Edited version of your written advice

Authorisation Number: 1051179641409

Date of advice: 11 January 2017

Ruling

Subject: CGT - Main residence - Trust - Deceased Estate

Question 1

Will capital gains tax apply to the sale of the house (the property)?

Answer

Yes.

Question 2

Will the property be exempt on the basis of the circumstances under which it was purchased and occupied as a family home?

Answer

Yes.

Question 3

If capital gains tax is applicable to the sale of the property, can the cost base be increased for the payment of rates and taxes, insurance, repairs and maintenance, and improvements to the property?

Answer

Yes.

Question 4

If capital gains tax is applicable to the sale of the property, will any other exemptions apply and what is the applicable rate?

Answer

No.

This ruling applies for the following period:

20ZZ.

The scheme commences on:

19YY

Relevant facts and circumstances

The testator (the deceased), died on in 19XX.

The deceased died leaving a will.

A clause in the deceased's provided a share of the estate be held on trust for the maintenance education or benefit of that beneficiary.

In 19YY a house (the property) was purchased by the estate.

The beneficiary and their family occupied the house on the property as life tenants.

A rates notice shows significant improvement in the property's value.

The beneficiary paid the rates, taxes, and insurance, and has maintained and extended the dwelling.

You now propose to sell the property and the beneficiary and his family will move to a house purchased by his spouse.

The house has been the beneficiary's main residence and was not rented out.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 960-100

Reasons for decision

Question 1

Summary

The sale of the property constitutes CGT event A1.

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling.

In this case, the sale of the property constitutes CGT event A1.

Question 2

Summary

You are not eligible for the main residence exemption under section 118-110. You are eligible for the special main residence exemption under section 118-210.

Detailed reasoning

General Main Residence Exemption

When the relevant criteria are satisfied there is a main residence exemption available under subsection 118-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The main residence exemption provides that a capital gain or capital loss made by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period.

The taxpayer must be an individual to be eligible for the main residence exemption. The ITAA 1997 defines an individual to mean a natural person.

A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity. The trustee of a trust is taken to be an entity consisting of the trustee(s) at any given time.

However, if a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. Therefore, the reference in subsection 118-110(1)(a) of the ITAA 1997 to an individual is a reference to an individual acting in their personal capacity only. It does not include an individual in the capacity of a trustee.

Because the dwelling in this case was acquired by the individuals in their capacity as trustees, the condition in subsection118-110(1)(a) of the ITAA 1997 cannot be satisfied.

Therefore, the general main residence exemption does not apply. Accordingly, any capital gain or capital loss made from the disposal of the dwelling by the individuals in their trustee capacity will not be disregarded under section 118-110.

Special Main Residence Exemption - Trustee acquiring dwelling under will

A special main residence exemption under section 118-210 of the ITAA 1997 is available where, under a deceased person's will, the trustee of the deceased estate acquires an ownership interest in a dwelling for occupation by an individual.

A trustee acquires an ownership interest in a dwelling "under the will" of the deceased if the interest is acquired in accordance with the terms of the will or under the authority of the will.

Paragraph 1 of Tax Determination TD 1999/74 Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997? states as follows:

In its context in subsection 118-210(1) of the Income Tax Assessment Act 1997, the preposition 'under' requires a connection between the trustee's acquisition of an ownership interest in a dwelling and the deceased's will. The connection required is not a strict one.

Paragraph 2 of TD 1999/74 further elaborates the concept of acquiring ownership interest "under a will" as follows:

A trustee acquires an ownership interest in a dwelling under the will of a deceased person for the purpose of subsection 118-210(1) 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.

Acquisition of ownership interest in pursuance of the will or under the authority of the will is also a situation covered by TD 1999/74 which will qualify as acquiring "under the will".

There is no limit on the number of dwellings that may qualify for the concession. This section applies regardless of when the deceased died or acquired the interest in the dwelling, ie, whether pre or post CGT. It is also immaterial that the trustee's acquisition is not pursuant to a mandatory requirement in the will.

In this situation, the dwelling would be considered to have been purchased under the will. You would therefore be eligible for the special main residence exemption.

If the dwelling was used as the individual's main residence during only part of that period, a partial exemption will apply. The capital gain should be apportioned by taking into account the total non-main residence days and the total days during the period as per subsection 118-210(4).

Question 3

Summary

The cost base can include incidental costs incurred in acquiring the asset, non-capital costs of ownership, capital expenditure incurred to increase or preserve the asset's value, and any costs incurred to establish, preserve or defend your title to the asset.

Detailed reasoning

The cost base of a CGT asset consists of five elements. 

1. The total of any money you have paid to acquire the asset;

2. The incidental costs incurred in acquiring the asset (such as stamp duty and brokerage fees);

3. Non-capital costs of ownership (such as interest and costs of maintaining the asset etc);

4. Capital expenditure incurred to increase or preserve the asset's value; and

5. Any costs incurred to establish, preserve or defend your title to the asset.

You can include rates land taxes, insurance premiums, and repairs within the third element of your cost base, provided you have not claimed a tax deduction for them in any year, or did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

You can include the cost of improvements to the property within the fourth element of your cost base.

Once the cost base of the property has been established you will be required to subtract the cost base from any consideration received. In your case, you will only need to calculate the cost base if you are not eligible for a full main residence exemption as trustee(s) acquiring a dwelling under will.

Question 4

Summary

No other exemptions apply. You are eligible for the special main residence exemption.

Detailed reasoning

There is no separate tax on capital gains; it is merely a component of your income tax. A capital gain is included in your income tax return and forms part of your assessable income. Your assessable income is then taxed at your marginal tax rate.

In your case, no other exemptions apply as you are eligible for the special main residence exemption as trustee(s) acquiring a dwelling under will.