Edited version of your private ruling

Authorisation Number: 1012613831586

Ruling

Subject: capital gains tax implications for a deceased estate

Question 1

Did the life interest in the property granted to C, commence on the date of the deed of agreement between C and B?

Answer: Yes

Question 2

Did the property form part of B's estate on the date of the surrender of C's interest in the property under the release and indemnity document?

Answer: Yes

Question 3

Will CGT event A1 happen to C when C surrenders their interest in the property under the release and indemnity document?

Answer: Yes

Question 4

Did you acquire the life interest in the property for its market value as at the date on which C surrendered their interest?

Answer: Yes

Question 5

Is the value of the life interest and the remainder interest calculated using the apportionment rules under section 112-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes

Question 6

Who is authorised to value the life and remainder interests?

Answer: Invalid, this question is not in respect of a relevant provision to which the Commissioner can provide a ruling on as defined in section 357-55 of Schedule 1 to the Taxation Administration Act 1953.

Question 7

Will you be eligible for the 50% capital gains tax (CGT) discount on disposal of that part of the property that relates to the life interest acquired from C?

Answer: No

Question 8

Will you be eligible for the 50% CGT discount on disposal of that part of the property that relates to the remainder interest acquired from B at the time of their death?

Answer: Yes

Question 9

Is the estate administration complete when residue is ascertained or when the deed of arrangement was created? When is residue ascertained?

Answer: Invalid, this question is not in respect of a relevant provision to which the Commissioner can provide a ruling on as defined in section 357-55 of Schedule 1 to the Taxation Administration Act 1953. This is a matter for the trustee to decide.

Question 10

Are you entitled to fully disregard any capital gain made on the disposal of the property under the main residence exemption?

Answer: No

Question 11

Are you entitled to partially disregard any capital gain made on the disposal of the property under the main residence exemption?

Answer: No

Question 12

Will the Commissioner allow you further time, under subsections 118-195(1) or 118-200(3) of the ITAA 1997, to access the main residence exemption?

Answer: No

Question 13

Will the first element of the cost base of the property at the time of disposal be the sum of;

• the market value of the life interest acquired from C (at the date the life interest was surrendered), and

• B's cost base of the remainder interest (at the time of their death)

Answer: Yes

Question 14

What will be the cost base for the remainder beneficiaries on the end of the life interest?

Answer: Not applicable, there are no remainder beneficiaries that are part of the deed of agreement.

This ruling applies for the following period(s)

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on

1 July 2012

Relevant facts and circumstances

You disposed of a property.

The property was originally acquired in prior to 1950 by the parents of A (spouse of B) who used the property as their main residence. The property was used by A's parents and their child, C.

A inherited the property solely prior to September 1985 after the death of A's parents.

A allowed C to live in the property after the death of A's parents. C did not own any other property and lived in this property as their main residence.

You state that at some point prior to September 1985, A acquired another property in which they lived with their spouse B. This property was their main residence.

A passed away in the 1990's.

A's will does not mention any arrangement in place for C to occupy any property. A's will provides that their estate is bequeathed to B.

A deed of agreement, dated in the 1990's between B and C provides that B is the sole beneficiary absolutely entitled to the estate of the deceased, being A.

The deed of agreement grants C the right to use and occupy the property or the right to receive the rents and profits there from until the deed of agreement is terminated or until their death, whichever occurs first. There is no mention of any reversion in the agreement.

C continued to reside in the property, as their main residence, until they disclaimed their entitlement by a release and indemnity document.

The property remained vacant until it was sold.

B passed away and their will does not mention the deed of agreement made B and C.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

Reasons for decision

Life interest or mere right to occupy

Taxation Ruling TR 2006/14 discusses the capital gains tax consequences of creating life and remainder interests in property.

Generally, if a taxpayer is granted a right to 'use and occupy' a property (that is, they have the rights to rents and profits) this indicates that a life estate is created. However, if a taxpayer is merely permitted to reside in the property then this would more likely be treated as the grant of a right to occupy the property.

