Edited version of private advice

Authorisation Number: 1052072571067

Date of advice: 9 February 2023

Ruling

Subject: CGT - deceased estate - sale of main residence

Question 1

Did you own the whole of the property for capital gains purposes just before it was sold?

Answer

Yes.

Question 2

Are you entitled to a partial main residence exemption in relation to the sale of the property due to either Beneficiary A or Child A child using it as their main residence during part of your ownership period?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away sometime after 1985.

The deceased's will (the will), appointed their two children (Beneficiary A and B), as co-executors and equal beneficiaries of the estate (you).

Your main asset was the property which the deceased acquired sometime before 1985 (pre-CGT).

The deceased did not have an ownership interest in any other properties. They resided in the property as their main residence from date of acquisition until their death.

The property was situated on less than two hectares of land.

The property was never used for income producing purposes and was never available for rent.

No capital improvements have been made to the property.

Upon the deceased's passing, Beneficiary A and their child (Child A) moved into the property. Beneficiary A continued to reside in the property as their main residence until they passed away several years after the deceased. After Beneficiary A's death, Child A, sole beneficiary of Beneficiary A's estate continued to stay in the property as his main residence until it was sold.

The will did not provide any person a right to occupy the home.

Beneficiary A and Child A did not have an ownership interest in any other property.

Probate of the will was granted shortly after the deceased passed away.

After probate, your solicitor transferred the property to Beneficiary A and Beneficiary B as your trustees.

Years later, Beneficiary B was placed under financial administration with State Trustees after suffering from health issues for several years.

State Trustees were given court orders to proceed with the administration of the estate.

Later, you entered into a contract to sell the property and it settled a shortly after.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Subdivision 118-B

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 1

Did you own the whole of the property for capital gains purposes just before it was sold?

Summary

You owned the whole of the property for capital gains purposes just before it was sold.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states: 'You can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event.' Subsection

104-10(1) of ITAA 1997 states: 'CGT event A1 happens if you dispose of a CGT asset'. Subsection 104-10(2) of the ITAA 1997 defines disposal for the purpose of subsection (1) as: 'You dispose of a CGT asset if a change of ownership occurs from you to another entity ...'.

The effect of these three provisions is that it is the owner of the CGT asset just before the disposal that makes any capital gain or capital loss due to the disposal of a CGT asset.

After probate, the property transferred to Beneficiary A and Beneficiary B as your trustees. Shortly after, you entered into a contract to sell the property. Therefore, you owned the property when it was sold and a change to the legal ownership of the property has occurred from you to another entity.

CGT event A1 happens to you as legal owner unless another CGT provision changes who makes the capital gain or capital loss.

You have argued that Beneficiary A and Child A's use of the property should alter the amount that you have to declare as a capital gain due to the sale of the property.

Does another provision change who makes the capital gain or capital loss from the sale of the property - Division 106 of the ITAA 1997?

The Guide to Division 106 of the ITAA 1997 (at section 106-1) states: 'This Division sets out the cases where a capital gain or loss is made by someone other than the entity to which a CGT event happens.'

Subsection 106-50(1) of the ITAA 1997 states:

For the purposes of this Part (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

Subsection 106-50(2) of the ITAA 1997 states:

This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal liability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of the trustee).

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides the Commissioner's opinion about when a beneficiary may be considered to be absolutely entitled to a trust asset.

Paragraph 23 of TR 2004/D25 states:

If there is more than one beneficiary with interests in the trust asset, then it will not be possible for any of one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

Paragraph 24 outlines an exception to this outcome, but it requires there to be multiple assets that are fungible (and other conditions also need to be satisfied). The discussion starting at paragraph 80 further shows the difficulties that arise when multiple beneficiaries have interests in the same asset.

In your case, you have been fully administered, there were two beneficiaries and the property is not a fungible asset (see paragraph 102 of TR 2004/D25). It would not have been possible for either of the beneficiaries to demand that the property be transferred to them.

It is the proceeds from the sale of the property that was distributed to the beneficiaries, not the property.

