Edited version of private advice

Authorisation Number: 1052304453712

Date of advice: 23 September 2024

Ruling

Subject: CGT - deceased estate

Question 1

Can the trustee of the deceased estate disregard a capital gain or capital loss on the disposal of the dwelling under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Is the deceased estate a resident trust estate for Australian taxation purposes?

Answer 2

Yes.

Question 3

Is the trustee of the deceased estate eligible for the 50% discount on any capital gain on the disposal of the property that is attributable to a resident beneficiary?

Answer 3

Yes.

Question 4

Is the trustee of the deceased estate eligible for the full 50% discount on any capital gain on the disposal of the property that is attributable to a non-resident beneficiary?

Answer 4

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away about 2 years ago.

The deceased purchased the property in joint ownership with their spouse about 30 years ago.

The deceased and their spouse were Australian citizens.

The property was main residence of the deceased and their spouse.

The deceased's spouse passed away about 20 years ago and the deceased acquired their 50% ownership interest by right of survivorship.

Since that time, the deceased consistently travelled between Australia and XX, rarely exceeding 183 days in Australia in any given year.

The property was rented out for some years prior to the death of the deceased.

Letters of Administration were granted to a child of the deceased who is an Australian citizen and resident of Australia for tax purposes.

The beneficiaries of the deceased's estate include resident and non-resident beneficiaries.

The deceased lodged Australian income tax returns as a non-resident for the income years 20XX to 20XX.

The property was sold within 2 years of the death of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 115

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1936 section 95(2)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98

Reasons for decision

Question 1 - main residence

Subsection 118-195(1) of the ITAA 1997 provides that a capital gain or capital loss made on a dwelling acquired from a deceased estate may be disregarded if:

•                     you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate

•                     both of the following requirements are satisfied

-        the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income, and

-        your ownership interest ends within 2 years of the deceased's death or within a longer period allowed by the Commissioner, and

•                     the deceased was not an excluded foreign resident just before the deceased's death.

Division 118 uses the expression 'excluded foreign resident' to refer to an individual who has been a foreign resident for a continuous period of 'more than 6 years' (subsection 118-110(4)). This is tested 'at a particular time', which is when the CGT event happens or, in the case of a deceased estate just before the individual dies.

An excluded foreign resident is a person who, at the time of the CGT event, has been a foreign resident for a continuous period of more than six years. A person who is an excluded foreign resident is not able to access the CGT main residence exemption, even if certain life events occur.

In this case, the deceased lodged their income tax return for the 20XX income year as a non-resident, that is, they self-assessed as a non-resident for the period commencing 1 July 20XX. Consequently, in the absence of evidence to the contrary, the Commissioner considers that the deceased was a foreign resident for more than 6 years just before they passed way; therefore, they were an excluded foreign resident just before they died.

Accordingly, the conditions in subsection 118-195(1) of the ITAA 1997 are not met and CGT will apply on the disposal of the property.

Question 2 - residency of deceased estate

Section 95(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a trust estate shall be taken to be a resident trust estate in relation to a year of income if:

(a)          a trustee of the trust estate was a resident at any time during the year of income, or

(b)          the central management and control of the trust estate was in Australia at any time during the year income.

In this case, the trustee of the deceased estate is an Australian resident for taxation purposes.

Therefore, the deceased estate is an Australian resident for taxation purposes.

Questions 3 and 4 - CGT discount

Section 128-15 of the ITAA 1997 states that a CGT asset owned by a deceased person that devolves to a legal personal representative, or beneficiary of the deceased estate, is taken to have been acquired on the day the deceased died.

Division 115 of the ITAA 1997 deals with discount capital gains made by individuals and trusts.

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 (section 115-25 of the ITAA 1997. In this case, the 12 months requirement is met on disposal of the property.

For the purposes of the availability of the CGT general discount a trustee/executor will be taken to have acquired a post-CGT asset of the deceased at the time the deceased acquired it: see Item 3 of the table in subsection 115-30(1) of the ITAA 1997. Subsection 115-30(3) makes it clear that this rule has effect despite section 128-15 of the ITAA 1997.

Section 115-110 of the ITAA 1997 applies to a foreign resident beneficiary of a trust to adjust the discount percentage so as to deny a discount for a capital gain to the extent the gain accrued while the beneficiary was a foreign resident after 8 May 2012.

Where section 115-110 applies, section 115-115 of the ITAA 1997 contains the formulas to determine the discount percentage applying to an individual with a discount capital gain.

Further, section 115-120 of the ITAA 1997 operates to reduce or deny the discount percentage to a trustee assessed under section 98 of the ITAA 1936 in respect of beneficiaries who are foreign or temporary residents. That is, the 50% discount percentage for a capital gain is reduced to the extent that the gain is accrued while the individual beneficiary is a foreign or temporary resident after 8 May 2012.

Subdivision 115-C of the ITAA 1997 sets out the rules for dealing with the net income of a trust that has a net capital gain. The rules treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts.

Taxation Determination TD 2022/12 discusses the tax treatment of trust capital gains that are attributable to non-resident beneficiaries:

•                     the trustee is assessed under section 98 of the ITAA 1936 on trust capital gains attributable to the non-resident beneficiary (also where the beneficiary is made specifically entitled to the gain). The source concept in subsection 98(2A) of the ITAA 1936 has no application in relation to the capital gains as section 115-220 of the ITAA 1997 increases the amount assessable to the trustee under section 98 of the ITAA 1936 without regard to those conditions

•                     capital gains are included in the calculation of the non-resident beneficiaries' net capital gain for the income year under section 115-215 of the ITAA 1997. However, the beneficiary is entitled to a refundable tax offset for the tax the trustee pays on their behalf under subsection 98A(2) of the ITAA 1936

•                     Division 6E of Part III of the ITAA 1936 prevents double taxation by ensuring capital gain amounts are disregarded in determining the trust income and net income that may be assessed under section 98 of the ITAA 1936.

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