Edited version of private advice

Authorisation Number: 1052162809432

Date of advice: 31 August 2023

Ruling

Subject: CGT - dwelling inherited from deceased estate

Question 1

Did Property 2 pass from the Estate of Person D to the Estate of Person A, as a beneficiary of the Estate of Person D, in accordance with section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Does subsection 128-15(3) of the ITAA 1997 apply to disregard the capital gain made by the Estate of Person D on the transfer of Property 2 to Estate of Person A?

Answer

Yes.

Question 3

Does subsection 128-15(2) of the ITAA 1997 apply to treat the Estate of Person A as having acquired Property 2 on the date of death of Person D?

Answer

Yes.

Question 4

Does subsection 128-15(4) of the ITAA 1997 apply to treat the first element of the cost base of Property 2 in the hands of Person A to be its market value at the date of Person D's death?

Answer

Yes.

Question 5

Does section 118-192 of the ITAA 1997 apply to treat the Estate of Person A as having acquired Property 2 at the first time it was used by Person A for income producing purposes for its market value at that time?

Answer

No.

Question 6

Is the Estate of Person A entitled to a partial main residence exemption under section 118-200 of the ITAA 1997, with adjustments via section 118-205 of the ITAA 1997, in relation to the sale of Property 2?

Answer

Yes.

Question 7

Is the Estate of Person A entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 2 in accordance with section 115-100 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

From 1 July 20XX until 30 June 20XX

The scheme commenced on:

X/XX/20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1.            On XX/XX/20XX, Person D died, leaving a Will.

2.            Under the terms of the Will, Person D appointed their 3 children (Person A, Person B and Person C) as the Executors of the Will and probate was granted on XX/XX/20XX.

3.            On XX/XX/20XX, the Executors of the Estate of Person D (Executors) were granted probate of the Will.

4.            In accordance with the terms of the Will, the 3 children were also the residuary beneficiaries, (Beneficiary A, Beneficiary B and Beneficiary C) giving them each a one-third interest in the residuary estate, which included properties and cash.

5.            The Executors, by mutual verbal agreement shortly after the death of Person D agreed to transfer the properties to themselves, being the residuary beneficiaries, in accordance with the relevant clauses of the will and the wishes of Person A as follows:

•                     Beneficiary A received Property 2

•                     Beneficiary B received Property 1, and

•                     Beneficiary C received Property 3.

6.            It was not until Beneficiary C was seeking to sell Property 3 in 20XX that any steps were undertaken to transfer the properties to each residuary beneficiary.

7.            The Executors commenced winding up the Estate of Person D in 20XX and Property 3 was transferred to Beneficiary C in accordance with that process.

8.            In 20XX, Beneficiary A died before the other properties could be transferred.

9.            With the delay in the administration of the Estate of Person A, Property 2 was not transferred to that Estate until XX/XX/20XX.

10.          Following the death of Beneficiary A, the remaining beneficiaries continued in their role as Executors of the Estate of Person D and Property 2 was appropriated under the Will to the Estate of Person A on the XX/XX/20XX.

11.          The Estate of Person D has not yet been fully administered and is expected to be completed in the current year.

Property 2

12.          Property 2 was purchased by Person D before the 20 September 1985 and was Person D's main residence until their death on XX/XX/20XX.

13.          Property 2 became Beneficiary A's main residence immediately after the death of Person D, however there was no handover of legal title to Property 2 at that time.

14.          On XX/XX/XXXX, Beneficiary A acquired another property and moved into that property, treating it as their main residence from that date.

15.          Property 2 was first used for income producing purposes from XX/XX/20XX.

16.          After the death of Person A, probate of their Will was granted on XX/XX/20XX.

17.          To finally formalise and give effect to the in-specie distribution on account of Person A's entitlement as a residuary beneficiary (Beneficiary A) of the Estate of Person D, Property 2 was transferred to the Estate of Person A on XX/XX20XX.

