Edited version of your written advice

Authorisation Number: 1051191412933

Date of advice: 15 February 2017

Ruling

Subject: Capital gains tax and deceased estate

Question 1

Is the sale of the property held by the Estate exempt from capital gain tax (CGT) due to one of the beneficiaries living in the house until it was settled?

Answer

No.

Question 2

Is any gain included on the Estates income tax return?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20ZZ

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died in 20WW.

The deceased purchased a property in late 19TT and become the sole owner after the deceased spouse passed away in 19UU.

The deceased resided in the house, as their main residence, from late 19TT to 20VV.

In 20VV, the deceased moved into a nursing home.

A beneficiary resided in the property from birth until the property was sold. This was not expressed in the deceased will.

Another beneficiary is a non-resident.

Two out of the three beneficiaries, become legal representatives of the property on the mid 20XX.

The property was sold with a settlement date of mid-late 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 98(3),

Income Tax Assessment Act 1936 subsection 98A(1),

Income Tax Assessment Act 1936 subsection 98A(2),

Income Tax Assessment Act 1997 subsection 118-145

Income Tax Assessment Act 1997 subsection 118-195

Income Tax Assessment Act 1997 subsection 118-200

Income Tax Rates Act 1986 section 12(6)

Reasons for decision

CGT exemption for dwelling acquired from a deceased estate

If a dwelling owned by a deceased person passes to an individual as a beneficiary of a deceased estate or as the trustee of a deceased estate, a capital gain or capital loss made on disposal of the dwelling may be disregarded if certain conditions are met (section 118-195 of the ITAA 1997).

A full exemption may be available if:

● the dwelling was, from the deceased's death until the ownership interest ends, the main residence of one or more of the following relevant individuals:

● the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

● an individual who had a right to occupy the dwelling under the deceased's will, or

● an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or

● the ownership interest ends within two years of the deceased's death.

In regard to what constitutes a right to occupy a dwelling under a will, ATO Interpretive Decision ATO ID 2003/109 states that:

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 (see Evans v. Friemann (1981) 53 FLR 229 at 238).

In this case, the beneficiary had no right under the will to reside in the house. The beneficiary resided in the house because the executors and other beneficiaries so agreed.

This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention (see Certoma, GL 1987, The Law of Succession in New South Wales, The Law Book Company, Sydney, p. 117).

This case is similar to your situation. The deceased did not express in the will that a beneficiary may continue to reside in the premises until the property was disposed of. Therefore the Commissioner deems that this beneficiary did not have a right to continue to occupy the property. Therefore the relevant criterion for a CGT exemption under section 118-195 of the ITAA 1997 is not met.

Section 118-200 of the ITAA 1997 also provides a partial exemption in certain circumstances.

However in your case, no partial exemption applies as the estate remained the owner of the property. Therefore any capital gain made on the sale of the property is fully assessable to the deceased estate.

Obligations of the Estate

The executor is required to lodge a return where the deceased estate:

● earns any amount of income including capital gains

● receives franked dividends (after the date of death) and they want to claim franking credits

● receives income from which tax has been withheld, or

● has carried on a business.

The rates that apply to income the deceased estate declares depend on the period of time after the person's death. The rates of tax for trustees found the Income Tax Rates Act 1986 (ITRA 1986).

For the first three income years, the deceased estate income is taxed at the individual income tax rates, with the benefit of the full tax-free threshold, but without the tax offsets, such as the low-income tax offset. No Medicare levy is payable. You cannot extend this concessional period of three tax years.

In this case, the tax free threshold is not available, as it only applies to the first three deceased estate trust tax returns. The relevant rates of tax for trustees are found in section 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 of the ITRA 1986.

Furthermore, if a beneficiary is presently entitled is a non-resident of Australia for tax purposes, the trustee is liable to pay tax on their share of the trust income at the non-resident tax rates.

However tax assessed to a trustee in relation to a non-resident beneficiary is generally not a final tax. If the trustee is assessed under subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of an individual beneficiary, those beneficiaries are assessed under subsection 98A(1) of the ITAA 1936 and allowed a credit under subsection 98A(2) of the ITAA 1936 for tax paid by the trustee.

Non-resident beneficiaries will need to know the amount of:

● interest in their distribution and the withholding tax paid

● unfranked dividends in their distribution and the withholding tax paid

● franked dividends in their distribution

● tax you have paid on their behalf.

Therefore in your case, if the estate has made capital gain in the 20YY-ZZ financial year, then the executor is required to lodge a return for the deceased estate. As a beneficiary is an individual non-resident beneficiary, and is presently entitled to the distribution, the trustee is liable to pay tax on their share of income. However the non-resident beneficiary is also required to lodge a return but will be allowed a credit for tax paid by the trustee.

Further issues for you to consider

As the sale of the property is not exempt from CGT you have requested to know if an individual beneficiaries' share of the proceeds be exempt from CGT. As the proceeds of the sale are to be paid to the estate then distributed to beneficiaries, an individual beneficiary is unable to have their share of the gain exempt from CGT as the CGT is to be paid by the estate in full. That is, the CGT event has occurred to the deceased estate and not the beneficiaries.