Edited version of your written advice

Authorisation Number: 1012846215094

Date of advice: 28 July 2015

Ruling

Subject: Capital gains tax - deceased estate - main residence

Question

Will any capital gain or capital loss made on the disposal of the property by the Trustees of the estate be disregarded under section 118-195 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods

Income year ending 30 June 2017

Income year ending 30 June 2018

The scheme commences on

1 July 2016.

Relevant facts and circumstances

The deceased and their spouse acquired a dwelling (the dwelling) before 20 September 1985, which had been their main residence and had never been used to produce assessable income.

The deceased's spouse passed away a number of years later and they bequeathed their share in the dwelling to the deceased.

The deceased continued to reside in the dwelling as her/his main residence until they passed away a number of years later, leaving one child (Beneficiary A) and a number of step-children.

The deceased's last will appointed one of their step-children (Trustee A) as the executor and trustee of their estate and bequeathed their estate as follow:

• items of jewellery to Beneficiary A

• gave the residue of the estate to the trustee to be sold and converted into money to:

• pay off debts; and

• divide the balance equally amongst Beneficiary A and the deceased's step-children

• directed the trustee to purchase a furnished dwelling from the residue of the estate of which Beneficiary A had the right to exclusive rent free occupation of such a dwelling until they died or got married, and if Beneficiary A dies or gets married, the dwelling and furniture shall be sold and the net proceeds shall be divided equally between the deceased's step-children then living.

Probate was granted on the deceased's estate around two months after the deceased had passed away.

Beneficiary A had resided in the deceased's dwelling before and after the deceased passed away and had expressed that they wanted to continue to reside in the deceased's dwelling.

The other beneficiaries of the deceased's estate agreed that Beneficiary A could continue to reside in the dwelling and they formalised this agreement in a Deed of Family Arrangement that was signed by the beneficiaries, and dated around three months after probate had been granted, under which:

• Beneficiary A relinquished all their rights under the will to have a furnished dwelling purchased by the trustee of the deceased's estate for their rent-free occupation,

• in consideration for Beneficiary A relinquishing their rights, they were permitted to have exclusive occupation of the deceased's dwelling rent-free, including the furniture, appliances and other effects in or about the dwelling until their death, marriage or when the dwelling ceased to be their principal place of residence,

• upon either Beneficiary A's death, marriage, or the dwelling ceasing to be Beneficiary A's principal place of residence, the trustee shall sell the dwelling and distribute the sales proceed to the beneficiaries or the beneficiary's legal personal representative

• Beneficiary A also relinquished any interest they have in the jewellery of the deceased, other than the items of jewellery specified in the will to be bequeathed to Beneficiary A; and

• appointed an additional trustee of the deceased's estate.

The dwelling will remain the main residence of Beneficiary A from the time the dwelling was acquired until the time the CGT event occurs, that is the disposal of the dwelling by the Trustees of the deceased's estate.

Copies of documentation have been provided with the private ruling application, which should be read in conjunction with, and forms part of the scheme of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 118-130(3)

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Full main residence exemption for a dwelling acquired from a deceased estate

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the following table are satisfied.

Limitations to the exemption

In relation to the trustee/s of the estate owning the interest in accordance with paragraph 118-195(1)(a) of the ITAA 1997, the Commissioner expresses the view in Taxation Determination TD 1999/74 (TD 1999/74) that the connection required for acquisition under a deceased's will is not a strict one. For example, it will be sufficient if the interest is acquired in accordance with the terms of the will, or in accordance with the terms of the will as modified by any court order. The trustee will also acquire an interest under the deceased's will if it is acquired in pursuance of the will or under the authority of the will.

Such an acquisition may be in pursuance of the will or under its authority, but does not have to be by force of the will nor in strict conformity with it.

If a beneficiary of the estate who does not have the right to occupy the dwelling under the will in fact occupies it, this does not satisfy the requirement above.

However, when considering paragraph 118-195(1)(b) of the ITAA 1997, an individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will, or under the authority of the will as was held in the court case of Evans v. Friedmann (1981) 53 FLR 229 at 238. It is also the view expressed in ATO Interpretive Decision ATO ID 2003/109 (ATO ID 2003/109).

