Edited version of private ruling

Authorisation Number: 1011775048275

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Deceased estate

Question and Answer

Does the estate have a capital gains tax liability as the result of the sale of the property?

No

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Prior to XX September 19XX the deceased and their spouse jointly purchased a property (the property) which they occupied as their main residence.

The area of the property was less than X hectares.

The deceased's spouse died on date A.

The deceased continued to use the property as their main residence until death on date A.

You are the trustee of the deceased's estate.

The deceased's will provided that their de facto spouse, have the right to reside in the property until such time as the de facto spouse decided to cease using the property as their principal place of abode.

The remainder interests were with several beneficiaries, with you being one of the beneficiaries.

The deceased's de facto spouse moved into a nursing home due to ill health on date B. Prior to moving into the nursing home they chose to continue to treat the property as their main residence until it was sold.

The deceased's de facto spouse lodged a claim on the deceased's estate and a mediation meeting was held at a court on date D. At the meeting the various parties with an interest in the Estate agreed that the deceased's de facto spouse was to receive a sum in settlement of their claim. This cash payment was in lieu of their right to reside in the property.

The Orders were subsequently filed at a court to amend the Grant of Probate. The amended probate was granted on date E.

You, as trustee of the deceased's estate, received the keys to the property on Date F, and subsequently arranged for property to be sold.

The property was sold soon after on date G with settlement taking place on date H.

The property was never used to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 103-25.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-30.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-195.

Income Tax Assessment Act 1997 Section 128-15.

Reasons for Decision

You, as trustee acquired your ownership of the property in question (dwelling) under the will of the deceased. For the purposes of this discussion, the deceased's de facto spouse, is the spouse of the deceased.

The deceased's will provided that their spouse have the right to reside in the dwelling until such time as they decided to cease using the property as their principal place of abode. The remainder interests were with several beneficiaries, with you being one of the beneficiaries.

Life Interest in Asset

As a result of the deceased's death, two separate interests in the property were created:

· the deceased's spouse as a life tenant; and

· the beneficiaries' interest in the remainder.

For capital gains tax purposes, these separate interests in the property are assets in their own right.

Capital gains tax

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997))

The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

However, there are a number of different exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part.

One such exemption relates to the disposal of a dwelling acquired as the trustee of a deceased estate.

Main residence exemption

Generally, a person can disregard a capital gain or capital loss made on the disposal of a dwelling that is their main residence if:

· the dwelling was their main residence for the whole period they owned it

· the dwelling was not used to produce assessable income, and

· any land on which the dwelling is situated is not more than two hectares.

Once a dwelling has been established as a person's main residence, they may elect to continue to treat that dwelling as their main residence even though they no longer live in it.

Continuing main residence status during absence

Section 118-145 of the ITAA 1997 provides that a person can continue to treat a dwelling as their main residence during periods of absence. If the dwelling is not used to produce income it can be treated as their main residence indefinitely (subsection 118-145(3) of the ITAA 1997). If the person makes this choice, they cannot treat any other dwelling as their main residence. This is known as the absence rule.

Making a choice

Subsection 103-25(1) of the ITAA 1997 details how the main residence choice is to be made. A choice made under section 103-25 of the ITAA 1997 must be made:

· by the day the person lodges their income tax return for the income year in which the relevant CGT event happened, or

· within a further time allowed by the Commissioner.

Separate assets

For CGT purposes, you, as trustee, are considered to have acquired two separate assets in relation to the dwelling in question. The first CGT asset is the original half share of the dwelling which the deceased purchased before 20 September 1985 (pre CGT asset).

The second CGT asset is the other half interest in the dwelling that the deceased acquired as the result of the death of their first spouse on date A (post CGT asset). Both interests must be treated separately.

