Edited version of your private ruling

Authorisation Number: 1012479792908

Ruling

Subject: Capital gains tax - deceased estate - deed of family arrangement

Question 1: Do you make a capital gain on the disposal of deceased's unit?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

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.

After 20 September 1985, the deceased purchased a unit for $X.

The deceased established the unit as their main residence.

The deceased resided in the unit for approximately two years.

The deceased moved out of the unit and resided with their spouse in their dwelling for a period of approximately 12 months.

The deceased rented out the unit when they moved out.

You have chosen to continue to treat the unit as the deceased's main residence for their entire ownership period.

The deceased moved into their spouse's main residence (property A) which is solely owned by their spouse.

The deceased's main residence has chosen property A as their main residence.

The same year the deceased and their spouse married.

The deceased died approximately four years ago.

Under clause 4(a) of the deceased's will their spouse has a life interest in the unit.

Upon the death of the deceased's spouse the unit passed to the deceased's child.

You now propose that the beneficiaries of the deceased's will enter into a deed of family arrangement which inter alia will.

It is contemplated that the net proceeds from the disposal of the unit will be divided X% to the deceased's spouse and X% to the deceased's child and other beneficiaries.

Valuations have been received and the unit's expected sale price range from $X to $X.

It is likely that since the death of the deceased's death the capital value of the unit has decreased.

It is estimated that the land agents commission and transfer expenses will be between $X and $X.

At present time the mortgage outstanding over the property has an outstanding balance of approximately $X.

You have been advised that you will make a capital gain when you dispose of the unit.

The proceeds from the disposal of the unit will be distributed as per the deed of family arrangement.

The estate has not been fully administered.

You have supplied a copy of documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 section 99A

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 108-5

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-170

Income Tax Assessment Act 1997 Section 118-192

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

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.

You can only make a capital gain or capital loss if a CGT event happens to a CGT asset you own.

CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity and the time of the event is when you enter into the contract for the disposal or if no contract, when the change of ownership occurs.

CGT event A1 will occur upon the disposal of the unit.

Deceased estate

If you acquire an asset owned by a deceased person as their executor or beneficiary, you are taken to have acquired the asset on the day the person died.

A CGT asset passed to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset and includes the following:

the asset passes under a will, or that will is varied by a court order, or

under a deed of arrangement where:

· the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate, and

· any consideration given by the beneficiary for the asset consists only of a variation or waiver of a claim to one or more assets that form part of the estate.

The effect of entering into a deed of family arrangement, will settle 'a claim to participate in the distribution of the estate'.

When the life tenant and the other beneficiaries entering into the deed of family arrangement, this will effectively alter the deceased's original will. The entitlements of the respective beneficiaries will be then determined by the deed of family arrangement.

In your case, the deed of family arrangement changes how the proceeds from the disposal of the unit will be distributed. The deceased's spouse will receive a X% share of the proceeds and the balance of the proceeds will go to the deceased's child and the other beneficiaries.

Deed of arrangement

Beneficiaries in a deceased estate who have been granted life and remainder interests may be dissatisfied with the provision that the deceased person made for them under their will. The beneficiaries may enter into a deed of arrangement under which they agree to share the deceased's assets rather than their life and remainder interest.

A deed of arrangement will be effective for the purposes of paragraph 128-20(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) provided that it is entered into:

to settle a claim to participate in the estate, and

any consideration given by the beneficiary consisted only of the variation or waiver of a claim to an asset or assets that form part of the estate.

The deed of arrangement must be entered into prior to the administration of the estate being completed unless the beneficiary can demonstrate that a court would, at the time the deed was entered into, have entered their application for family provision, or an extension of time in which to make such an application.

Surrender of the life interest

A life tenant created under the terms of a deceased's will is considered to be a CGT asset. The life interest is held by a life tenant.

If the life tenant surrenders their life interest in a CGT asset there are no CGT consequences for you as the trustee of the deceased estate.

Disposal of unit

Broadly, the provision dealing with capital gains and capital losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. This means that if a CGT event happens in relation to the asset, the beneficiary (and not the executor) is responsible for any resulting capital gain or capital loss.

Draft Taxation Ruling TR 2004/D25 explains the circumstances where a beneficiary of a trust is considered to be absolutely entitled to a CGT asset as against the executor. Paragraph 54 of

TR 2004/D25 states that the requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied if there are multiple beneficiaries in respect of a single asset such as land.

