Edited version of private ruling

Authorisation Number: 1011583166206

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Ruling

Subject: Capital gains tax (CGT) - deceased estate - life interest - main residence exemption - interest income - present entitlement

1. Is any capital gain made on the sale of the property disregarded in full?

Yes.

2. Will the interest income form part of the net income of the trust estate?

Yes.

3. Will the beneficiaries be assessed under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) on their share of the interest income?

Yes.

This ruling applies for the following periods

Year ended 30 June 2009.

Year ended 30 June 2010.

The scheme commenced on

After 20 September 1985

Relevant facts and circumstances

Prior to 20 September 1985 the deceased inherited a home (the property) from their parent.

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

A few years later the deceased prepared their last Will and testament.

Quite a few years later the deceased passed away.

As at the deceased's date of death you estimate the value of the property to be a certain amount and this is subject to confirmation by valuation.

The deceased's will provided the following:

· that the deceased's main residence be held in trust to permit their spouse to have the free use and occupation and enjoyment of the property during their lifetime (a life interest in the property)

· that the deceased's spouse was to receive the net annual income from the deceased's estate during their lifetime, and

· that upon the death of the deceased's spouse the deceased's surviving children were to receive between them equally the net income of the deceased's estate.

A testamentary trust was created by the deceased's Will to enable:

· a life tenancy to be granted to the deceased's spouse

· the bequest of income of the estate firstly to the deceased's spouse whilst they were alive, and

· then secondly to any surviving children (residual beneficiaries) after the deceased's spouse's passing.

A few years ago, the deceased's spouse moved out of the property (their main residence) to live in a nursing home due to ill health.

The deceased's spouse made the choice to continue to treat the property as their main residence whilst they lived in the nursing home, (absence choice).

The property sat vacant from the time the deceased's spouse moved out until it was sold.

The property was sold for a certain amount less costs, settlement occurred 30 days later.

The proceeds from the sale of the property were invested in the name of the estate of the deceased for a certain period (term deposit) maturing in a later financial year.

After the property was sold and prior to the term deposit maturing the deceased's spouse passed away.

Bank interest earned by the estate of the deceased falls into three categories:

· interest income earned prior to the deceased's spouse's date of death for income year ended 30 June 2010

· interest income earned after the deceased's spouse's date of death for income year ended 30 June 2010, and

· interest income earned after the decease's spouse's date of death for income year ended 30 June 2011.

All of the bank interest earned by the estate has accumulated in the bank account of the estate.

The deceased's spouse was entitled (as per the Will of the deceased) to the bank interest earned by the estate prior to their death, however they suffered from illness and did not request payment to themself. The deceased's spouse was not under a legal disability.

When required you had withdrawn monies from the trust bank account/s to pay any expenses that related to the property, rather than amounts being paid by the deceased's spouse.

To date, no interest income of the estate has been paid to the surviving children (beneficiaries).

The surviving children are not under a legal disability.

You await the answer to this private ruling request before any distributions of interest income and capital are made to the beneficiaries.

You expect that the testamentary trust - estate of the deceased will be wound up by 30 June 2011.

You have provided a copy of the deceased's Will of a certain date, this document forms part of and is to be read with these facts.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 116-30(1)

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Reasons for decision

Question 1

Summary

Any capital gain made on the sale of the property will be disregarded in full?

Detailed reasoning

Full exemption

Where your ownership interest in a dwelling devolved to you as trustee of a deceased estate and the deceased acquired the ownership interest before 20 September 1985 (pre-CGT) and the dwelling was the main residence of the spouse of the deceased from the time immediately before the death of the deceased until your ownership period ends, any capital gain or capital loss arising from the disposal of the dwelling will be disregarded in full. Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997).

Absence choice

When a dwelling that was a person's main residence ceases to be their main residence, they may choose to continue to treat it as their main residence even though they no longer live in it. Section 118-145 of the ITAA 1997.

If you rent out the dwelling, you can choose to treat it as your main residence for a maximum period of up to six years after you cease living there. If you do not rent the dwelling out you can treat it as your main residence indefinitely.

In your case, the dwelling was the spouse of the deceased's actual main residence from the time immediately before the deceased's death, up until they moved into the nursing home. From the time that the deceased's spouse moved into the nursing home until your ownership period ended (settlement date), the deceased's spouse made the choice to continue to treat the property as their main residence (absence choice).

Therefore, the period covered by the deceased's spouse's absence choice and the period that the deceased's spouse actually resided at the dwelling covers your entire ownership period.

Therefore, any capital gain that you made on the sale of the property will be disregarded in full.

Question 2

Summary

The interest income will form part of the net income of the trust estate.

Detailed reasoning

A testamentary trust is a trust created as a result of a Will, that is, where a person specifies in a Will that estate property or income is to be held in trust, for the beneficiary or beneficiaries of a Will.

In your case, you are a co-executor and co-trustee for your parent's deceased estate. The Will states that the deceased's spouse had a life interest in the property and that the deceased spouse will be paid the net annual income of the estate during their lifetime. The Will states that upon the death of the deceased's spouse the deceased's surviving children shall receive between them the net income of the deceased's estate.

Therefore, a trust was established as a result of the Will.

The net income of a trust estate for an income year would include bank interest. Bank interest would be considered income according to ordinary concepts. Section 95 of the ITAA 1936.

Question 3

Summary

The beneficiaries will be assessed under section 97 of the ITAA 1936 on their share of the interest income.

Detailed reasoning

A beneficiary who is not under a legal disability and who is presently entitled to income of a trust estate will include in their assessable income their share of the net income of the trust estate. Section 97 of the ITAA 1936.

Present entitlement

Taxation Ruling IT 2622 deals with the issue of present entitlement during the stages of administration of deceased estates. It states at paragraph 7 that whether a beneficiary is presently entitled to a share of the trust income depends on:

· the stage reached in the administration of the estate, including whether probate has been granted

· the terms of the Will and any orders made by the courts, and

· whether the trustee is able to make any discretionary payments to the beneficiaries.

Paragraph 16 of IT 2622 states that the administration of the estate does not have to reach the stage where the estate is wound up for the beneficiaries to enjoy present entitlement to the income of the estate. If the executors have provided for all debts incurred by the deceased, and funeral and other administrative expenses, it may be possible to ascertain the residue with certainty.

When probate has been granted, the Will has been officially proved, and the executors have the authority to deal with the estate, including calling up the deceased's assets and liabilities and pay debts, funeral and testamentary expenses.

After these matters have been attended to, the executor distributes the property of the deceased to the beneficiaries of the estate (this may be through the establishment of a testamentary trust so that future income and life interests can be provided for).

In this case, probate was granted many years ago for the deceased estate. The will clearly states the entitlements of each beneficiary.

The deceased's Will made it clear that any income earned by the estate during the deceased's spouse's lifetime would be theirs and after that, any income would be divided equally among the surviving children. In this case, interest earned after the deceased's spouse's death will be divided equally amongst the surviving children.