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Ruling

Subject: Capital gains tax in respect of a deceased estate

Issue 1

Questions and answers

1. Do you have the option of using the date you sold the shares as the final capital gains tax (CGT) event date for all or some of the parcels of shares and initial CGT date for the beneficiaries?

No.

2. Do you have the option of passing the deceased's initial CGT acquisition dates on to the beneficiaries?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Issue 2

Questions and answers

1. Is any capital gain or capital loss made on the sale of the deceased's main residence disregarded?

Yes.

2. Is any capital gain or capital loss made on the sale of the deceased's share in the commercial property disregarded?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The deceased passed away some time after 20 September 1985. The estate is fully administered and you are the executor of the estate.

The principle beneficiaries of the estate are the deceased's children who are entitled to an equal share of the remaining estate.

These beneficiaries have received part of their inheritance already in the form of money or shares.

The deceased's grandchildren were also entitled to a specified amount of money and have received a slightly higher amount each to compensate for inflation. This amount was drawn from money in bank deposits at the time of the deceased's death.

One of the deceased's grandchildren was a non resident at the time of the deceased's death.

The deceased held shares at the time of their death. Some of these shares were acquired before 20 September 1985 and some of these shares were acquired after 20 September 1985.

All of the shares were sold on the market or transferred to beneficiaries who had opted for shares in lieu of the proceeds of sale.

The deceased also held two properties at the time of their death.

One of the properties was a house that was the deceased main residence. The deceased became the owner of the house some time prior to 20 September 1985 upon the death of their spouse.

Some years prior to their death, the deceased was obliged to move into a nursing home due to poor health.

The house was rented out for a period of less than six years. You wish to make the choice on behalf of the deceased that the deceased continued to treat the house as their main residence during their absence from it.

The house was sold and settlement occurred within two years of the deceased's date of death.

The deceased also owned a share in a commercial property which they acquired through their spouse's Will.

The commercial property had been used to run a business owned by the deceased's spouse and their sibling. The deceased's sibling in law died some time prior to 20 September 1985 and the property was leased to unrelated parties shortly afterwards.

Some time later some capital improvements were made to the commercial property.

It continued to be leased after the deceased's death, and was eventually sold. Settlement occurred some time in the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 106-50,

Income Tax Assessment Act 1997 Section 118-195,

Income Tax Assessment Act 1997 Section 128-15,

Income Tax Assessment Act 1997 Section 128-20,

Income Tax Assessment Act 1997 Section 152-35 and

Income Tax Assessment Act 1997 Section 152-40.

Reasons for decision

1. Do you have the option of using the date that you sold the shares as the final capital gains tax (CGT) event date for all or some of the parcels of shares and initial CGT date for the beneficiaries?

Where you acquire an asset owned by a deceased person as their legal personal representative or a beneficiary of their estate, you are taken to have acquired the asset on the date the deceased died.

This means that the estate acquired the deceased's shares on the deceased's date of death. The beneficiaries of the estate will also acquire the shares on this date.

When a deceased estate is fully administered and a resident beneficiary is not under a legal disability and is absolutely entitled to a share of an asset, the sale of the asset by the trust is assessable income in the hands of the beneficiary rather than the trust, if:

· the assets are easily divisible, at least to the extent to which a person would reasonably be expected to be indifferent to the replacement of any one asset with another,

· equity would permit the beneficiary to have their interest in all those assets satisfied by the distribution or allocation in their favour of a specific number of them,

· there is a clear understanding on the part of all relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries to a specific number of the trust's assets.

In your situation, you as the trustee of the estate distributed shares to some of the beneficiaries and capital proceeds from the sale of the shares to other beneficiaries. As the deceased's Will entitled the beneficiaries to a specified portion of her estate, the shares were easily divisible and the beneficiaries were all entitled to an equal portion of the estate. Accordingly the beneficiaries of the estate became absolutely entitled to the shares that the estate held once the estate had been fully administered.

As the beneficiaries were absolutely entitled to the shares in the estate, any capital gain that is made by the estate passes through to the beneficiaries and is assessable income of the beneficiaries.

The deceased's Will also provided for a cash distribution to the deceased's grandchildren. You distributed a slightly higher amount to take into account inflation. The distribution was made from the monies that the deceased held in bank accounts. As the monies came from existing assets and monies of the estate rather than income generated by the estate this is a distribution of the corpus of the estate. Accordingly the fact that one of the grandchildren was a non resident at the time of the deceased's death will have no income tax consequences for the estate.

2. Do you have the option of passing the deceased's initial CGT acquisition dates on to the beneficiaries?

As previously stated the date that both the estate and the beneficiaries acquired the shares is the date of the deceased's death. You are not able to pass on the deceased acquisition date to either the estate or the beneficiaries.

Where a deceased person acquired an asset prior to 20 September 1985 the first element of the assets cost base and reduced cost base is the market value of the asset on the date of the deceased death.

Where a deceased person acquired an asset after 20 September 1985 the first element of the assets cost base and reduced cost base is the same as that of the deceased person on the date of their death.

In your situation, the deceased held shares that they had acquired both prior to and after 20 September 1985. Accordingly the first element of the cost base and reduced cost base of the shares acquired by the deceased prior to 20 September 1985 will be their market value on the date of the deceased's death. The first element of the cost base and reduced cost base of the shares acquired by the deceased after 20 September 1985 will be the same cost base and reduced cost base as in the hands of the deceased on the date of their death.

Issue 2

1. Is any capital gain or capital loss made on the sale of the deceased's main residence disregarded?

A capital gain or capital loss that either a legal personal representative or beneficiary makes on the sale of a dwelling that they acquired from a deceased estate is disregarded if:

· the deceased acquired their interest in the dwelling prior to 20 September 1985, and

§ from the deceased's date of death until the ownership interest ends the dwelling was the main residence of one or more of the following persons:

· the spouse of the deceased immediately before death,

· an individual who had a right to occupy the dwelling under the deceased's Will or

· an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary, or

§ the legal personal representative or beneficiary disposes of their ownership interest in the dwelling within two years of the deceased's death.

The two year period is measured from the date of acquisition of the dwelling, in your case this was the date of the deceased's death until the date of settlement of the sale.

As the sale of the deceased's main residence occurred less than two years from their date of death, any capital gain or capital loss that you made on its sale is disregarded.

2. Is any capital gain or capital loss made on the sale of the deceased's share in the commercial property disregarded?

Note: As the commercial property is not a 'dwelling' the above provisions do not apply to disregard any capital gain or loss made on the sale of the commercial property.

In order for us to establish whether any capital gain or capital loss that you made on the sale of the commercial property will be disregarded, it is necessary to consider the CGT small business concessions.

One of the basic conditions that must be met in order for the CGT small business concessions to apply is that the CGT asset (in your case the commercial property) must be an active asset.

Section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the meaning of active asset for the purposes of the CGT small business concessions.

Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset .

In your situation, the commercial property was rented to an unrelated third party by the deceased and continued to be used to derive rent by the estate. Accordingly, the commercial property is not an active asset and the CGT small business concessions will not apply to it.

As the CGT small business concessions will not apply, any capital gain or capital loss that you made on the sale of the commercial property cannot be disregarded.