Edited version of your written advice

Authorisation Number: 1051323929292

Date of advice: 4 January 2018

Ruling

Subject: Capital Gains

Question 1

When the Property is sold by the Trustee of the Testamentary Trust will there be any capital gain or loss for the Trustee of the Testamentary Trust?

Answer

No

Question 2

Will there be a capital gain or loss made by the Trustee of the Testamentary Trust on the sale of the Replacement Property?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

1. A is married to B (the spouse).

2. A is the sole owner of a post Capital Gains Tax (CGT) residence (the Property).

3. The Property is A’s, and the Spouse’s, main residence.

4. A intends to execute a will that has the following attributes in respect of the Property:

If the Spouse survives A by more than 28 days:

a) A Testamentary Trust will be created over the Property for the benefit of the Spouse with an equitable interest in the Property as life tenant. (The interest will be free of any rental charges provided that the Spouse pays for all costs of occupancy, including rates and taxes, and pays for adequate building insurance and keeps the property in a reasonable state).

b) The Trustee of the Testamentary Trust may sell the Property and the proceeds will be applied to buy a replacement residence or a bond to enter a retirement village or a care facility (the Replacement Property). The Trustee will grant the Spouse an equitable interest in the Replacement Property as life tenant. The balance of the proceeds, after the sale of the Property and the purchase of the Replacement Property, will be distributed in equal shares to the Spouse and to the Testamentary Trust.

c) On the death of the Spouse the interest in the Property, or the Replacement Property, vests in the Testamentary Trust for the benefit of the Remainder Beneficiaries.

If the Spouse does not survive A by more than 28 days:

d) The interest in the Property will vest in the Testamentary Trust.

5. The tax agent for A provided a draft will with the intent to reflect the outcomes described in point 4 above. However the terms of draft will are ambiguous. This ruling can only be relied upon if the will that is executed reflects the outcomes and effects described in point 4 above.

6. Once the deceased estate has been administered the Trustee of the Testamentary Trust will hold the Property, or any Replacement Property, on trust for the beneficiaries in accordance with the will.

7. The Property will be the Spouse’s home (main residence) until the Property is sold or the Spouse dies.

8. If a Replacement Property is purchased by the Trustee, the Replacement Property will be the Spouse’s home (main residence) until the Spouse dies.

9. The Replacement Property is sold by the Trustee after the death of the Spouse.

Relevant legislative provisions

Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-55 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Section 104-90 of the Income Tax Assessment Act 1997

Section 116-30 of the Income Tax Assessment Act 1997

Section 118-195 of the Income Tax Assessment Act 1997

Section 118-210 of the Income Tax Assessment Act 1997

Subsection 128-15(2) of the Income Tax Assessment Act 1997

Subsection 128-15(4) of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Detailed reasoning

Consequences for the Trustee of the Testamentary Trust

When the administration of the Deceased’s estate is completed a trust (the Testamentary Trust) is created over the Property. This is a CGT event E1 (section 104-55 of the ITAA 1997). The capital loss or gain made by the Deceased is disregarded under section 128-10 of the ITAA 1997.

The legal title to the Property is taken to be acquired by Trustee of the Testamentary Trust at the date of death of the Deceased (subsection 128-15(2) of the ITAA 1997) for the market value of the property at the date of death (subsection 128-15(4) of the ITAA 1997).

If the Property is sold by the Trustee CGT event A1 will occur (section 104-10 of the ITAA 1997). If the sale occurs within two years of the Deceased’s death the Trustee’s capital gain or loss will be disregarded (section 118-195 of the ITAA 1997). Further since the Property is the Spouse’s main residence, from the time the Trustee acquired the Property to time of the sale of the Property, the Trustee will not make a capital gain or loss from the sale of the Property (section 118-210 of the ITAA 1997).

Question 2

Detailed reasoning

The Trustee of the Testamentary Trust purchases the Replacement Property from the proceeds of sale of the Property. The will of the Deceased requires a trust to be created over the Replacement Property for the benefit of the Spouse during their life and for the remainder interest holders on the death of the Spouse.

There will be consequences under Part 3-1 and Part 3-3 of the ITAA 1997 for the Trustee of the Testamentary Trust arising from:

● the creation of the interest (the trust over the Replacement Property);

● the death of the Spouse;

Consequences for the Trustee of the Testamentary Trust on creation of the interest

The creation of a trust over the Replacement Property is a CGT event E1 (section 104-55 of the ITAA 1997.

The Trustee will need to work out any capital gain or loss under section 104-55 of the ITAA 1997.

Subsection 104-55(4) of the ITAA 1997 applies because, while the Spouse is alive, no beneficiary is absolutely entitled to Replacement Property due to the Spouse having an equitable life interest in the Replacement Property. Therefore, the first element of the cost base and the reduce cost base will be the Replacement Property’s market value when the trust was created.

Since no capital proceeds were received by the Trustee for the creation of the Trust over the Replacement Property, the capital proceeds received by the Trustee is taken to be the market value of the Replacement Property (section 116-30 of the ITAA 1997).

The capital gain or loss made can be worked out under subsection 104-55(3) of the ITAA 1997. Given the cost base and capital proceeds are both based on the market value of the Replacement Property at the time the trust was created any capital gain or loss is likely to be minimal.

Consequences for the Trustee of the Testamentary Trust on death of the Spouse

When the Replacement Property is sold by the Trustee CGT event A1 will occur (section 104-10 of the ITAA 1997) in respect of the legal ownership interest held by the Trustee.

There is no exemption under section 118-195 of the ITAA 1997 because the Replacement Property had not been the Deceased spouse’s dwelling.

However section 118-210 of the ITAA 1997 will apply to allow a partial exemption for the period the Spouse occupied the Replacement Property as their main residence. This section applies where a trustee acquires an ownership interest in a dwelling for the occupation by an individual (in this case the Spouse). A full exemption is allowable if the Trustee receives money in relation to a sale of the Replacement Property and the Replacement Property is used as the Spouse’s main residence from the time the Trustee acquired the property until it is sold.

The Replacement Property will cease to be the Spouse’s main residence at the date of their death and therefore a full exemption will not apply. However the capital gain or loss will be reduced based on the percentage of days the Replacement Property was the Spouse’s main residence. The capital gain or loss is to be calculated using the formula in subsection 118-210(4) of the ITAA 1997.