In your case, there are multiple beneficiaries in respect of the unit, and no beneficiary can be absolutely entitled.

Therefore, you as executor will make a capital gain or capital loss on the disposal of the unit.

Absence choice 

You can make the choice that a dwelling that was your main residence continues to be treated as your main residence after you cease living in it. If the dwelling is used to produce income, there is a six year time limit on the continuing main residence status. If you make this choice you cannot treat any other dwelling as your main residence for that period (except for a limited time if you are changing main residences).

You make the choice for the income year you enter into the contract to dispose of the property.

Main residence used to produce income for more than six years

Where a main residence is used to produce income for more than six years after you cease living in it, an exemption cannot be claimed for the time in excess of six years.

Any capital gain made on the dwelling after the six year period will be subject to CGT, the Commissioner has no discretion to extend this six year period.

Where a main residence is first used to produce income after 20 August 1996, there is a special rule that affects the way you calculate your capital gain or capital loss.

Under this special rule, you are taken to have acquired the dwelling at its market value at the time it is first used to produce income if all of the following conditions apply: 

you acquired the dwelling on or after 20 September 1985;

you first used the dwelling to produce income after 20 August 1996;

when a CGT event happens in relation to the dwelling, you would only get a partial exemption because the dwelling was used to produce income during the period you owned it; and

you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.

Where the market value of an asset needs to be determined, you can either obtain a detailed valuation from a qualified valuer or compute your own valuation based on reasonable objective and supportable data.

Having a different home for your spouse

If an individual and their spouse each have a dwelling during a particular period, they must either choose one of the dwellings as the main residence of both of them for the period or nominate a different dwelling as their main residence for the period.

However, if you make separate nominations, you will each only be entitled to a maximum 50% main residence exemption for the period.

There is nothing to prevent either spouse from nominating the other's dwelling as their main residence even though they do not have an ownership interest in that dwelling.

You are entitled to make this choice on his behalf.

In your case, you have made an election to treat the unit as the deceased's main residence up until their date of death. The unit has been rented out for more than six years and deceased's spouse has nominated property A as their main residence.

Full exemption

A requirement to disregard the capital gain or capital loss made on the disposal of a dwelling owned by the deceased is that is was the deceased's main residence on their date of death.

As the dwelling was not, any capital gain or capital loss made is not disregarded.

Note: As it was not the deceased's main residence you acquired the dwelling for the deceased's cost base (market value on the date it was first rented out).

Partial exemption

If you do not qualify for a full exemption from CGT for the home, you may be entitled to a partial exemption. 

You calculate your capital gain or capital loss as follows:

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

total days

Non-main residence days is the number of days that the dwelling was not the main residence where the deceased person acquired the dwelling on or after 20 September 1985, is the number of days in the period from their death until settlement of the contract for sale of the dwelling when it was not the main residence of one of the following:

· a person who was the spouse of the deceased

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

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary

· plus the number of days in the deceased's period of ownership when the dwelling was not their main residence.

The total days is the number of days in the period from when the deceased acquired the dwelling until you dispose of your ownership interest.

Your calculation

In your case, the non-main residence days will be the number of days in the period from the end of six year period to date of settlement on the disposal of the unit plus half the number of days in the period between date the unit was rented out and when the deceased and the deceased's spouse nominated different main residences.

Total days - is the number of days from the day when the unit was first rented out until settlement.

As you meet all the relevant criteria you can use the discount method to calculate your capital gain.

The discount percentage is 50%.

Present entitlement of the beneficiaries

Generally, beneficiaries cannot enjoy present entitlement to income derived by the estate during the administration of the estate. Income of the estate in income years before administration is complete is the income of the executors and is not income of the beneficiaries (paragraph 9 of Taxation Ruling IT 2622).

However, the beneficiaries are presently entitled to any amounts that are actually paid to them by the executor. During the administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts.

Where the executor exercises the discretion, to pay some of the income to, or on behalf of the beneficiaries, in this situation they will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them or on their behalf (paragraph 14 of Taxation Ruling IT 2622).

The executor of the estate is assessable on any part of the estate's net income that no beneficiary is presently entitled to.

On disposal of the unit, CGT event A1 will happen. Any capital gain made on the disposal of the unit will be included in the trusts income tax return.

Presently entitled beneficiaries include their share of the trusts net income, including any capital gain, in their income tax returns. A net capital gain distributed needs to be grossed up by multiplying the amount by two. The beneficiary can then apply any capital losses to the amount, and then apply the 50% discount.