Edited version of private advice

Authorisation Number: 1051944243984

Date of advice: 7 February 2022

Ruling

Subject: Deceased estate - deed of appropriation

Question 1

Will the spouse of the deceased have a capital gain in relation to their right to reside at the property granted by the Will upon executing the Deed of Appropriation?

Answer

No. The right of occupancy granted under the Will of the deceased will come to an end when it is replaced by an acknowledgement from the children of the spouse that the spouse can continue to reside at the property. On the right of occupancy coming to an end, capital gains tax (CGT) event C2 will occur. A right to occupy a dwelling constitutes an ownership interest, and as such, any capital gain or loss the spouse makes on the right of occupancy ending will be disregarded under section 118-110 of the Income Tax Assessment Act (ITAA 1997).

Question 2

When the interests in the relevant properties are transferred to the children in accordance with the Deed of Appropriation, will they pass to the children as beneficiaries of the Estate within the meaning of section 128-20 of the ITAA 1997?

Answer

Yes. Paragraph 128-20(1)(c) of the ITAA 1997 provides that a CGT asset passes to a beneficiary in an estate if the beneficiary becomes the owner of the asset because it is appropriated to the beneficiary by a legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the estate.

As the property interests will be transferred to the children in satisfaction of their entitlements under the Will by a Deed of Appropriation, and in equal shares, the requirements of section 128-20 of the ITAA 1997 will be met.

Question 3

Will the children have a capital gain upon entering into the Deed of Appropriation?

Answer

No. As the Estate is a trust to which Division 128 of the ITAA 1997 applies, CGT events E5 and E7 will not happen when the Deed of Appropriation is entered into and no other CGT event will happen (Taxation Ruling TR 2006/14).

The acknowledgement by the children that the spouse can continue to reside at the property will result in CGT event D1 happening.

However, section 137-15 of the ITAA 1997 provides that a CGT event does not happen to the extent it relates to creating a granny flat interest in a dwelling under an arrangement. In this case, considering the personal circumstances of the spouse and the acknowledgement that the spouse can continue to reside at the property, section 137-15 of the ITAA 1997 will apply so that there will be no CGT event when the acknowledgement is granted.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased owned certain properties prior to their death.

The property interests of the deceased were all used in a business that was carried on by the deceased in partnership with his spouse and adult children.

The last will and testament of the deceased (the Will) provided that the spouse of the deceased would be permitted to occupy the dwelling on one of the properties for their life. Further, after the death of the spouse, the property interests were to be divided between the children, as tenants in common in equal shares.

The spouse of the deceased continues to reside in the home on the relevant property and has done so at all times since the death of the deceased. The deceased and spouse lived at the home prior to the deceased's death, and at all times the home was the main residence of the deceased. The home was never used to produce income.

One of the children (both in their personal capacity and as executor of the Estate), along with the other children and spouse of the deceased will enter into a Deed of Appropriation under which the executor will transfer the deceased's property interests to the children in satisfaction of their entitlements under the Will.

In accordance with the Deed of Appropriation, the value of the properties to be transferred to the children will be equal, reflecting their entitlement to share in the deceased's property interests as tenants in common in equal shares under the Will.

The spouse will continue to reside in the home on the property following the transfers of the properties in accordance with an acknowledgement made by the children in the Deed of Appropriation.

The spouse has reached pension age.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 paragraph 128-20(1)(c)

Income Tax Assessment Act 1997 section 137-10

Income Tax Assessment Act 1997 section 137-15

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