Edited version of your private ruling

Authorisation Number: 1012548679336

Ruling

Subject: Capital gains tax

Question and answer

Will the Commissioner exercise his discretion under section 118-195 of the Income Tax Assessment Act 1997 to extend the two-year period in which a deceased's main residence must be disposed of?

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

Your parents acquired a property (the property) prior to 1985 which was their main residence.

Your parents acquired the property as tenants in common. They owned a % share each.

Parent A passed away after 1985.

A clause of Parent A's will stated that it was their request that the Trustees transfer to their children as tenants in common in equal shares a minor proportion of their share and interest in the freehold property.

A clause of Parent A's will stated that their property (not disposed of by the will) would be given to the Trustees upon Trust.

A clause of Parent A's will stated that the trustees should hold the residuary estate upon trust for Parent B absolutely.

A trust was created over the property.

The trust deed stated that the property would be transferred to the Trustees for nil consideration and that the Trustees would be the legal owners holding the title for the beneficial owners.

A clause of the trust deed stated that the beneficial tenants in common were Parent B with a majority share, and you and your siblings with a minor share each.

Parent B continued to live in the property until they passed away.

You and your siblings were beneficiaries of Parent B's estate.

None of the beneficiaries under Parent B's will used the property as their main residence.

No individual occupied the property as having a right to occupy the property under the terms of Parent B's will.

You and the other beneficiaries intended to sell the property as soon as possible.

Much of the period between the death of the deceased and placing the property on the market was taken up with negotiations with the authorities and satisfying queries and requests for valuations.

Decorative and other repairs were deemed essential before the house could be placed on the market.

The property was placed on the market within two years of Parent B's death and settlement for the sale of the dwelling occurred two years after the date of Parent B's death.

A capital gain was made on the disposal of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-130(3).

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 128-20

Reasons for decision

Section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that one of the ways a capital gains tax (CGT) asset passes to a beneficiary of a deceased estate is when the beneficiary becomes the owner of the asset under the will of the deceased.

It does not matter whether the asset is transmitted directly to the beneficiary, is transferred to the beneficiary by the executor or administrator of the deceased estate, or is transferred from a testamentary trust. A testamentary trust is a trust that is created under the terms of the will of the deceased. This contrasts with an 'inter vivos' trust (or living trust) which is created during a person's lifetime.

A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a CGT event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependant upon:

· whether the deceased acquired the ownership interest before 20 September 1985, or

· whether the deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income,

and,

· whether the dwelling was disposed of within two years of the date of the deceased's death, or

· who occupied the dwelling after the date of the deceased's death.

Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract.

A person has an ownership interest or legal interest in land or property where he or she is the registered proprietor of the legal title to the land. Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned.

In your case, your parents each had a % ownership interest in a property which was their main residence. Under the terms of Parent A's will, you and your siblings were each given a minor ownership interest in the property. Parent B was left the remaining interest in the property to be held in trust for them by the trustees of the estate.

Under the trust created, the full ownership of the property was transferred to the trustees for them to hold the title in trust for the co-owners, or beneficial owners. The beneficial tenants in common were your parent with a majority share, and you and your siblings with a minor share each.

Consequently, it is evident that Parent B ceased to have a legal ownership interest in the property when the trust was created. Further, the trust was not a testamentary trust as it was not created solely under the terms of the will of Parent A; instead, it was made up of all the interests in the property. That is, Parent B placed their pre-existing % share of the property in the trust which was an action unrelated to the terms of Parent A's will. Accordingly, it is also evident that your interest in the property was placed into a trust which was not a testamentary trust.

For the capital gains exemption available under section 118-195 of the ITAA 1997 to apply, your ownership interest must have passed to you from the deceased estate or testamentary trust and the property must have been owned by the deceased at the time of death. In your case, these circumstances did not occur and the exemption ceased to be available to you when the inter vivos trust was created and the ownership interests of you, your siblings and Parent B were placed in the trust.

Therefore, the exemption from CGT under section 118-195 of the ITAA 1997 is not available to you and the Commissioner is unable to consider an extension of the two year period in which a deceased's main residence must be disposed of.