Edited version of private advice

Authorisation Number: 1052130085571

Date of advice: 21 August 2023

Ruling

Subject: CGT - deceased estates

Question 1

Is the income derived in the period from the deceased's date of death to administration of the estate (the period) assessed to the trustee under subsection 99(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

In part.

IT 2622 Income tax: present entitlement during stages of administration of deceased estates provides that beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the initial stage of the administration of the estate.

However, during the intermediate stage of the administration of the estate, the executors may pay amounts to beneficiaries, having determined that this part of the estate will not be required for the payments of debts or expenses of the estate. In this case the beneficiary is presently entitled to such amounts.

IT 2622 further states that the net income of the trust estate and whether any beneficiary is presently entitled to a share of the net income is determined on the final day of the income year.

In your case, income was derived by the estate in the income year ended 30 June 20XX. Part of this income was distributed to the spouse of the deceased in the same income year. The amounts distributed to the spouse before 30 June 20XX that were not 'costs of the estate' will be assessed to you under section 98 of the ITAA 1936. The remainder of the capital gain will be assessed to you under subsection 99(2) of the ITAA 1936. Accordingly, we are of the opinion that it would be unreasonable that section 99A of the ITAA 1936 should apply in relation to the trust estate for the period.

Question 2

Are you eligible for a 50% CGT discount on the capital gain made on the sale of the property?

Answer

In part.

You are eligible for a 50% CGT discount for that part of the capital gain assessed under section 99 of the ITAA 1936.

As noted above, the spouse is presently entitled to income paid to them, or on their behalf, prior to completion of the administration of the estate and before 30 June 20XX, in this case $XXX.

IT 2622 provides that assessment of any income in the hands of the trustee will be under section 99 of the ITAA 1936. Income to which beneficiaries are presently entitled will be assessed under section 98 or section 97 of the ITAA 1936 as appropriate. As the spouse is a foreign resident, the income to which they are presently entitled will be assessed to you as the trustee under subsection 98(2A) of the ITAA 1936.

Division 115 of the ITAA 1997 deals with discount capital gains and trusts with net capital gains. Section 115-120 of the ITAA 1997 operates to deny the discount percentage to trustees assessed under section 98 of the ITAA 1936 where beneficiaries are foreign or temporary residents. You will not be entitled to the discount percentage for the $XXX you distributed to the spouse as they were a foreign resident for the entire discount period.

Sections 115-222 and 115-225 of the ITAA 1997 operate together to determine the trustee's entitlement to the discount percentage for amounts assessed under section 99 of the ITAA 1936. The effect of these provisions is that the trustee will be entitled to a 50% discount capital gain so long as the asset was acquired at least 12 months before the relevant CGT event. In your case, you acquired the asset more than 12 months before its sale. Therefore, you are entitled to the 50% discount capital gain for the remainder of the gain after deducting the amount you distributed to the spouse in the 20XX income year.

Question 3

Is the first element of the cost base of the property equal to the deceased's cost base, including the effect of the rollover under section 126-5 of the ITAA 1997, calculated as at the date they passed away?

Answer

Yes.

The first element of the cost base of the property for you as trustee is determined by item 1 of subsection

128-15(4) of the ITAA 1997. This equals the deceased's cost base calculated as at the date they passed away.

The deceased's cost base is calculated according to each ownership interest. The deceased acquired their first 50% ownership interest when they purchased the property with their former spouse for $XXX. The first element of the deceased's cost base for this ownership interest is equal to the amount they paid to acquire their ownership interest, $XXX.

The deceased's second 50% ownership interest was acquired some years later pursuant to an Order of the Family Court (the Court). The Court ordered the deceased's former spouse (transferor) to transfer their 50% interest in the property to the deceased (transferee). This transfer satisfied the requirement for the same-asset CGT roll-over under section 126-5 of the ITAA 1997.

As a result of the rollover, subsection 126-5(5) provides the first element of the deceased's cost base for this ownership interest is equal to their former spouse's cost base. In your case, it is the amount they paid, $XXX to acquire their ownership interest. Therefore, the first element of the cost base of the property for you as trustee includes the total amount paid to purchase the property, $XXX.

Note, stamp duty is included in the second element of the deceased's cost base. Therefore, it is included in the first element of the cost base of the property for you as trustee.

Question 4

Does the cost of obtaining probate form part of the cost base of the property?

Answer

Yes.

The costs you incurred in confirming the validity of the deceased's will and obtaining the grant of probate were incurred solely to preserve the rights over the property held by the estate. Consequently, the costs are included in the fifth element of the cost base of the property under subsection 110-25(6) of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Estate

At some time after 1985, the deceased died domiciled in Australia.

The last will and testament of the deceased named their spouse as their sole executor and sole beneficiary.

The deceased owned real property which formed the bulk of the value of the estate.

You are the legal representative of the deceased's estate (the estate). You are also the lawful attorney of the spouse of the deceased.

You received Letters of Administration (probate). You incurred costs solely to obtain ownership of the property.

You are and were at all relevant times a resident in Australia.

The spouse is and was at all relevant times a resident in Country A. The spouse has never been an Australian resident for tax purposes.

You have not completed administration of the estate.

Before 30 June 20XX, you made payments of $XXX, $XXX and $XXX to the spouse.

These comprised:

•         'costs of the estate' including:

o   debts of the deceased - $XXX

o   funeral expenses - $XXX

•         distribution to the spouse - $XXX

After 30 June 20XX, you paid an additional distribution to the spouse of $XXX

The property

At some time after 1985, the deceased purchased the property with their former spouse for $XXX.

Later, the deceased acquired the other 50% interest in the property pursuant to an Order of the Family Court.

At the time of the deceased's death, the deceased used the property as an investment property.

You sold the property as trustee of the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 115-120

Income Tax Assessment Act 1997 Section 115-222

Income Tax Assessment Act 1997 Section 115-225

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 126-5

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 98

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