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Ruling

Subject: Capital gains tax - deceased estate

Question 1:

Does the net income of a deceased estate trust include capital gains tax on the disposal of properties acquired by the deceased after 20 September 1985?

Answer:

Yes

Question 2:

Do the costs of administering the estate and holding and disposing of the properties form part of the cost base for capital gains tax purposes?

Answer:

Yes

Question 3:

Are the beneficiaries required to include their share of the net income of the trust in their own personal tax assessments?

Answer:

Yes

Question 4:

Is the capital gain made on the disposal of the properties eligible for the CGT discount?

Answer:

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences 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 person during the 2010-11 financial year. At that time the deceased owned two investment properties which were acquired after 20 September 1985.

The properties had always been used for the purpose of producing assessable income.

The properties were disposed of during the 2011-12 financial year.

Probate for the estate was also granted during the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 95(1),

Income Tax Assessment Act 1936 Section 97,

Income Tax Assessment Act 1936 Section 99,

Income Tax Assessment Act 1997 Subsection 100-20(1),

Income Tax Assessment Act 1997 Section 110-25,

Income Tax Assessment Act 1997 Section 115-30,

Income Tax Assessment Act 1997 Section 128-10 and

Income Tax Assessment Act 1997 Subsection 128-15(4).

Reasons for decision

Question 1

The provisions that relate to the taxation of trust income are contained in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Net income is defined in sub-section 95(1) of the ITAA 1936 as the total assessable income of the trust derived during the income year, calculated as if the trustee were a resident taxpayer, less allowable deductions.

In order to have a capital gain or loss, a Capital Gains Tax (CGT) event must occur (subsection 100-20(1) Income Tax Assessment Act 1997 (ITAA 1997)). The most common CGT event is disposal of an asset (CGT event A1). The disposal of the properties by the trustee of the deceased estate will trigger CGT event A1, so that any net capital gain from this event will form part of the deceased estates income in the same income year that the event happened. 

Section 128-10 of the ITAA 1997 states that when you die, a capital gain or loss from a CGT event that results for a CGT asset you owned just before dying is disregarded. This means that although the passing of the asset from the deceased person to their beneficiary or legal representative is an effective disposal, it does not trigger CGT event A1. It does not mean that there are no CGT implications of the asset passing to the beneficiary or legal representative.

Subsection 128-15(4) states that for assets the deceased acquired after 20 September 1985 (other than trading stock or a dwelling used as a main residence), the first element of the asset's cost base or reduced cost base in the hands of the legal representative is the deceased's cost base or reduced cost base on the date of death (item 1 of the table in subsection 128-15(4) of the ITAA 1997). That is, the legal representative inherits the deceased's cost base or reduced cost base.

In your case, as the properties were acquired after 20 September 1985 and were not the main residence of the deceased, the disposal of the properties will therefore be subject to CGT.  

The amount of the capital gain will therefore be included in the net income of the deceased estate trust.

Question 2

Section 110-25 of the ITAA 1997 details the five elements which constitute the cost base of a CGT asset. Subsection 110-25(6) details the fifth element of the cost base, being capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset.

Capital expenditure incurred to establish, preserve or defend title to an asset, or a right over the asset that is expenditure incurred within subsection 110-25(6) of the ITAA 1997 forms part of the cost bases of assets of the taxpayer. The expenditure incurred by a taxpayer in their capacity as the executor of an estate to preserve and defend the title to the assets of the estate falls into this category.

Expenditure that would fall within the cost base could include legal fees incurred by a beneficiary in taking action to establish title to the estate's property. The cost base could also include costs incurred by an executor to obtain probate ( IR Commrs v. Executors of Dr Robert Richards (1971) 1 All ER 785).

You incurred costs of administering the estate, legal expenses in obtaining probate, proving the will, and selling and transferring the assets of the estate. These items would all be included in the cost bases of the properties. Please note the expenses may have to be apportioned between all of the assets of the estate.

Question 3

Sections 99 and 99A of the ITAA 1936 apply to assess the trustee on income to which no beneficiary is presently entitled. However where the beneficiaries are presently entitled to the trust income, the income will be taxed in the hands of the beneficiaries (section 97 ITAA 1936).

Taxation Ruling IT 2622 discusses present entitlement during the administration of deceased estates. Although present entitlement is generally not present until probate is granted and the estate fully administered, present entitlement may arise depending upon the terms of the will or discretionary payments made by the executor.

In your case, as probate has already been obtained, the beneficiaries are considered to be presently entitled to the income of the trust. As such, section 97 of the ITAA 1936 states that the assessable income of a beneficiary who is not under a legal disability shall include their share of the net trust income attributable to the period the beneficiary was a resident.

Question 4:

For the CGT discount to apply, you must have acquired the asset at least 12 months before disposing it. For the purposes of this 12-month ownership test, you are taken to have acquired the asset on the date the deceased acquired the asset because the deceased acquired the property after 20 September 1985 (section 115-30 of the ITAA 1997).

In your case, the deceased person acquired the properties after 20 September 1985. The properties were more than 12 months after their acquisition by the deceased. As the period between when the deceased person acquired the properties and the properties were disposed of was greater than 12 months, the capital gains will be eligible for the discount.