Edited version of private advice

Authorisation Number: 1052236721590

Date of advice: 23 June 2025

Ruling

Subject: Capital gains tax - deceased estate - sale of dwelling - absolutely entitled beneficiary?

Question 1

Did CGT event A1 happen to the taxpayer due to the sale of the property?

Answer

Yes.

Question 2

Is any capital gain or loss the taxpayer made due to the sale of the property disregarded?

Answer

No.

This ruling applies for the following period:

20XX-XX income year

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The first deceased acquired the property as the sole proprietor under the will of their pre-deceased spouse, which was registered on the title before 1985.

The first deceased lived at the property together with their only child, (the second deceased).

Some 20 years ago, the first deceased passed away, leaving a will.

Pursuant to paragraph 2 of the will, the deceased appointed the second deceased as executor.

Pursuant to paragraph 3 of the will, the second deceased was the sole beneficiary of the first deceased's estate.

Paragraph 3 of the first deceased's will listed the second deceased's issue as potential alternate beneficiaries should the second deceased die during the first deceased's life (and certain other conditions were satisfied).

Paragraph 4 of the first deceased's will listed further alternate beneficiaries should the dispositions in paragraph 3 wholly fail.

The property was the only asset in the first deceased's estate. The first deceased did not have an ownership interest in any other property.

The second deceased continued to live and treat this property as their main residence until they passed away. They also did not have an ownership interest in any other property.

The second deceased, during their lifetime and occupation of the property, had paid for rates, insurance and maintenance of the property.

The second deceased passed away at the property recently.

The second deceased had met the conditions to be the sole beneficiary of the first deceased's estate and those rights as beneficiary transferred to the second deceased's estate (the taxpayer) on this death under estate law.

The second deceased passed away without a valid will. Letters of administration of the second deceased's estate (the taxpayer) were granted to an appropriate trustee shortly afterward.

During initial investigations into the second deceased's estate, a title search was completed on the property.

The results of the title search showed that the property was still registered under the first deceased's name.

On the basis that the second deceased survived the first deceased but later died without proving their Will or administering their estate, The trustee applied for the probate of the first deceased's will.

Letters of administration with the will annexed of the first deceased's estate were granted to this trustee.

The property has never been used for income producing purposes.

The trustee, as the legal personal representative of the first deceased's estate, obtained possession of the property and sold it promptly. Settlement of the sale took place quickly.

The net proceeds from the sale of the property will be transferred from the first deceased's estate to the taxpayer as the sole beneficiary.

The sole beneficiary of the taxpayer is a relative of the second deceased. They have had no contact with the second deceased and were only notified after the trustee conducted genealogy searches.

Assumption

For the purpose of this ruling, it is assumed that the administration of the first deceased's estate was completed after the date that letters of administration were granted and before the date the contract for the sale of the property was signed.

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 106-50

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Reasons for decision

Question 1

Summary

CGT event A1 happened to the taxpayer due to the sale of the property.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer can only make a capital gain or capital loss if a CGT event happens to them.

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens to a taxpayer if they dispose of a CGT asset. Disposal is a term defined by subsection 104-10(2) of the ITAA 1997 for CGT purposes and refers to the situation where there is a change of ownership from that taxpayer to another entity.

Generally, the taxpayer mentioned above is the entity that owns the CGT asset at common law. However, there is an exception provided by section 106-50 of the ITAA 1997 for a CGT asset owned at common law by a trust if there is an absolutely entitled beneficiary of the trust in relation to that CGT asset. In such cases, the CGT provisions are applied as if the absolutely entitled beneficiary owned the CGT asset and acts done by the trustee of the trust were instead done by the absolutely entitled beneficiary.

Consequently, the issue here is whether the taxpayer was absolutely entitled to the property as against the first deceased's estate at the time of the CGT event due to the sale of it. If so, then the taxpayer owned the property for CGT purposes as at the time of the CGT event.

Was the taxpayer the absolutely entitled beneficiary to the property as against the first deceased's estate at the time of the event for the sale?

By paragraph 3 of the first deceased's will, the second deceased was the sole beneficiary of the first deceased's estate and the second deceased survived the first deceased by more than 30 days. Therefore, the second deceased's entitlement as sole beneficiary of the first deceased's estate became absolute as against any other potential beneficiary.

The property remained an asset of the first deceased's estate while the second deceased was alive and the legal title to it was never transferred to the second deceased during their lifetime.

On the second deceased's death, the taxpayer became successor beneficiary to the first deceased's estate but the legal title to the property was never transferred to the taxpayer.

The Commissioner's view about the meaning of the concept 'absolutely entitled' for CGT purposes is contained in Draft Taxation Ruling TR 2004/D25.

