Edited version of private advice

Authorisation Number: 1051812712650

Date of advice: 24 March 2021

Ruling

Subject: CGT - deceased estate

Question 1

Is there a capital gains tax even when Child C Testamentary Trust transfers its XX% interest in shares to Child B as an individual?

Answer

Yes

Question 2

Can Child C's use of The Property be regarded as main residence days for the purpose of calculating the capital gain in section 118-200 of the Income Tax Assessment Act 1997 (ITAA 1997) for Child C Testamentary Trust?

Answer

Yes

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away in 20XX.

Probate was granted in 20XX.

The Deceased was survived by their children - Child A, Child B and Child C.

The Deceased owned shares in a company which provided them with exclusive occupancy rights to a property (The Property).The Deceased purchased the shares as joint tenants with their spouse in 19XX. They and their spouse used The Property as their main residence until 19XX.

Following this, The Property was used by The Deceased's parent as their main residence from 199X until 201X.

As a result of a relationship breakdown, The Deceased became the sole owner of the shares.

In 20XX, Child B moved into The Property and made it their main residence.

In 20XX, Child C moved into The Property.It was their main residence until 20XX.

In accordance with the terms of The Deceased's Will, separate testamentary discretionary trusts were created for Child A, Child B and Child C. The trusts created were:

a)    Child A Testamentary Trust (Child A Trust)

b)    Child B Testamentary Trust (Child B Trust)

c)    Child C Testamentary Trust (Child C Trust)

In 20XX, in accordance with The Will, shares were transferred to the following testamentary trusts: XX% to Child B Trust and XX% to Child C Trust.

In 20XX, the following share transfers took place:

Child B Trust transferred its XX% interest in shares to Child B in their capacity as an individual beneficiary and transferred its XX% interest in the property to Child B in their capacity as an individual and received consideration of $XXX,000.

After transfer, Child B became the sole owner of the shares in their capacity as an individual.

Child C Trust has made a capital gain on the disposal of its XX% interest to Child B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 sub-paragraph 118-130(1)(c)(iii)

Income Tax Assessment Act 1997 section 118-195(1)

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 subsection 128-15 (3)

Income Tax Assessment Act 1997 subsection 128-20(2)

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Question 1

Subsection 128-15(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that any capital gain that arises in the hands of the Legal Personal Representative (LPR) on the passing of a capital gains tax (CGT) asset to a beneficiary is disregarded.

In certain circumstances, the Commissioner treats the trustee of a testamentary trust in the same way as a LPRwhen a CGT asset of the deceased passes to a beneficiary.As subsection 128-15(3) of the ITAA 1997 applies to this trust, any capital gain that arises in the hands of the trustee on the transfer of the asset from the trustee to the beneficiary would be disregarded.

In this instance however, the CGT asset is being transferred to Child B for consideration of $XXX,000. Even if Child B was a beneficiary of Child C Trust, as they become the owner via sale from the LPR, the asset does not pass to them as a beneficiary of Child C Trust. CGT event A1 will therefore occur on the disposal of the shares from The Child C Trust to Child B.

Question 2

In accordance with the table in subsection 118-195(1) of the ITAA 1997, you can disregard a capital gain or capital loss you make from a CGT event that happens in relation to your ownership interest in a dwelling if certain conditions are met.

You have an ownership interest in a dwelling if you have a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you a right to occupy it.

Child C Trust has acquired a XX% interest in shares owned by The Deceased that give the owner the right to exclusively occupy The Property, thereby satisfying the ownership requirement. That ownership interest ended when Child C Trust disposed of its shares to Child B.

For an ownership interest acquired after 20 September 1985, the conditions for a full main residence exemption are that the dwelling was the residence of the deceased just before their death and was not then being used for the purpose of obtaining assessable income.

A further condition is that the dwelling must be disposed of within two years or a longer period allowed by The Commissioner or be the main residence of an individual listed in the table of 118-195(1) of the ITAA 1997 until your ownership interest ends.

In this instance, these conditions are not met so it is necessary to look to section 118-200 of the ITAA 1997 regarding a partial exemption. Section 118-200 of the ITAA 1997 provides that you may get a partial or no main residence exemption if you have an ownership interest in a dwelling as trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply

Where a dwelling is occupied by an individual who had a right to occupy the dwelling under The Deceased's Will, these days count towards a partial main residence exemption for the purposes of section 118-200 of the ITAA 1997.

In this instance, there is a paragraph in The Deceased' s Will that provides as follows: 'The Trustee has a right to acquire a new property for occupation, use and enjoyment by the beneficiaries.'

In this instance, the property that Child C resided in between 20XX and 20XX did not constitute a new property, as it had previously been occupied by their parents and subsequently their grandparent. However, the relevant clause in The Deceased's Will provides that a new property may be acquired for occupation, use and enjoyment by the beneficiaries. The Will therefore contains an implied right to provide a property for occupation, use and enjoyment by Child C as a beneficiary of Child C Trust.

Child C's occupation of The Property will therefore count towards main residence days for the purpose of calculating the partial exemption in section 118-200 of the ITAA 1997 for Child C Trust.

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