18.          A contract for the sale of Property 2 was entered into by the Estate of Person A on XX/XX20XX with settlement to occur on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act Section 115-10

Income Tax Assessment Act Paragraph 115-10(c)

Income Tax Assessment Act Section 115-15

Income Tax Assessment Act Section 115-20

Income Tax Assessment Act Section 115-25

Income Tax Assessment Act Section 115-30

Income Tax Assessment Act Subsection 115-30(1)

Income Tax Assessment Act Section 115-100

Income Tax Assessment Act Section 115-110

Income Tax Assessment Act Section 118-192

Income Tax Assessment Act Section 118-195

Income Tax Assessment Act Section 118-200

Income Tax Assessment Act Subsection 118-200(2)

Income Tax Assessment Act Section 118-205

Income Tax Assessment Act Subsection 118-205(2)

Income Tax Assessment Act Division 128

Income Tax Assessment Act Subsection 128-15(2)

Income Tax Assessment Act Subsection 128-15(3)

Income Tax Assessment Act Subsection 128-15(4)

Income Tax Assessment Act Section 128-20

Income Tax Assessment Act Subsection 128-20(1)

Income Tax Assessment Act Paragraph 128-20(1)(a)

Income Tax Assessment Act Paragraph 128-20(1)(c)

Income Tax Assessment Act Subsection 995-1(1)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Trustee of the Estate of Person A and the Trustee of the Estate of Person D.

This is to explain how we reached our decision. This is not part of the private ruling.

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Did Property 2 pass from the Estate of the Person D to the Estate of Person A, as a beneficiary of the Estate of Person D, in accordance with section 128-20?

Summary

Property 2 passed to the Estate of Person A, as a beneficiary of the Estate of Person D, in accordance with subsection 128-20(1).

Detailed reasoning

1.            Subsection 128-20(1) states:

A *CGT asset passes to a beneficiary of the estate if the beneficiary becomes the owner of the asset in following circumstances:

(a)          under your will, or that will as varied by a court order; or

(b)          by operation of an intestacy law, or such a law as varied by a court order; or

(c)           because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d)          under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate' and

(ii) any *consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate.

2.            Under the terms of the Will, Person A was one of the Executors and a residuary beneficiary (Beneficiary A) of the Estate of Person D, being entitled to a one-third share of the residue, comprising property and cash.

3.            Person A began residing in Property 2 as their main residence on XX/XX/20XX, (the date of death of Person D).

4.            The Executors agreed, consistent with the wishes of their late parents, that Property 2 would be treated as Beneficiary A's and that it would be appropriated pursuant to the power given to them under the terms of the Will.

5.            In accordance with the Will, Property 2 was transferred by the Estate of Person D to the Estate of Person A on XX/XX/20XX, in satisfaction of Person A's one-third beneficial interest in the residuary estate. Therefore, Property 2 passed to the Estate of Person A in accordance with paragraphs 128-20(1)(a) and (c).

Question 2

Does subsection 128-15(3) apply to disregard the capital gain made by the Estate of Person D on the transfer of Property 2 to the Estate of Person A?

Summary

Any capital gain or capital loss made on the disposal of Property 2 by the Estate of Person D to the Estate of Person A is disregarded in accordance with subsection 128-15(3).

Detailed reasoning

6.            Subsection 128-15(3) states:

Any *capital gain or *capital loss the *legal personal representative makes if the asset passes to a beneficiary is disregarded.

7.            The concept of a 'legal personal representative' (LPR) is central to the operation of Division 128 because the LPR is responsible for administering the estate of the deceased. The term is defined in subsection 995-1(1) to mean (as relevant for the purposes of deceased estates) 'an executor or administrator of an estate of a person who has died'.

8.            As Property 2 was transferred by the Estate of Person D to the Estate of Person A, (as a beneficiary of the Estate of Person D) any capital gain or capital loss made by the Estate of Person D from passing Property 2 to the Estate of Person A will be disregarded in accordance with subsection 128-15(3).

Question 3

Does subsection 128-15(2) apply to treat the Estate of Person A as having acquired Property 2 on the date of death of Person D?

Summary

The Estate of Person A is taken to have acquired Property 2 on the date of death of Person D pursuant to the operation of section 128-15(2).

Detailed reasoning

9.            Section 128-15(2) states:

The *legal personal representative or beneficiary, is taken to have *acquired the asset on the day you die.