In your case, the agreement entered into between B and C granted C the right occupy and the rights to the rents and profits from the property, accordingly a life interest in the property has been created.

Value of life and remainder interests

A acquired the property in prior to September 1985, making the property a pre-CGT asset in their hands. On their death, the property passed to their spouse, B. According to subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997), B is taken to have acquired the asset for its market value at the date of A's death.

Later, on entering into the deed of agreement, B has granted a life interest in the property to C. As B did not receive any proceeds from C, they are treated under subsection 116-30(1) of the ITAA 1997 as having received capital proceeds equal to the market value of the life interest at the time of the transfer.

B would have calculated their capital gain by reducing their capital proceeds by a portion of the cost base of the property. The cost base attributable to the life interest is determined under the following apportionment formula derived from subsection 112-30(3) of the ITAA 1997:

As there is no reference to any reversion, it is considered that the remainder interest stays with the original owner, B. The cost base remaining is attributed to B's interest in reversion (subsection 112-30(4) of the ITAA 1997).

C acquires their life interest for an amount equal to its market value at the time of the transfer.

Surrender or release of life interest

TR 2006/14 provides that if a life interest owner surrenders or releases their interest, CGT event A1, under section 104-10 of the ITAA 1997, happens. This is because there will be a change of ownership of the interest from one party to another. A deed of surrender will operate as a conveyance of the interest.

Subsection 116-30(1) of the ITAA 1997 provides that if you receive no capital proceeds from the CGT event, you are taken to have received the market value of the asset that is the subject of the event.

Subsection 112-20(1) of the ITAA 1997 explains that if you did not incur any expenditure to acquire an asset from another entity, the first element of the cost base and reduced cost base of the asset will be its market value.

In your case, the life interest holder, C, has surrendered their interest in the property to the estate of the original owner (on the conveyance of their interest under the release and indemnity document) and CGT event A1 happened. The estate is considered to have acquired the life interest for its market value as it did not incur any expenditure to acquire the asset from C.

Cost base of the property on disposal

Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain from the disposal of an asset if the amount of money you received on the disposal was more than the cost base of the asset.

Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base;

1) money paid, or market value of property given, to acquire the asset

2) incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset

3) certain non-capital costs of ownership

4) capital expenditure on improvements

5) capital expenditure in respect of title or right to the asset

Section 110-35 of the ITAA 1997 provides that incidental costs include remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.

Subsection 128-15(4) of the ITAA 1997 provides that assets which the deceased acquired on or after 20 September 1985 (other than trading stock and their main residence) are acquired by the trustee for an amount equal to the deceased's cost base or reduced cost base. A dwelling that was the deceased's main residence just before they died or an asset that the deceased acquired before 20 September 1985 is acquired for market value at the date of death.

In your case, the estate already holds the remainder interest it acquired from the original owner, B, on the date of their death, which it acquired for an amount equal to the deceased's cost base. The estate also now holds the life interest it acquired from C, for its market value.

When the estate disposed of the property to a third party, CGT event A1 happened to the life and remainder interests.

The first element of the cost base of the property at the time of disposal will be the sum of;

• the market value of the life interest acquired from C (at the date the life interest was surrendered), and

• B's cost base of the remainder interest (at the time of their death)

You will need to determine whether if there is any other expenditure that may be included in the cost base of the property to determine your capital gain on the disposal of the property.

Main residence exemption

Subsection 118-130(1) of the ITAA 1997 provides that you have an ownership interest in land or a dwelling if;

a) for land - you have a legal or equitable interest in it or a right to occupy it; or

b) for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

c) for a flat or home unit - you have:

i. a legal or equitable interest in a stratum unit in it; or

ii. a licence or right to occupy it; or

iii. a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

C's life interest is a right to 'use and occupy' the dwelling and as such, falls within definition of an ownership interest in the dwelling as outlined in subsection 118-130(1) of the ITAA 1997.

