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Edited version of your written advice
Authorisation Number: 1013038536969
Date of advice: 23 June 2016
Ruling
Subject: 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 deceased's property exempt from tax under the capital gains tax (CGT) provisions?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The deceased lived overseas.
They built and owned a property which was their main residence before later moving into an aged care facility. The property was then left vacant.
The deceased later passed away.
The property has since been sold by the executors of the estate. Settlement occurred within two years of the deceased's passing.
Proceeds from the deceased's life insurance payout, as well as their bank accounts also passed to the estate.
The remaining proceeds were then distributed to you as the sole beneficiary of the estate.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 6-5
Income Tax Assessment Act 1936 - Section 99B
Income Tax Assessment Act 1997 - Section 6-15
Income Tax Assessment Act 1997 - Section 118-195
Income Tax Assessment Act 1997 - Section 108-5
Reasons for decision
On the death of a person, the property of the deceased passes to their estate and legal control is exercised by an executor or administrator. Taxation Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates, discusses tax issues in relation to deceased estates and deals with the issue of who is presently entitled to the income of the deceased estate during the stages of administration.
In your situation, the administration of the estate is finalised and you are the sole beneficiary. It is therefore necessary to determine if any of the proceeds you received from the estate are assessable income. Broadly, your assessable income consists of your ordinary income and statutory income (including any capital gains) but excludes exempt income.
Bank accounts and life insurance
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 is therefore not assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). In addition, corpus from a deceased estate is not assessable under the statutory provisions of the taxation legislation either (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, you will not be required to pay any Australian tax on the receipt of these funds.
Disposal of property
Generally, the assessable income of an Australian resident also includes income from the sale of CGT assets, subject to certain exemptions.
A capital gain or capital loss may arise if a 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. Accordingly, the deceased's former main residence is a CGT asset. Under section 104-10 of the ITAA 1997 the disposal of a CGT asset triggers CGT event A1.
Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you own a dwelling in your capacity as trustee of a deceased estate (or if it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:
• the property was acquired by the deceased before 20 September 1985, or
• the property was acquired by the deceased 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
• your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).
You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).
In this case, the property was the deceased's main residence until they moved into an aged care facility in 2XXX. The property was then left vacant until the deceased later passed away in 2XXX. The property has since been sold with settlement occurring within two years of the deceased's death. Accordingly, any capital gain or loss made on the sale of the property can be disregarded and is not included in your assessable income.