Edited version of private advice

Authorisation Number: 1052154597667

Date of advice: 9 August 2023

Ruling

Subject: CGT - deceased estates

Question 1

Will a full CGT exemption apply on the sale of the dwelling?

Answer

No.

Question 2

Will a partial CGT exemption apply on the sale of the dwelling?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

After the death of Z probate was granted on XX/XX/20XX.

A clause of the will gave part of the residue of the estate to a number of Z's grandchildren who were all minor beneficiaries at the time of death, to be held in trust until they were 21.

Another clause of the will authorises and empowers the trustees of the estate in their absolute discretion to apply any part of a minor beneficiary's share of the estate towards their maintenance or benefit in any manner as the trustees think fit.

You, as trustees, exercised your power of investment pursuant to the will and purchased a property for the purpose of allowing the children to live there and utilise the property as their main residence.

The children, their parent and the parent's partner lived in the property.

The solicitors for the estate suggested that a fee be paid to the estate by the parent while they resided in the property so that they would not be seen to be receiving any benefit from the estate asset. An agreement was entered into between you as trustees and the parent which set the fee at $XXX per week for a period of X years with it to be reviewed at the expiration of that period. The fees have been disclosed as income in the income tax returns of the estate.

You now want to sell the property and distribute the funds to the beneficiaries. The property has remained the main residence of the children and their parent.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-210

Income Tax Assessment Act 1997 subsection 118-210(1)

Income Tax Assessment Act 1997 subsection 118-210(3)

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset. Its sale is a CGT event under section 104-10 of the ITAA 1997.

Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if all of the following conditions apply:

•         you are an individual

•         the property is less than two hectares.

•         the dwelling was your main residence throughout your ownership period

•         the ownership interest did not pass to you through a trust or a deceased estate.

In most cases the full exemption will apply where an individual or individuals own a dwelling and occupy it as a main residence.

The property is considered to be owned by the person(s)/entity registered on the title.

A trustee who has legal title to a CGT asset is the relevant owner of that CGT asset unless section 106-50 of the ITAA 1997 applies. This section applies where there is a beneficiary who is absolutely entitled to the asset as against the trustee. If there is a beneficiary who is so entitled, then any capital gain or loss from the asset is taken to be made by the beneficiary themselves rather than by the trustee. That is, the gain or loss is not taken into account in working out the trust's net capital gain. However, the ATO takes the view that multiple beneficiaries cannot be absolutely entitled to a single trust asset.

In your case, the trust owns the property, and the beneficiaries who occupy it are not absolutely entitled to it so they are not deemed to own it for CGT purposes. Therefore, the general main residence exemption under section 118-110 of the ITAA 1997 does not apply.

However, section 118-210 of the ITAA 1997 may apply if you are the trustee of a deceased estate and under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual.

Subsection 118-210(3) of the ITAA 1997 provides that if the trustee receives money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event.

One of the conditions for this exemption to apply is that the dwelling is purchased in accordance with the deceased's will.

The Commissioner expresses the view in Taxation Determination TD 1999/74 Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997? that the connection required for acquisition under a deceased's will is not a strict one. Such an acquisition may be in pursuance of the will but does not have to be by force of the will nor in strict conformity with it.

Having considered your circumstances and our view in TD 1999/74, the Commissioner agrees the property was acquired under the will of the deceased.

The trustee acquired the ownership interest in the property for occupation by beneficiaries who were children. From the time the ownership interest was acquired in the property until the time of the CGT A1 disposal event, the dwelling was the main residence of the children. Therefore, the exemption under section 118-210 of the ITAA 1997 is applicable.

However, in your case, the parent of the children and their partner also lived at the property and the parent paid fees to the estate which were disclosed as income in the income tax returns of the estate.

Section 118-190 of the ITAA 1997 is directed at reducing the main residence exemption and only allowing you a partial exemption if you use part of the dwelling for income producing purposes. Therefore, in your case, a partial main residence exemption applies.

The general rule for apportioning the main residence exemption is to make adjustments on the basis of floor area in a way similar to the calculation of proportionate interest or rent deductions, but also taking into account the period of income-producing use. However, in some cases, a more appropriate basis for apportionment may be available in Taxation Determination TD 1999/66 Income tax: capital gains: what factors should be taken into account in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the Income Tax Assessment Act 1997? You should calculate your partial CGT exemption on a reasonable basis.

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