There is no evidence to support any conclusion that any beneficiary of the estate was absolutely entitled to the property as against State Trustees as your Legal Personal Representatives.

Does another provision change who makes the capital gain or capital loss from the sale of the property - section 118-130 of the ITAA 1997?

You have argued that Beneficiary A and Child A had an ownership interest in the property and that by virtue of section 118-130 of the ITAA 1997 these interests should adjust the portion of the property that you are considered to own. However, Beneficiary A and Child A never became the legal owner of the property (or of an interest in the property).

Subsection 118-130(1) of the ITAA 1997 provides a definition 'ownership interest' in land or a dwelling. The condition in paragraph 118-130(1)(b) of the ITAA 1997 applies to the property, that is:

(b) for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it.

Subsection 118-130(1) of the ITAA 1997 is used in conjunction with subsection 118-130(3) which defines when the ownership interest ends to work out the test period when accessing the main residence exemption in section 118-195 or the partial main residence exemption in section 118-200.

In each instance contemplated by paragraph 118-130(1)(b) of the ITAA 1997, it is the legal or equitable interest in the land or the licence or right to occupy the dwelling that is the CGT asset for the purpose of section 108-5. Being an ownership interest for the purposes of Subdivision 118-B is merely an additional attribute that might alter the capital gains consequences when a CGT event happens to a CGT asset.

While Beneficiary A and Child A occupied the dwelling on the property after the deceased passed away, there is nothing to demonstrate that Beneficiary A and Child A held a CGT asset that could be an ownership interest for the purposes of section 118-130 of the ITAA 1997. Mere occupation of a dwelling does not in itself bring an ownership interest into existence.

The meaning of the term 'ownership interest' as found in subsection 118-130(1) of the ITAA 1997 was considered in Mingos v FCT [2019] FCA 834 and Mingos v FCT No. 2 [2019] FCAFC 211. While the case was largely about other matters, it was noted at paragraph 81 of the judgement of Kerr and Steward JJ that:

The taxpayer faintly pressed a right of occupancy for the purposes of s 118-130 of the 1997 Act. It was said that this should be inferred from the fact that until its sale the taxpayer had lived at the property and paid for its upkeep. In our view, this de facto occupation of land does not support, without more, a legal right to occupy the property for the purposes of s 118-130. In any event, as the Commissioner had observed, even if the taxpayer held such a right, that was not the CGT asset sold here.

Furthermore, even if Beneficiary A and Child A held such a CGT asset, there is nothing in section 118-130 of the ITAA 1997 that limits your ownership of the property. Ownership interests do not have to be exclusive. For example:

A landlord owns a residential rental property. The landlord's legal interest in the land is an ownership interest under section 118-130 of the ITAA 1997. The landlord leases the property to a tenant. The rights held by the tenant are a different CGT asset and also an ownership interest under section 118-130 of the ITAA 1997. The ownership interests held by the tenant do not diminish the CGT asset owned by the landlord.

Therefore, the occupation of the property by Beneficiary A and Child A after the deceased passed away does not affect the portion of the property owned by you or of the CGT consequences for you due to the sale of it.

Does another provision change who makes the capital gain or capital loss from the sale of the property - section 128-20 of the ITAA 1997?

After probate, your solicitor transferred the property to Beneficiary A and Beneficiary B as your trustees. Although the intention was to transfer the property to the beneficiaries as tenants in common, this did not occur and you retained ownership of the property. Therefore, neither Beneficiary A or Beneficiary B became the legal owner of the property (or of an interest in the property.

Section 128-20 of the ITAA 1997 provides a definition for the term 'passes'. The adjustments made by section 128-15 of the ITAA 1997 generally apply to CGT assets that pass to a beneficiary.

Subsection 128-20(1) of the ITAA 1997 has a test that must be satisfied for a CGT asset to pass to a beneficiary. The condition in the test is all of the words that follow the word 'if'.

The first element in the condition for the definition of 'passes' to be satisfied is that the beneficiary must become the owner of the CGT asset for capital gains purposes.