As the dwelling in which C holds an ownership interest is their main residence, the main residence exemption should be considered on the disposal of their interest.

Subsection 118-110(1) of the ITAA 1997 explains that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

a) you are an individual; and

b) the dwelling was your main residence throughout your ownership period; and

c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

CGT event A1 will happen on the surrender of the life interest by C. As C satisfies all the requirements under subsection 118-110(1) of the ITAA 1997, they will be eligible to disregard any capital gain they make on the surrender of their life interest under the main residence exemption.

However, there will be no such exemption for the estate on the ultimate disposal of the property.

Subsection 118-195(1) of the ITAA 1997 provides that if the deceased died on or after 20 September 1985 and had acquired the dwelling on or after 20 September 1985 and you have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate, or you have owned it as trustee of a deceased estate, you disregard any capital gain or capital loss you make from a capital gains tax (CGT) event that happens to the dwelling if the following applies:

• you disposed of your ownership interest within two years of the deceased's death (or a longer period allowed by the Commissioner), and

• just before the deceased's death:

• the dwelling was their main residence; and

• it was not then being used to produce assessable income.

Section 118-200 of the ITAA 1997 provides that if you do not qualify for a full exemption from CGT for the home, you may be entitled to a part exemption.

For a partial exemption, you calculate your capital gain or capital loss as follows:

'Non-main residence days' is the number of days that the dwelling was not the main residence of the deceased.

'Total days' (if the deceased acquired their ownership interest after 20 September 1985) is the number of days in the period from the acquisition of the dwelling by the deceased until you disposed of your ownership interest.

Subsection 118-200(3) of the ITAA 1997 ensures that for post-CGT dwellings, where the trustee or beneficiary's ownership interest ends within two years of the deceased's death (or a longer period allowed by the Commissioner), the period between the deceased's death and when their ownership interest ends can be ignored when calculating a capital gain or capital loss.

In your case, on the death of A the title of the property was passed to their spouse, B. The property was not the main residence of A or B.

B entered into an agreement with C whereby C was granted a life interest to reside in the property. C did not acquire the life interest under the deceased's will.

B passed away having never used the property as their main residence. C continued to reside in the property, as their main residence, until they surrendered their life interest.

Therefore, based on the information provided, the property was at no time the main residence of the deceased, B. Accordingly, you cannot fully or partially disregard any capital gain made on the disposal of the property.

Discretion to extend the time period to access the main residence exemption

The Commissioner has the discretion to extend the time period in subsections 118-195(1) and 118-200(3) of the ITAA 1997 (about the main residence exemption), where the trustee or beneficiary of a deceased estate's ownership interest ends after two years from the deceased's death.

However, as the property in question was at no time the main residence of the deceased, the main residence exemption cannot apply in your situation. Accordingly, the Commissioner cannot exercise his discretion under subsections 118-195(1) or 118-200(3) of the ITAA 1997 to allow any further time to access this exemption.

50% CGT discount

A 50% discount may be applied to a discount capital gain realised by a trust. In order to be considered a discount capital gain, the asset that gave rise to the capital gain must have been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

Subsection 115-30(1) of the ITAA 1997 explains that for the purposes of determining whether a capital gain made by on disposal of an asset qualifies for the CGT discount (that is, applying section 115-25 of the ITAA 1997) the section applies as if an entity (the acquirer) had acquired a CGT asset described in an item of the table at the time mentioned in the item. Item 3 of the table states that for a CGT asset that passed to the acquirer as the legal personal representative (LPR) of a deceased individual's estate, except one that was a pre-CGT asset of the deceased immediately before his or her death, the LPR is taken to have acquired the asset when the deceased acquired the asset.

Accordingly, as you acquired the remainder interest from the deceased well over 12 months prior to the disposal, any capital gain made on the disposal of that part of the property will be eligible for the 50% discount. However, as you only acquired the life interest some 6 months prior to the disposal, when it was surrendered by C, any capital gain made from the disposal of that interest will not be eligible for the 50% discount.