Edited version of your private ruling

Authorisation Number: 1012059167843

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Ruling

Subject: Capital gains tax - deceased estate and disposal of property

Question 1: Is the capital gain made on the disposal of the deceased's main residence within two years of the death of the beneficiary who had resided at the property disregarded?

Answer: No.

Question 2: Are you entitled to a partial main residence exemption upon disposal of the deceased's main residence?

Answer: Yes.

Question 3: Are the beneficiaries presently entitled to the net income of the deceased estate?

Answer: Yes.

This ruling applies for the following period

Year ended 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.

The deceased and their spouse acquired a dwelling at the property before 20 September 1985.

The deceased and their spouse established the property as their main residence.

The deceased's child A also resided at the property.

The deceased's and spouse resided at the property until the deceased's spouse passed away after early 1993.

The deceased continued to reside at the property until their death on mid 2002.

Probate was granted on late 2002.

Under the deceased's Will dated early 1993, the deceased's children are the beneficiaries, with each to receive an equal share of their estate.

Child A continued to reside at the property after the death of their surviving parent.

In early 2003, the beneficiaries entered into an agreement to allow child A to continue to reside at the property for the duration of their life.

Under this agreement the beneficiaries of the deceased estate were the following:

o child B - a specified share of the residuary estate

o child C - a specified share of the residuary estate

o child D - a specified share of the residuary estate

o child E - a specified share of the residuary estate

o grandchild A - a specified share of the residuary estate, and

o grandchild B - a specified share of the residuary estate.

Distributions from the deceased estate were made in mid 2003 to the beneficiaries.

Since mid 2003 there have been no bank accounts or assets held by the deceased estate other than the property.

Child A passed away on early 2011.

The executors of the estate will dispose of the property and divide the proceeds between the beneficiaries of the deceased estate as per the agreement dated early 2003.

The executors of the estate will make a capital gain on the disposal of the property.

You have provided a copy of the documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling:

You have provided a copy of the documentation to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling:

1. Agreement dated early 2003

2. Supreme Court of an Australian state - Inventory of Assets and Liabilities dated late 2002

3. Supreme Court of an Australian state - Probate Jurisdiction, and

4. the Last Will and Testament.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 110-25

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 tax (CGT) event, CGT event A1 is when you dispose of an asset to another entity. The time of the event is when you enter into the contract for disposal or if there is no contract when the change of ownership occurs.

Main residence exemption

Normally, when an executor of a deceased estate acquires a dwelling which was the deceased's main residence, they acquire the dwelling on the deceased's date of death.

The first element of the cost base and reduced cost base of the dwelling - its acquisition cost is its market value at the date of deceased's date of death if either:

· the dwelling was acquired by the deceased acquired before 20 September 1985, or

· the dwelling passes to you after 20 August 1996 and it was the main residence of the deceased immediately before their death and was not being use to produce income at that date.

The deceased acquired two interests in the property a 50% interest when they originally acquired the property prior to 20 September 1985 and a 50% interest from their spouse upon their date of death at its market value on that date.

In your case, the executors acquired these two separate interests in the property. Each of these interests are considered to be separate CGT assets and must be dealt with separately.

Generally, if a CGT asset the deceased owned before dying devolves to their executor upon their death and the executor later disposes of the asset, it is the executor that makes any resulting capital gain or capital loss.

When the property is disposed of, it will be registered in executors' names and is held in trust for the beneficiaries.

Therefore, it will be the executors who are disposing of the property, not the individual beneficiaries as it will not 'pass' to the individual beneficiaries.

A capital gain or capital loss can be disregarded when a CGT event happens to an ownership interest in a dwelling owned by the executors if any of the following applies:

· it was the deceased's main residence just before their death and was not being used at that date to produce assessable income, or

· the deceased acquired their ownership interest before 20 September 1985,

AND

· you dispose of your ownership in the property within two years of the deceased's death, or

· during your ownership period it was the main residence of one or more of the following:

· the main residence of the spouse of the deceased, or

· an individual who had a right to occupy the dwelling under the deceased's will.

An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of their will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238 and Taxation Ruling IT 2664, paragraphs 22 and 23).

Under the deceased's will there was no beneficiary who had a right under the will to reside in the dwelling. The beneficiary, child A who did reside in the dwelling did so because the executors and the other beneficiaries allowed him to reside in the property.

This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (See Certoma, GL 1987, The Law of Succession in New South Wales, The Law Book Company, Sydney, p 117.)

As child A did not have a right to occupy the dwelling under the deceased's will, nor was the dwelling disposed of within two years of the deceased's death the executors cannot disregard the capital gain made on the disposal of the property.

While, the executors do not qualify for a full exemption from CGT, however, they may be eligible for a partial exemption.

Partial exemption 

You calculate your capital gain or capital loss using the following formula:

Capital gain or capital loss X Non-main residence days

Total days

First interest

The capital gain is the amount you make from the disposal of the property (the 50% interest the deceased acquired prior to 20 September 1985).

Your non-main residence days are the sum of days from mid 2002 to settlement date.

Total days are the number days from mid 2002 to settlement date.

In your situation, as the non-main residence days and total days are equal there is no partial exemption allowable

Second interest

For the second interest the executors acquired (the 50% interest that the deceased acquired after 20 September 1985).

Your main non-main residence days are the number of days from mid 2002, to settlement date.

Your total days are the number of days from the deceased's spouse's date of death until settlement date.

Present entitlement 

As the executors, you are disposing of the property so you will make the capital gain. However, any capital gain made by you as the executors will be assessable to each of the beneficiaries according to their interest in the property as per the agreement dated early 2003. The beneficiaries of the estate have been presently entitled since mid 2003 when the initial distributions were made and the bank accounts were closed. The enclosed Taxation Ruling No. IT 2622 - Income tax: Present entitlement during the stages of administration of deceased estates, provides you with further information. Additional information is also available on our website - www.ato.gov.au.

Each beneficiary will have to calculate their own capital gain, they can include in their cost base any expenditure the executors incurred.