Application to your situation

We consider that the primary issue in this situation centres around when is an individual regarded as someone who has the right 'under the deceased's will' to occupy an inherited dwelling when the wording of the will and the actions undertaken by the Trustee/s as being consistent with the will are not clear.

The issues we have considered are:

1. Is Beneficiary A 'an individual who had a right to occupy the dwelling under the deceased's will'?

2. Can the trustee otherwise able to rely on section 118-210 of the ITAA 1997 to disregard any capital gain that may arise from the disposal of the dwelling?

We have taken the following into consideration when making our decision:

In this case, following the deceased's death the dwelling passed to the trustee of the deceased's estate. The trustee of the deceased estate is viewed as owning the dwelling as trustee of the deceased's estate and paragraph 118-195(1)(a) of the ITAA 1997 appears to be satisfied.

For the portion of interest that the deceased acquired prior to 1985, as the dwelling has been the main residence of Beneficiary A from the time of the deceased's death and will continue to be their main residence until the trustee sells the dwelling, paragraph 118-195(1)(b) of the ITAA 1997 will be satisfied if Beneficiary A is 'an individual who had a right to occupy the dwelling under the deceased's will'.

On one hand, it is arguable that Beneficiary A is an individual who had a right to occupy the dwelling under the deceased's will because:

• the will provided that furnished dwelling be purchased for the rent-free occupation of Beneficiary A and the dwelling fits the description of a furnished dwelling and Beneficiary A does have rent-free occupation of the dwelling; and

• ATO view products such as TD 1999/74 and ATO ID 2003/109 suggest that the connection required is not strict and the individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will, in pursuance of the will or under the authority of the will.

On the other hand, it is equally arguable that Beneficiary A does not have a right to occupy the dwelling under the deceased's will because:

• the will specifically directed the trustee to purchase a furnished dwelling (from the residue of the estate); and

• Clause 1 of the Deed of Family Arrangement stated that Beneficiary A relinquishes their rights under the will to a furnished dwelling. It might be argued that under the deed of family arrangement a new (different) right to occupy the dwelling has been obtained as a consideration of relinquishing Beneficiary A's occupancy rights under the will.

If there was merely an intent under the will to provide a particular kind of occupation for Beneficiary A, then it can be said that the retention of the dwelling for their occupancy was broadly consistent with that intent. In that context the Deed of Arrangement resolves some uncertainties in giving effect to the wishes of the deceased and ensures that the trustee has performed their responsibilities of carrying out the wishes of the deceased under the will.

Another characterisation might include the proposition that, under the will, Beneficiary A was unmarried and was entitled to a furnished dwelling to be purchased for them under the will, but the trustee has failed to do what they were required to do under the will, such as 'purchase' a property. On this approach Beneficiary A has subsequently obtained a 'compensating' right of occupancy in the unit of the deceased in satisfaction of the trustee obligations to Beneficiary A for what was actually intended to be conferred by the deceased on Beneficiary A, their full period of occupancy can reasonably be said to be an ownership interest 'under the deceased's will ', as per TD 1999/74: under the will', 'in pursuance of' or 'under the authority of' the will.

Conclusion

Under either characterisation of the facts, particularly the intent of the deceased, such as whether or not the trustee has initially met the requirements to 'purchase' a furnished dwelling or not, the outcome is that a right of occupancy has been obtained for Beneficiary A either in accordance with the terms of the will, in pursuance of the will, or under the authority of the will.

Accordingly, section 118-195 of the ITAA 1997 is satisfied for the Trustees where the property was Beneficiary A's main residence up until the Trustee's ownership interest ends. The same applies for Beneficiary A, given that they had a 'right to occupy that constitutes an 'ownership interest' per subparagraph 118-130c (ii) of the ITAA 1997.

Note: We have also taken into consideration section 118-210 of the ITAA 1997. However, this section is not applicable to this situation as it deals with situations where the trustee of a deceased estate acquires a dwelling and not when a dwelling was owned by the deceased.