Ownership interest

For CGT purposes the ownership interest of a trustee commences on the date of death of the deceased (section 128-15 of the ITAA 1997) and ends on the disposal of the dwelling when their legal ownership ends (section 118-130 of the ITAA 1997). In your case, your two ownership interests in the dwelling began on the date of death of the deceased, date B, and ended on the settlement of the sale of the dwelling on date H. We shall now consider each interest separately.

Interest acquired by deceased pre CGT

A capital gain or capital loss made from the disposal of an ownership interest in a dwelling acquired by the deceased before 20 September 1985, is disregarded if: 

· the ownership interest in the dwelling ends within two years of the deceased person's death, or

· from the deceased's death until the ownership interest ends, the dwelling was not used to produce income and it was also the main residence of one or more of the following persons: 

o the spouse of the deceased immediately before death

o an individual who had a right to occupy the dwelling under the deceased's will, or

o an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary.  

Your situation

In your case, the first test is not satisfied as the dwelling was not sold within two years of the deceased's death.

A person has an ownership interest in a dwelling if the person has a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it. Thus with regard the second test, the deceased's spouse was granted a life tenancy in the dwelling, or a right to occupy the dwelling, under the deceased's will. They lived in the dwelling as their main residence from the deceased's date of death, date B, until date C when they moved into a nursing home.

The deceased's spouse lodged a claim on the deceased's estate with a court. In settlement of their claim, they received a payment. The payment was in lieu of their right to reside in the property. Thus they were no longer an individual who had a right to occupy the dwelling under the deceased's will and no longer had an ownership interest in the dwelling.

In your circumstances, for purposes of the main residence exemption, the person who gave up their right to occupy the dwelling was also the spouse of the deceased. So the person was still one of the eligible occupants for the purpose of section 118-195 of the ITAA 1997. They lived in the dwelling as their main residence from the time of the deceased's death and when they moved into the nursing home, they chose for it to be their main residence until sale. As the deceased's spouse treated the dwelling as their main residence for your entire ownership period, and did not use the dwelling to produce assessable income, any capital gain or loss on the sale of the pre CGT interest is ignored.

Interest acquired by deceased post CGT

A capital gain or capital loss made from the disposal of an ownership interest in a dwelling acquired by the deceased after 20 September 1985 is disregarded if:

· the dwelling was the main residence of the deceased immediately before their death and not being used to produce income,

· the property is disposed of within two years of the death of the deceased, or

· from the time of death until its disposal of it, the property was the main residence of the deceased's spouse or an individual who had a right of occupancy under the will.

Your situation

In your case, the deceased used the dwelling as their main residence immediately before death and the dwelling was not used to produce income. Furthermore, from the time of the deceased's death until its disposal, the dwelling was the main residence of the deceased's spouse as they chose for the dwelling to be their main residence until sale. Thus any capital gain or loss on the sale of the post CGT interest is also ignored.

Conclusion

You, as trustee, acquired two separate assets in relation to the dwelling in question, a pre CGT ownership interest and a post CGT ownership interest. For CGT purposes your ownership interest in both interests commenced on the date of death of the deceased (date B) and ended on the disposal of the dwelling when your legal ownership ended (date H).

As the deceased's spouse treated the dwelling as their main residence for your entire ownership period, and did not use the dwelling to produce assessable income, any capital gain or loss on the sale of the pre CGT interest is ignored. For the post CGT interest, any capital gain or loss on sale is also ignored as the deceased used the dwelling as their main residence immediately before death and the dwelling was not used to produce income. Furthermore, from the time of the deceased's death until its disposal, the dwelling was the main residence of the deceased's spouse under the absence rule.

In conclusion, the estate does not have a capital gains tax liability as the result of the sale of the dwelling in question.

Additional information

As amended probate has been granted, each of the beneficiaries of the estate is presently entitled to their share of the net income of the estate. Any capital gain made on disposal of trust property is the liability of the beneficiaries of the trust, not the estate itself.

In this particular case, there will be no capital gain or capital loss as a result of the sale of the dwelling in question and hence neither the trustee nor the beneficiaries have any CGT liability.