10.          As Property 2 was not transferred to Person A by the Estate of Person D whilst Person A was alive but transferred to the Estate of Person A under the terms of the Will of Person D, the Estate of Person A is taken to have acquired Property 2 on the day Person D died.

Question 4

Does subsection 128-15(4) apply to treat the first element of the cost base of Property 2 in the hands of the Estate of Person A to be its market value at the date of Person D's death?

Summary

The first element of the cost base of the Property 2 in the hands of The Estate of Person A is equal to the market value of Property 2 at the date of death of Person D.

Detailed reasoning

11.          The table in subsection 128-15(4) sets out the cost base rules of a CGT asset in the hands of the LPR or beneficiary.

12.          Following the death of Person D, Person A is taken to have acquired Property 2 on Person D's date of death.

13.          In determining the first element of the cost base / reduced cost base for Property 2, which Person D acquired before 20 September 1985, item 4 in the table in subsection 128-15(4) states that the first element of the cost base / reduced cost base of Property 2, in the hands of the Estate of Person A, is the market value of Property A on the day Person D died.

Question 5

Does section 118-192 apply to treat the Estate of Person A as having acquired Property 2 at the first time it was used by Person A for income producing purposes in 20XX for its market value at that time?

Summary

Section 118-192 will not apply to treat the Estate of Person A as having acquired Property 2 for its market value at the time it was first used to produce income as Person A was not entitled to a full main residence exemption at that time.

Detailed reasoning

14.          Section 118-192 contains a special rule which applies when the taxpayer loses the entitlement to a full main residence exemption because the dwelling was used for income-producing purposes for the first time.

15.          Where the following conditions are satisfied, the taxpayer is taken to have acquired the dwelling or the taxpayer's ownership interest in the dwelling immediately before the first time it was used for income producing purposes for its market value at that time:

(a)          the taxpayer is only eligible for a partial exemption in relation to the dwelling as it was used for the purpose of producing assessable income during the taxpayer's ownership period

(b)          it was first used for income producing purposes after 7.30 pm on 20 August 1996, and

(c)           the taxpayer would have been entitled to a full exemption if the CGT event had happened just before the first time (referred to as the income time) it was used for income producing purposes.

16.          It has been determined that the Estate of Person A acquired Property 2 on the date Person D passed away, and Person A immediately using the property as their main residence until they acquired another property on XX/XX/XXXX.

17.          As Property 2 was first used by Person A for income producing purposes on XX/XX/XXX, Person A is not entitled to a full main residence exemption when Property 2 was first used to produce assessable income, as another property was claimed to be his main residence at that time. As a result, section 118-192 will not apply to treat Property 2 as being acquired for its market value at the time of first income producing use.

Question 6

Is the Estate of Person A entitled to a partial main residence exemption under section 118-200, with adjustments via section 118-205, in relation to the sale of Property 2?

Summary

The Estate of Person A is entitled to a partial main residence exemption in accordance with section 118-200 and section 118-205 in relation to the sale of Property 2.

Detailed reasoning

18.          Section 118-200 describes when a partial exemption for deceased estate dwellings applies and provides a formula for calculating a capital gain or loss made when a partial exemption applies.

19.          Broadly, a partial exemption applies if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate, and section 118-195 does not apply.

20.          Section 118-195 sets out when a capital gain or capital loss you make from a CGT event that happens in relation to an ownership interest is disregarded. As Person D acquired Property 2 before 20 September 1985, the following requirements in item 2 in the table in subsection 118-195(1) need to be satisfied:

The *dwelling was, from the deceased's death, until your *ownership interest ends, the main residence of one or more of:

(a)          the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

(b)          an individual who had a right to occupy the dwelling under the deceased's will; or

(c)           if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual.

21.          Whilst Person A did have the right to occupy Property 2, Person A did not use Property 2 as their main residence until their ownership interest ended, therefore section 118-195 cannot apply.

