Edited version of private advice

Authorisation Number: 5010071854138

Date of advice: 15 April 2021

Ruling

Subject: CGT consequences of the sale of land by trustees of a deceased estate

Question 1

Is xx/xx/20xx the acquisition date for the purposes of determining any capital gains tax (CGT) consequences in relation to the lots disposed of by the Trustees of the Estate?

Answer

Yes.

Question 2

Will the main residence exemption apply to the sale of the lots by the Trustees of the Estate?

Answer

A partial exemption for deceased dwellings is available for the capital gain made on the sale of the house with land. No exemption is available for the capital gain made on the sale the remaining lots.

Question 3

What is the first element of the cost base for CGT purposes of the lots sold by the Trustees of the Estate?

Answer

The first element of the cost base for each Lot sold is its market value as at xx/xx/199x.

This ruling applies for the following period(s)

1 July 20xx to 30 June 20xx

The scheme commences on

xx/xx/20xx

Relevant facts and circumstances

The lots constituting the Property was bought by husband and wife as one continuous parcel of land pre-1985 and was their main residence until the husband passed away on xx/xx/19xx. Historically, custom and bank practice ensured the title to the property was only registered in the husband's name.

The Property comprised of the land and improvements.

On the husband's death the Property was bequeathed to his wife, which remained her main residence until she died on xx/xx/20xx. During this time the Property was not used to produce assessable income.

On her death, the wife bequeathed the Property to her remaining children equally. The Will provided the Trustees of the Estate with the right to dispose of or retain her Estate for investment, business or sale purposes as they saw fit.

After her death, the primary caregiver (also, a beneficiary of the Will), remained living in the home until XX 20XX; while probate was obtained, the house cleared for sale and to maintain security while the Property was initially marketed. There was no provision in the Will to provide this beneficiary with a right to occupy the house.

Following the failed attempt to sell the Property at auction and by private treaty, the house was rented out from later in that year for two years and again for a further two year period.

After three and a half years trying to sell all the lots as a single property, an offer was accepted for one lot which is a block of land adjacent to the main residence and larger than two hectares in area.

The Trustee of the Estate sold one further block of land, which is not adjacent to the main residence and less than two hectares in area.

The remaining two lots with the main residence in situ (the dwelling) have also been sold. The lots are less than two hectares in area.

The market values as at xx/xx/199x (being the date of death for the husband) and as at xx/xx/20xx (being the date of death for the wife) of the four lots sold by the Trustees of the Estate were provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Division 112

Income Tax Assessment Act 1997 Section 112-55

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-165

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Subsection 128-15(1)

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Subsection 128-20(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Further issues for you to consider

The application of the CGT discount under section 115-10 to any capital gain made.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Is xx/xx/20xx the acquisition date for the purposes of determining any capital gains tax (CGT) consequences in relation to the lots disposed of by the Trustees of the Estate of the wife?

Summary

The legal personal representatives / Trustees of the Estate of the wife is taken to have acquired the Property on the date of her death, that is on xx/xx/20xx.

Detailed reasoning,

The husband acquired the Property on which his main residence was situated pre-1985. At his death on xx/xx/199x, it was bequeathed to his wife who became the legal owner of the Property.

As a general rule, the CGT provisions apply to any change of ownership of a CGT asset, unless it was acquired prior to 20 September 1985 (pre-CGT). As the Property passed to the wife as a beneficiary of the Estate on the death of her husband, she is taken to have acquired the Property on the day he died, that is on xx/xx/199x.[1]

When the wife became the owner of the Property, a change in ownership occurred that resulted in CGT event A1 in subsection 104-10(1) happening. However, any capital gain or loss that would have been made by the husband would be disregarded.[2] As the Property is a pre-CGT asset, Item 4 in the table in subsection 125-15(4) states that the first element of cost base for the Property in the wife's name is the market value of the Property on the day the husband died.

The wife resided in the Property until she passed away on xx/xx/20xx and the Property was not used by her to derive assessable income. Again, any capital gain or loss that would have been made by the wife would be disregarded.[3]

If you are a deceased person's legal personal representative or a beneficiary of a deceased estate, special CGT rules in Division 128 explain the effect of death on the transfer of any CGT assets.

