Edited version of your private ruling

Authorisation Number: 1012075989363

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. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax - deceased estate - taxation of capital gain distributed to a minor

Issue 1

Question: Are you eligible for a partial main residence exemption upon disposal of the deceased's main residence?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Issue 2

Question: Is the capital gain derived as excepted assessable income on the basis that it constitutes income derived from the estate of the deceased person and is not taxable at Division 6AA of the Income Tax Assessment Act 1936 rates in the hands of the minor beneficiary?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced 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.

In mid 20XX the deceased acquired a property (the property) for $X plus stamp duty of $X and an estimated settlement agent fee cost of $X.

The deceased resided at the property as their main residence until their death in early 20XX. The deceased died without a will (intestate).

The beneficiaries of the deceased's estate were their children who were minors at the time of their death.

The deceased's children moved in with their surviving parent and did not occupy the property.

There was a delay in granting probate of the estate of the deceased due to the intestacy and the age of the beneficiaries.

Under the Administration Act, the children of the deceased shared equally in their mother's estate (as there is an absent surviving spouse) and as infants cannot receive their bequests until they reach 18 years of age. The Administrator holds child A's share of their parent's estate in trust until they reach the age of 18 years.

Probate was granted in late 2008.

The property remained vacant until its disposal in mid 2009.

The property was disposed of for $X. After deductions for payment of real estate commission, outstanding rates, taxes and conveyancing fees, yielded a net sum of $X to the estate.

The children each received a distribution of $X from their parent's estate.

For the purpose of this ruling the market value at death was equal to the cost base 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:

§ capital gain calculations for the disposal of the property, and

§ CGT distribution from Estate to the beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1936 Div 6AA

Income Tax Assessment Act 1936 102AE

Income Tax Assessment Act 1936 Section 98

Income Tax Rates Act 1986 Schedule Sch 7

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.

Issue 1

Question: Are you eligible for a partial main residence exemption upon disposal of the deceased's main residence?

Answer: Yes.

Detailed reasoning

Capital gains tax (CGT) is the tax that you pay when a CGT event happens to a CGT asset, such as a dwelling.  The most common CGT event (CGT event A1) is when you dispose of the asset to another entity. 

Generally, assets inherited through a deceased estate are acquired on the date of death.

In your case, you are taken to have acquired your interest in the property on the deceased's date of death, early 2002. 

If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. The first element of the cost base and reduced cost base of a dwelling is its market value at the date of death where the dwelling passes to you after 20 August 1996 and it was the main residence of the deceased immediately before their death and it was not being used to produce assessable income.

In your case, you are taken to acquired the property for it market value on the deceased's date of death.

A capital gain or capital loss can be completely disregarded when a CGT event happens to a deceased person's main residence that you acquired as a trustee or beneficiary of a deceased estate after 20 September 1985, if:

§ you are an individual and any of the following apply:

o your ownership interest ends within two years of the person's death;

o from the deceased's death until your ownership interests ends the dwelling was the main residence of one or more of:

§ the spouse of the deceased immediately before death,

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

§ the individual as a beneficiary if they are disposing of the dwelling as a beneficiary.

In your case, as none of the above conditions have been met you are not entitled to the full exemption on your interest in the dwelling.

Partial exemption

Although you are not entitled to a full exemption from CGT you are entitled to a partial exemption.

In your case, the capital gain or capital loss will be calculated using the following formula:

Capital gain or capital loss amount X non-main residence days

total days

Where: 

  A capital gain or capital loss is the difference between the capital proceeds and the cost base of the dwelling.

Non-main residence days are the number of days from the deceased's death until settlement date on its disposal.  

Total days are the number of days in the period from the date the deceased acquired the property until settlement date on its disposal.

You can use the discount method to calculate your capital gain as you meet all the necessary criteria.

Issue 2

Question: Is the capital gain derived as excepted assessable income on the basis that it constitutes income derived from the estate of the deceased person and is not taxable at Division 6AA of the ITAA 1936 rates in the hands of the minor beneficiary?

Answer: Yes.

Detailed reasoning

Section 102AC of the ITAA 1936 defines a prescribed person to be a person under 18 years of age unless the person is an excepted person for the purposes of that section.

Section 102AE of the ITAA 1936 allows the ordinary rate of tax to apply if the trust income is excepted income. Excepted income includes employment or business income and income received from the investment of amounts received from some damages or compensation amounts, or received directly as the result of the death of another person from life assurance, superannuation funds or similar funds or proceeds received from a deceased estate.

In this case, the beneficiary (child A) was born in 1995, so they are under 18 during the relevant income year. Child A is under a legal disability at all times during this year, this means the trustee is assessable and is required to pay tax on their share of the net income that was distributed from the deceased estate.

The capital of the trust arose from the proceeds of estate of the beneficiary's parent. This income would be considered to be excepted income.

As the income is excepted income, the higher rates that apply to assessments when Div 6AA is applicable, do not apply in this case.

Therefore, the trustee's assessment will be based on the ordinary resident individual rates of tax. These rates include a tax free threshold of $6,000.