was survived by Person B, and two adult children, Child One and Child Two.

The will provides for Child Two to reside in the dwelling as long as they meet conditions stipulated in Clause 8.2 of the will. Should Child Two cease to reside in the dwelling, Person Two, Child One and Child Two (the remaindermen) will each be entitled to a one third ownership interest in the dwelling.

A new trust was established to administer the right to occupy.

Since the deceased's date of death, Child Two has been residing in the dwelling as their main residence.

The remaindermen appointed a lawyer to represent them.

STL received an email from the remaindermen's lawyer advising that:

a)    Child Two had purchased a property which they intend to relocate to, and

b)    The dwelling was to be transferred to the remaindermen as per the will.

STL have taken the date of the receipt of the email as the date Child Two relinquished their right to occupy the dwelling, although Child Two has not yet moved out of the dwelling.

Child Two will not receive consideration for their relinquishment of their right to occupy.

The dwelling will be transferred to the remaindermen during the period of this ruling.

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 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Question One

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) says you can only make a capital gain or capital loss if a capital gain tax (CGT) event happens. The gain or loss happens at the time of the event.

Section 104-10 of the ITAA 1997 says that CGT event A1 happens if you dispose of a CGT asset.

The asset being disposed of is the right to occupy the dwelling. The owner of the right to occupy is Child Two.

The asset owned by the Trust is the dwelling. The Trust owned the dwelling before Child Two disposed of the right to occupy and the Trust continues to own the dwelling after this disposal.

As the Trust does not own the right to occupy, a CGT event does not happen to the asset owned by the Trust when Child Two relinquishes their right to occupy.

Question Two

Division 128 of the ITAA 1997 applies to the passing of an asset from a deceased individual's legal personal representative to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death).

Accordingly, 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate. The Commissioner considers that the words 'a trust to which Division 128 applies' should be interpreted as a deceased estate to the extent that it is a trust over an assetoriginally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 of the ITAA 1997 (TR 2006/14).

Law Administration Practice Statement PS LA 2003/12 confirms that:

...the Commissioner will not depart from the ATO's long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128 of the ITAA 1997.

The ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

Therefore Division 128 of the ITAA 1997 will apply to the Trust.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary of a deceased estate is disregarded.

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

(a) under a will, or that will as varied by a court order, or

(b) by operation of an intestacy law, or such law as varied by a court order, or

(c) because it is appropriated to the beneficiary by the deceased legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate, or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased estate, and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

In this case the Trustee will transfer the dwelling to the remaindermen to satisfy their interest or share in the estate. As such, subsection 128-15(3) of the ITAA 1997 will apply to disregard any capital gain or loss resulting from this transfer.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).