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Edited version of your written advice
Authorisation Number: 1013021404570
Date of advice: 19 May 2016
Ruling
Subject: Income from deceased estate
Question 1
Is the life insurance amount and money from a bank account distributed to you from the deceased estate assessable income?
Answer
No.
Question 2
Is any capital gain made on the sale of the main residence exempt from tax under the capital gains tax (CGT) provisions?
Answer
Yes.
Question 3
Do the CGT provisions apply to the sale of the holiday house?
Answer
Yes.
Question 4
Is the first element of the cost base of the holiday house equal to the market value of the dwelling on the date of death?
Answer
Yes.
Question 5
Is there any tax payable on the sale of the holiday house where the cost base of the holiday house equals the capital proceeds from the sale and your net capital gain equals $0?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
The scheme has commenced
Relevant facts
You are an Australian resident.
Your relation passed away overseas and was a foreign resident.
As the beneficiary of the deceased estate, you received the following:
• money from a life insurance policy,
• money from bank accounts,
• money from the sale of the main residence and
• money from the sale of a holiday house situated overseas.
The main residence was transferred to you after your relation's death and sold a short time later.
Your relation acquired the main residence after 1985. The residence was not used for the purpose of producing assessable income.
The holiday house was transferred to you after your relation's death and sold soon after. The property was sold at market value.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Section 6-15.
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 118-195.
Income Tax Assessment Act 1997 Section 128-15.
Income Tax Assessment Act 1936 Section 99B.
Reasons for decision
Ordinary income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.
The distribution of the money from a life insurance policy and bank account is regarded as a distribution of corpus or capital amount.
A distribution of corpus received from a deceased estate is not considered to be ordinary income and therefore not assessable under subsection 6-5(2) of the ITAA 1997.
Property such as a main residence and holiday house are capital assets and any money received on the sale of such properties are capital in nature and not assessable as ordinary income. However, the capital gains tax provisions are relevant.
Statutory income
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.
Corpus from a deceased estate is not assessable income of a beneficiary (section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)).
Furthermore, there are no capital gains tax (CGT) consequences under the CGT provisions in relation to a distribution or entitlement of the corpus of a deceased estate.
Therefore, the money from the bank account and money from the life insurance policy are not regarded as ordinary or statutory assessable income under the ITAA 1936 or ITAA 1997.
Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently the amounts from the life insurance policy and bank accounts received are not included in your assessable income.
Capital gains tax
A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Therefore the main residence and holiday house are CGT assets.
Under section 104-10 of the ITAA 1997 the disposal of a CGT asset causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity.
You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.
However, not all assets are subject to CGT. The CGT provisions contain various exemptions.
Deceased estate main residence exemption
Section 118-195 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that was acquired as a beneficiary or a trustee of a deceased estate if the specified conditions are met.
Where the deceased acquired the dwelling on or after 20 September 1985, any capital gain or loss is disregarded where:
• the dwelling was the main residence of the deceased just before their death, and not then used for the purpose of producing assessable income, and
• the dwelling is disposed of within two years of the deceased's death.
In your case, you satisfy the above conditions. Therefore any capital gain or loss made on the sale of the main residence is disregarded and not assessable income.
Holiday house
Under subsection 128-15(2) of the ITAA 1997, where an asset is acquired through a deceased estate the asset is taken to have been acquired on the date of death of the deceased.
Subsection 128-15(4) of the ITAA 1997 sets out modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.
Where assets of a deceased foreign resident are passed to the deceased's legal personal representative or a beneficiary and the asset is not taxable Australian property, the first element of the assets cost base (or reduced cost base) for the legal personal representative or beneficiary is the market value of the dwelling on the date of death (item 3A of subsection 128-15(4) of the ITAA 1997).
The holiday house is not taxable Australian property (as defined in section 855-15 of the ITAA 1997). Therefore for CGT purposes, you acquired the property at the market value.
The CGT provisions do not provide an exemption for the sale of the holiday house. Therefore your assessable income includes any capital gain.
However, as you sold the property soon after your relation's death for its market value, and the cost base and capital proceeds are the same, then your net capital gain is $0. Therefore you will not be liable to pay tax in relation to this property.