Draft Taxation Ruling TR 2004/D25 concludes at paragraphs 20 to 22 that a single beneficiary is absolutely entitled to an asset of a trust if they can terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

However, Draft Taxation Ruling TR 2004/D25 also states at paragraph 13 that:

The following persons cannot be absolutely entitled because they do not have an interest in the trust's assets"

   • ...

   • A beneficiary of a deceased estate prior to the completion of its administration.

Paragraph 72 of Draft Taxation Ruling TR 2004/D25 explains further and states:

A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate's assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased's debts and liabilities have been paid.

Similar statements are made in Taxation Ruling IT 2622, such as at paragraph 13 which states:

Until the estate of a testator has been fully administered and the net residue ascertained, a residuary beneficiary has no proprietary interest in any specific investment forming part of the estate or in the income from any such investment. Both corpus and income are the property of the executors or administrators.

And at paragraph 4 of Taxation Ruling IT 2622 which states:

Even though a will may provide beneficiaries with absolute and indefeasible interests in the capital or income of an estate, under State laws those interests cannot crystalise until probate has been granted.

The status of the first deceased's estate was that it had been fully administered before the time of the event for the sale of the property.

The consequence of this is that the nature of the relationship between the first deceased's estate and the taxpayer as beneficiary of it changed from that outlined at paragraph 13 of Draft Taxation Ruling TR 2004/D25 to that outlined at paragraph 22.

Therefore, the taxpayer was absolutely entitled to the property as against the first deceased's estate as at the time of the CGT event for the sale and was the owner of it for CGT purposes.

Question 2

Summary

Any capital gain or loss the taxpayer made due to the sale of the property is not disregarded.

Detailed reasoning

Section 102-5 of the ITAA 1997 counts every capital gain and loss made by a taxpayer toward the calculation of their net capital gain or net capital loss for that income year unless they are disregarded by specific exemptions.

A specific exemption is afforded by section 118-195 of the ITAA 1997 to certain dwellings if conditions of this provision are satisfied. One relevant being that the taxpayer acquired the ownership of the dwelling for CGT purposes before he passed away.

Consequently, the issue here is whether the second deceased was absolutely entitled to the property as against the first deceased's estate just before they passed away. If so, then then the first deceased owned the property for CGT purposes just before they passed away.

Was the second deceased the absolutely entitled beneficiary to the property as against the first deceased's estate just before they passed away?

The Commissioner's view about the meaning of the concept 'absolutely entitled' for CGT purposes is as outlined above.

By paragraph 3 of the first deceased's will, the second deceased was the sole beneficiary of the first deceased's estate and the second deceased survived the first deceased by more than 30 days. Therefore, the second deceased's entitlement as sole beneficiary of the first decease's estate became absolute as against any other potential beneficiary.

The property remained an asset of the first deceased's estate while the second deceased was alive and the legal title to it was never transferred to second deceased during their lifetime. However, the second deceased would only be the absolutely entitled beneficiary of the property (and therefore the owner of it for CGT purposes) if the first deceased's estate was fully administered before the second deceased passed away.

However, the first deceased's estate had not been fully administered by the time that the second deceased passed away.

The consequence of this is that the nature of the relationship between the first deceased's estate and the second deceased as beneficiary remained as outlined at paragraph 13 of Draft Taxation Ruling TR 2004/D25 for an unadministered estate when the second deceased passed away. That means the second deceased did not have any proprietary interest in the property at that time.

Therefore, the second deceased was not absolutely entitled to the property as against the first deceased's estate just before they passed away and was not the owner of it for CGT purposes at that time. The second deceased as a beneficiary of the first deceased's estate had a beneficial right to see that the estate is properly administered, rather than ownership interest in the assets of the estate.

The flow-on effect of this is that:

   • The second deceased did not become the owner of the property for CGT purposes by virtue of section 106-50 of the ITAA 1997 at any time during their life - instead, the first deceased's estate continued to be the owner of the property for CGT purposes

   • The property did not pass from the first deceased's estate to the second deceased in the manner described in Taxation Determination TD 2004/3 for CGT purposes

   • The property did not devolve to the taxpayer from the second deceased as described in subsection 128-15(1) of the ITAA 1997 - instead, the property passed to the taxpayer from the first deceased's estate in the manner described in Taxation Determination TD 2004/3

   • The taxpayer did not dispose of the property (for CGT purposes) as an asset that had been owned for CGT purposes by the second deceased - instead, the taxpayer disposed of the property (for CGT purposes) as the beneficiary of the first deceased's estate

That means, the condition that the deceased acquired the ownership interest before they died is not met and therefore the taxpayer is not entitled to the main residence exemption afforded by section 118-195 of the ITAA 1997.

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