Edited version of private ruling

Authorisation Number: 1011863364793

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Ruling

Subject: CGT - Deceased Estate

Questions and Answers

1. Did the half interest in the property pass to the residuary beneficiary on the death of the life tenant?

No.

2. Is the executor liable for the capital gains or capital loss on the sale of the half interest in the property?

No.

3. Is the residuary beneficiary liable for the capital gains or capital loss on the sale of the half interest in the property?

Yes

This ruling applies for the following period:

30 June 2010

The scheme commences on:

1 July 2009

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.

The deceased died in September 1997.

The deceased was an Australian resident for tax purpose.

The deceased created a will whereby an executor was appointed.

The deceased will stated;

· The deceased's spouse was to be granted life tenancy to their interest in the property.

· The trustees will get all real and personal estate, including any property over which the deceased had any power of testamentary disposition and including the remainder interest in the property that the deceased's spouse occupies as a life tenant, and pay all the deceased debts, funeral and testamentary expenses.

· Clause 5 and 6 of the will states that the remaining balance "the residuary estate' is to held upon trust for the residuary beneficiary to be applied for general charitable purposes whereby the trustee are not obliged to see to or enquire into the application of money or assets by the residuary beneficiary.

· Clause 7 states that the trustee has power to retain any investment or security held by the deceased at the time of death and invest or reinvest in any investment or securities; to apply whole or part of the income or capital of the vested contingent or presumptive share or any beneficiary under the will for their maintenance, education, benefit or advancement of life; To sell lease or mortgage all or part of the real and personal estate and to appropriate and partition any real or personal property forming part of the estate to the beneficiary under the will.

The life tenant occupied the property until the deceased's spouses' death.

Life tenant's daughter undertook the management of the life tenant's tenancy due to a power of attorney granted to the deceased's spouse by the life tenant.

The executor took steps to monitor that the life tenant complied with her obligation to pay the rates and insured the property.

The life tenant's daughter used the property for her benefit after the death of the life tenant without notifying the executor.

The residuary beneficiary and the executor decided to file an application for the appointment of a statutory trustee for the sale of the Property pursuant to Division 2 of part 5 of the Property Law Act 1974 (QLD).

The Supreme Court appointed Trustees for the sale of the property.

The trustees entered into a contract for the sale of the property.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 128-10 of the Income Tax Assessment Act 1997

Section 128-15 of the Income Tax Assessment Act 1997

Section 128-20 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-20 of the Income Tax Assessment Act 1997

section 104-75 of the Income Tax Assessment Act 1997

Section 106-50 of the Income Tax Assessment Act 1997

Reasons for decision

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

Section 128-10 of the ITAA 1997 provides that when a person dies, a capital gain or capital loss from a CGT event happening to a CGT asset the person owned just before death is disregarded.

Where the asset devolves to the legal personal representative (the trustee) or passes to a beneficiary of the deceased estate, the trustee or beneficiary is taken to have acquired the asset on the day the person died. Any capital gain or capital loss the trustee makes if the asset passes from the Trustee to the beneficiary is disregarded under subsection 128-15(3) of the ITAA 1997.

Section 128-20 of the ITAA 1997 sets out the circumstances when an asset is taken to have passed to a beneficiary. An asset passes to a beneficiary if they become the owner of a CGT asset under a will (subsection 128-20(1) of the ITAA 1997).

This section does not provide a definition of the meaning of the phrase 'becomes the owner'. Nor does the Explanatory Memorandum provide any guidance. For the purposes of section 104-10 of the ITAA 1997, a change of ownership will only occur where there is a change in the beneficial ownership of an asset rather than simply a change in legal ownership.

Granting an interest under the will of a deceased person

The individual in some cases may wish to create a legal life and remainder interests in beneficiaries under their will. In these circumstances, the deceased's legal personal representative (LPR) is taken to have acquired the original asset on the date of the deceased's death.

CGT event E6 and CGT event E7 do not happen when the trustee transfers a legal life and remainder interest to the beneficiaries in accordance with the deceased's will because of the exception for trusts to which Division 128 of the ITAA 1997 applies. Further no other CGT event is considered to happen as a result of the transfers by the LPR to the life interest and remainder beneficiaries. That is specific exception to CGT events E6 and E7 having applied, it is not considered appropriate to apply CGT event A1.

While any capital gain or capital loss the LPR would make from CGT event A1 happening would be disregarded by subsection 128-15(3) of the ITAA 1997, there is no provision to disregard capital gains or capital losses that the life interest or remainder owners may make in respect of the ending of their trust interest.

The life interest and remainder owners acquire their interests in the property at the date of death based on a reasonable apportionment of the LPR's cost base and reduced cost base as per subsection 128-15(4) and (5) of the ITAA 1997.

Death of life interest owner

On the death of the life interest owner, CGT event C1 in section 104-20 of the ITAA 1997 happens. We do not consider the CGT event C2 happens in this case because the legal life interest is not an intangible asset. If the life interest owner makes a capital gain or loss from CGT event C1 happening, it is disregarded under section 128-10 of the ITAA 1997.

The death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner; their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset.

If on the ending of the life interest, the remainder owner becomes absolutely entitled, as against the trustee, to a trust asset CGT event E5 in section 104-75 of the ITAA 1997 may happen. This event does not happen in this instance as it is a deceased estate.

Absolutely Entitled

Once it has been established that there is a difference between the legal and beneficial ownership of a property the next step in determining whether a CGT liability arises is to establish whether or not the beneficial owner is absolutely entitled to the property as against the trustee.

Absolute entitlement is a specific type of beneficial ownership. Section 106-50 of the ITAA 1997 states:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part (Part 3-1) and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it

The Commissioners view on absolute entitlement is contained in Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words absolutely entitled to a CGT asset as against the trustee of a trust as used in Part 3-1 and 3-3 of the ITAA 1997.

As discussed in TR 2004/D25, the core principle underpinning the concept of absolute entitlement in the CGT provisions is the beneficiary who, as against the trustee is absolutely entitled in equity to the entire asset and thus has a vested, indefeasible and absolute interest in the asset; and able to direct the trustee how to deal with the asset.

If more than one beneficiary has an interest in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset (paragraph 23 of TR 2004/D25).

In the current circumstances, the residuary beneficiary's has absolute entitlement to the CGT assets of this trust and can on face value call for an asset to be transferred at their direction.

Therefore the residuary beneficiary in this case has absolute entitlement to the dwelling.

Consequently any capital gains or capital loss is assessable to the residuary beneficiary.