22.          Property 2 passed to Person A via their Estate under Person D's Will, the Estate of Person A is taken to have acquired Property 2 on XX/XX/20XX. Due to Person not using Property 2 as their main residence for their whole ownership period, in determining whether a partial main residence exemption applies to disregard any capital gain or capital loss made by the Estate of Person A from the sale of Property 2, the following formula in subsection 118-200(2) is to be used:

Capital gain or Capital loss amount × Non-main residence days / Total days

23.          Non-main residence days' is the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(aa) if the deceased acquired the ownership interest on or after 20 September 1985 and, just before the deceased death, the deceased was an excluded foreign resident - the number of remaining days in the deceased's ownership period; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of the individual referred to in item 2, column 3 of the table in section 118-195.

24.          'Total days' is:

(a) if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership period ends; or

(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership period ends.

25.          Section 118-205 states that you must adjust the formula in subsection 118-200(2) if the ownership interest of the deceased individual referred to in section 118-200 (the most recently deceased) passed to the individual on or after 20 September 1985 as a beneficiary in, or the individual owned it as trustee of, a deceased estate. As the Estate of Person A is taken to have acquired Property 2 on XX/XX/20XX, the Estate of Person A must use the formula in section 118-200 as adjusted by section 118-205.

26.          'Non-main residence days' are calculated according to subsection 118-205(2) as follows:

Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the dwelling was not the main residence of one or more of:

(a)          an individual who owned the dwelling at the time of the individual's death; or

(b)          an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c)           an individual who had a right to occupy the dwelling under a will; or

(d)          an individual to whom an *ownership interest in the dwelling *passed as a beneficiary in, or who *acquired an ownership interest in the dwelling as trustee of, a deceased estate.

27.          'Total days' are calculated according to subsection 118-205(2), as follows:

Add to the component total days in the formula the fewer of:

(a)          the number of days between 20 September 1985 and the day when the interest *passed to or was *acquired as trustee by the most recently deceased; and

(b)          the number of days between the time when an *ownership interest in the *dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

28.          In calculating the amount of partial main residence exemption that will apply to the sale of Property 2 by the Estate of Person A, using the formula in sections 118-200 and 118-205, the following information is to be included:

•                     the date Property 2 was acquired by Person D and the days used as Person D's main residence

•                     the date Property 2 was transferred to the Estate of Person A

•                     the days Property 2 was used as the main residence of Person A

•                     the period Property 2 was used for income producing purposes by Person A and the Estate of Person A, and

•                     the contract date for the sale of Property 2 by the Estate of Person A.

Question 7

Is the Estate of Person A entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 2 in accordance with section 115-100?

Summary

The Estate of Person A is entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 2 in accordance with section 115-100.

Detailed reasoning

29.          Division 115 sets out the conditions in which an entity may be entitled to a discount capital gain including the discount percentage.

30.          To be a discount capital gain, the capital gain must meet the requirements of sections 115-10, 115-15, 115-20 and 115-25.

31.          As the Estate of Person A is a trust, it will meet the requirement in paragraph 115-10(c).

32.          When Property 2 was sold by the Estate of Person A via a contract of sale on XX/XX/20XX, CGT event A1 happened on this date, resulting in the requirement in section 115-15 being satisfied.

33.          As indexation of the cost base will not be used, the requirement in section 115-20 is satisfied.

34.          Section 115-25 states that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

35.          The Estate of Person A acquired its ownership interest in Property 2 on the date of death of Person D 2002. With CGT event A1 happening on XX/XX/20XX, the 12 month period referred to in section 115-25 has been satisfied, such that any capital gain made by the Estate of Person A from the sale of Property 2 will be a discount capital gain.

36.          Therefore, it is not necessary to consider whether section 115-30 applies to treat Property 2 as being acquired earlier by the Estate of Person A.

37.          The Estate of Person A has therefore met all the above requirements for the capital gain it made from the sale of Property 2 to be a discount capital gain.

38.          Section 115-100 determines the discount percentage that is to apply to the discount capital. For a trust, the discount percentage is set at 50%, so long as the trust is not a foreign or temporary resident pursuant to section 115-110.

39.          As the Estate of Person A is not a foreign or temporary resident estate, it is entitled to a discount percentage of 50% on the amount of capital gain made on the sale of Property 2 that is not eligible for the main residence exemption.

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