Edited version of private ruling

Authorisation Number: 1011861680874

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Ruling

Subject: Capital gains tax - deceased estate and disposal of main residence

Question: Is the capital gain or capital loss made on the disposal of the deceased's main residence disregarded?

Answer: Yes.

This ruling applies for the following period

30 June 2012

The scheme commenced on

1 July 2011

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.

In early 1960 the deceased acquired a property solely in their name.

At the time the deceased purchased the property they were married.

The deceased and their family moved into the property and established it as their main residence.

The deceased made all payments in respect of the mortgage on the property. The mortgage was discharged in mid 19XX.

The deceased made all payments in respect of the improvements, maintenance and outgoings relating to the property.

The deceased continued to reside at the property as their main residence until their death in late 20XX.

In late 19XX, the property was registered in one of the deceased's child's name (person A) on the express understanding that:

· person A would have no interest in the property save for the property being registered in their name as trustee for the benefit of their parent, the deceased

· the full beneficial interest in the property was at all times to remain solely and exclusively the deceased's

· person A was not regarded as the owner of the property notwithstanding the fact that their name appeared on the title.

These understanding were documented in a declaration of trust in 20XX and a deed in 20XX.

Person A at all times held their interest in the property upon bare trust or as trustee of a resulting trust for the absolute benefit of the deceased.

The deceased continued to pay all costs associated with the property, such as rates, insurance and all utilities after the title was transferred in person A's name.

The deceased not only had the exclusive use of the property but continued to regard it as their exclusive property.

Person A at all times owned their own property which they occupied with their then spouse.

After person A's separation from their spouse they acquired their own property utilizing the funds from the divorce property settlement. Person A continued to reside at this property.

Person A at no stage considered the property as theirs as they had made no contribution whatsoever towards the property. They considered the property to be the deceased's main residence.

Under the deceased's Will there are beneficiaries, the deceased's children in equal shares. The Will also has a clause that notes that person A owns the property as trustee only and the property is an asset that they own.

Person A is also the trustee of the deceased estate.

You will dispose of the property within two years of the deceased's date of death.

You have supplied copies of the following documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling:

· copy of deceased's Will

· copy of the agreement between the deceased and person A

· copy of the Certificate of Title

· copy of rate notice , and

· copy of correspondence from an insurance company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The most common capital gains (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 the change of ownership occurs.

When you dispose of the property CGT event A1 will occur.

If you acquire an asset owned by a deceased person as their trustee you are taken to have acquired the asset on the day the person died.

In your case, as the trustee of the estate you are taken to have acquired the deceased's assets on their date of death.

Capital gains tax legal v beneficial ownership

When considering the disposal of an asset the most important element in the application of the CGT provisions is ownership. Both legal and beneficial ownership must be determined.

In the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title. However, it is possible for the legal ownership of an asset to differ from the beneficial ownership. Where the legal and beneficial ownership of an asset differ, a trust situation occurs. In this situation the legal owner is the trustee of the asset. However, it is in extremely limited circumstances where the legal and equitable interests are not the same and in the absence of evidence to the contrary, property is considered to be owned in accordance with the title.

The CGT provisions do not apply to the legal owner of a dwelling if the legal owner holds it on trust for another person and the other person was absolutely entitled to that dwelling as against the trustee.

Absolute entitlement

The concept of absolute entitlement in the CGT provisions is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

If the trustee is holding a property on trust for a beneficiary and the beneficiary has been always absolutely entitled to the property, then any act done by the trustee is as if it were done by the beneficiary. 

If this were the case, the CGT event that would occur upon the disposal of the property by the trustee would be deemed to be a CGT event for the beneficiary and not the trustee.

In your case, the deceased requested person A to hold the property in trust for their as evidenced in their Will, the declaration by person A and the deed of arrangement between the deceased and person A. This indicates that the deceased did have a vested and indefeasible interest in the property and would be able to call for the dwelling to be transferred to them or be transferred at their direction. Accordingly, the deceased was absolutely entitled to the property.

CGT and deceased estates

As discussed above, any change of ownership of a CGT asset results in a CGT event, unless the asset was acquired before 20 September 1985 (pre-CGT).

As the deceased is absolutely entitled to the property their acquisition date is still considered to be their acquisition date in 1960.

When a person dies, the assets that make up their estate can either pass directly to a beneficiary or pass directly to their trustee of a deceased's estate who may dispose of the assets or pass them to the beneficiary.  This is a change of ownership for CGT purposes.

A capital gain or capital loss is disregarded if a person dies and an asset they owned just before their death passes to their trustee or beneficiary. .

Inherited main residence

If you have an ownership interest in the deceased's main residence, and that interest passed to you as trustee of a deceased estate, you can disregarded any capital gain or capital loss you make from a CGT event that happens to the dwelling if either of the following applies:

· you disposed of your ownership interest within two years of the person's death that is, if the dwelling was disposed of under a contract, settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two year period. We have no discretion to extend the two year period, or

· from the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

· a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)

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

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

As the property will be disposed of within two years of the deceased's death and it was acquired by the deceased prior to 20 September 1985, and it was their main residence up until their death, any capital gain or capital loss made on its disposal is disregarded.