A beneficiary can become the owner of such a CGT asset either due to the estate transferring the legal ownership of that asset to the beneficiary, or by the beneficiary becoming absolutely entitled to that asset as against the trustee of the estate (see Taxation Determination TD 2004/3 Income tax: capital gains: does an asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate?).

The second element in the condition is a consideration of the manner in which the beneficiary became the owner of the CGT asset. It has to be in one of the four ways specified in the paragraphs within subsection 128-20(1) of the ITAA 1997 to meet the definition of 'passes'.

The first element in the condition in subsection 128-20(1) of the ITAA 1997 is not satisfied because Beneficiary A and Beneficiary B never became the owners of the property for capital gains purposes. Therefore, the property has never passed to Beneficiary A and Beneficiary B, and section 128-20(1) of the ITAA 1997 cannot be used to deem Beneficiary A and Beneficiary B to be the owners of any part of it in preference to you.

In summary, we consider there are no other factors that change the owner of the property for capital gains purposes, including:

•         absolute entitlement - there are no beneficiaries absolutely entitled to the property.

•         meaning of ownership interest in land or a dwelling - these provisions are relevant in the calculation of the main residence concession when a CGT event happens to the legal owner of the land or dwelling.

•         when a CGT asset passes to a beneficiary - the first element is not met as neither Beneficiary A, Child A nor Beneficiary B became the owner of the asset.

The property was never transferred to Beneficiary A, Child A, or Beneficiary B as beneficiaries. Therefore, you retained ownership of the whole property and Beneficiary A, Child A and Beneficiary B never received an ownership interest in the property.

Question 2

Are you entitled to a partial main residence exemption in relation to the sale of the property due to either Beneficiary A or Child A using it as their main residence during part of your ownership period?

Summary

You are not entitled to a partial main residence exemption in relation to the sale of the property due to either Beneficiary A or Child A using it as their main residence during part of your ownership period?

Detailed reasoning

You are entitled to a full main residence exemption on the sale of the property if the conditions in section 118-195 of the ITAA 1997 are satisfied. These conditions are not satisfied because it was not the main residence of a relevant individual from the date that the deceased passed away until your ownership period ended.

Section 118-200 of the ITAA 1997 applies to you on the sale of the property because:

•         you owned the property as the trustee of a deceased estate

•         there was a dwelling on the property when you sold it, and

•         section 118-195 does not apply to you.

Your entitlement to a reduction to your capital gain or capital loss from the sale of the property is based on the proportion of your total days that are main residence days. In the opposite, the capital gain or capital loss remains to the extent that you're your total days are non-main residence days.

Subsection 118-200(2) of the ITAA 1997 defines 'total days' where the deceased acquired the property before

20 September 1985 as the number of days in the period from their death until your ownership period ends. On the same basis, it defines 'non-main residence days' as the number of days in the period from their death until your ownership period ends when the dwelling on it was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

The individuals identified in item 2, column 3 of the table in section 118-195 of the ITAA 1997 are:

•         the spouse of the deceased

•         an individual with a right to occupy the dwelling under the will of the deceased, and

•         if the property is sold by an individual to whom the ownership interest passed as a beneficiary - that individual.

The formula in subsection 118-200(2) of the ITAA 1997 is not adjusted by section 118-205 because the deceased became the owner of the property before 20 September 1985.

The only individuals that have occupied the property as their main residence since the deceased passed away are Beneficiary A and Child A. Neither Beneficiary A nor Child A are an individual referred to in item 2, column 3 of the table in section 118-195 of the ITAA 1997 because:

•         neither Beneficiary A nor Child A was the deceased's spouse.

•         the will did not give any individual a right to reside in the property, and

•         the property was sold by you and not by Beneficiary A, Child A, or Beneficiary B as a beneficiary.

Consequently, the number of non-main residence days is equal to the number of total days so there is no reduction in the capital gain or capital loss due to the sale of the property under section 118-200 of the ITAA 1997.

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