When a person dies, the assets that make up their estate can pass directly to:[4]

•                    a beneficiary (or beneficiaries), or

•                    their legal personal representative (for example, their executor[5]) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).

At the wife's death, the Property passed to the Trustees of her Estate, who are taken to have acquired the Property on the day the wife died, that is on xx/xx/20xx.[6]

Question 2

Will the main residence exemption apply to the sale of the lots by the Trustees of the Estate?

Summary

A partial exemption for deceased dwellings is available for the capital gain made on the sale of the two lots with the dwelling. No exemption is available for the capital gain made on the sale of the remaining two lots.

Detailed reasoning

Subdivision 118-B allows you to disregard a capital gain or capital loss that happens to a dwelling that is your main residence.

Subsection 118-195(1) states:

A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling, or your ownership interest in it, is disregarded if:

(a)          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; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.

The wife acquired a 100% interest in the dwelling on xx/xx/199x and it remained her main residence until her death on xx/xx/20xx. As the dwelling was then used to derive rental income after her death, and the Property was not sold within two years of her death, Item 1 in the above table does not apply to disregard any capital gain or loss made from the disposal of the Property.

However, section 118-200 allows a trustee or beneficiary of a deceased estate to apply a partial exemption for deceased estate dwellings if the criteria set out under section 118-195 are not met.

The amount of the capital gain or capital loss is calculated using the formula:

Capital Gain or Capital Loss amount × Non-main residence days

Total days

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's 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 an individual referred to in item 2, column 3 of the table in section 118-195

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 interest 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 interest ends.

The dwelling was acquired by the wife on xx/xx/199x and was continuously used as her main residence until her death on xx/xx/20xx. Non-main residence days accumulate from that date until the Trustees' ownership interest in the dwelling ended.

Total days is the number of days in the period from the acquisition of the dwelling by the wife on xx/xx/199x, until the Trustees' ownership interest ended with the sale of the main residence.

The remaining two lots are not eligible for the main residence exemption as none of the lots was sold with the main residence.[7] Each of these lot sales resulted in a separate CGT event A1 happening.

The partial exemption for deceased dwellings is available to the capital gain made on the sale of the two lots with the dwelling, but the exemption is not available to the capital gain made on sale of the remaining two lots.

Question 3

What is the first element of the cost base for CGT purposes of the lots sold by the Trustees of the Estate?

Summary

The first element of the cost base for each lot sold is its market value as at xx/xx/199x.

Detailed reasoning

Subsection 110-25(2) provides the first element of the cost base of a CGT asset and refers to Division 112 where there is no money paid or promised or a payment in kind of other property made when acquiring an asset. The Trustees of the Estate acquired the Property without paying for, promising to pay or providing anything in kind for it. The second note under this subsection directs you to Division 112 for exceptions to subsection 110-25(2).

Section 112-55 directs you to section 128-15 where the CGT asset devolves to the legal personal representative, which includes the Trustees of the Estate.

Subsection 128-15(4) provides the cost base rules for an asset's cost base and reduced cost base in the following table.

Item 3 in the table would not apply, as the Property had been rented out twice after the wife's death. Item 1 in the table will apply as the Trustees of the Estate are taken to have acquired the Property on her death, that is xx/xx/20xx. In working out the first element of the cost base and reduced cost base of the Property on her death, it needs to be ascertained what was the first element of the cost base and reduced cost base of the Property on the date she acquired the property. As the Property was a pre-CGT asset when the wife acquired the Property, Item 4 in the table in subsection 125-15(4) states that the first element of cost base for the Property in the wife's ownership is the market value of the Property on the day the husband died. Therefore, for the purposes of Item 1 in the table, the first element of the cost base for each lot is its market value at xx/xx/19xx.

The Trustees of the Estate have sold the lots constituting the Property in several sales.

The first element of the cost base for each lot is its market value as at xx/xx/19xx at the market values you advised.

[1] Subsections 128-15(2) and 128-20(1)

[2] Section 128-10

[3] Section 128-10

[4] Subsection 128-15(1)

[5] Refer meaning of a 'legal personal representative' in subsection 995-1(1)

[6] Subsection 128-15(2)

[7] Section 118-165

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