Edited version of your written advice

Authorisation Number: 1051461288478

Date of advice: 29 November 2018

Ruling

Subject: Capital gains tax – deceased estate and passing of an asset

Question 1:

Was the Estate of the late Deceased the owner of the Property for capital gains tax purposes at the time of sale?

Answer:

No.

Question 2:

Will the Estate of the Deceased be required to include any capital gain or capital loss made on the sale of the Property under section 104-10 of the Income Tax Assessment Act 1997?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 2019.

The scheme commences on:

1 July 2018.

Relevant facts and circumstances

The Deceased made their will prior to 20 September 1985 which outlined that:

● Person A, being their spouse, and Person B, being their child, were to be appointed as the executors of their will and trustees of their estate; and

● Person A had a life interest in the Deceased’s principle residence owned by them at the date of their death, which would at the end of the life interest go to Person B, being the remainder beneficiary.

After 20 September 1985, the Deceased purchased a property (the Property) in which they and Person A resided until the Deceased passed away a number of years later.

Person A continued to reside at the Property following the passing of the Deceased.

No action was taken by either Persons A or B to administer the Deceased’s estate for more than twenty years from the date the Deceased passed away.

Person A was under a State Civil and Administrative Tribunal administration order and a number of years after the Deceased passed away, you were appointed as Person A’s administrator.

Person A had moved from the Property into an Aged Care facility shortly after you were appointment as their administrator.

Person A made the absence choice to continue to treat the Property as their main residence after they moved out of it.

The Property remained vacant after Person A moved out and was in a derelict condition.

After a number of years you sent a letter to Person B advising them to obtain a grant of probate of behalf of the Deceased’s estate.

Person A continued to reside at the Aged Care facility until they passed after a number of years.

In accordance with the Deceased’s will, the Property passed to Person B for their use and benefit absolutely.

A number of months after Person A passed away, Person B sent a letter to you advising that they did not accept the Deceased’s will, or being executor of the Deceased’s estate and wished to revoke any claims to the Property.

More than 12 months later, you contacted Person B’s solicitor seeking Person B’s authority for you to administer the Deceased’s estate.

You contacted Person B after a number of months to obtain authority to administer the Deceased’s estate, however Person B did not respond.

After a period of months you sent a letter to Person B to advise them of your intention to apply for the grant of the Deceased’s estate.

You engaged the services of a party to provide retrospective market values for the Property. An inspection of the Property was undertaken with the values provided as follows:

● Date Deceased passed away - Property valued at $XX,XXX; and

● Date Person A passed away – Property valued at $XXX,XXX.

Probate for the Deceased’s estate was granted.

In the following month you sent a letter to Person B requesting the withdrawal of the caveat they had put over the Property, which was removed. (Lodging the caveat indicates that Person B continued to have claims over the Property and did not revoke them.)

A number of further caveats had previously been put over the Property which required you to lodge separate applications to have them withdrawn, with all caveats being withdrawn in the year after probate was granted, which provided a clear title to the Property.

You took possession of the Property and commenced the process of putting the Property on the market by engaging the services of a real estate agent more than six months after probate was granted, who put the Property on the market shortly after their services were engaged.

A contract of sale was drawn and clearance from the State Revenue Office was obtained.

In the month after the Property was put on the market a contract of sale for the Property was entered into for the amount of $XXX,XXX, with settlement on the sale occurring after a short period.

The Executor Services Distribution Schedule Approval Form provides the following information:

● the Property was the only asset in the Deceased’s estate and had to be sold to pay for all testamentary expenses, debts/liabilities, fees, commissions and other legal expenses of the Deceased’s estate;

● the Legatee was to receive net residue of the proceeds of sale after all estate expenses;

● Person B is listed as the absolute beneficiary; and

● particulars of entitlement were listed as the net residue of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Subsection 109-5(1)

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1936 Section 95

Income Tax Assessment Act 1936 Section 97

Reasons for decision

Capital gains tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

CGT event A1 under section 104-10 of the ITAA 1997 happens if your ownership interest in a CGT asset is disposed of.

The effect of section 106-50 of the ITAA 1997 about absolutely entitled beneficiaries

Ordinarily, the CGT event happens to the legal owner of the CGT asset, but this outcome is altered where the legal owner holds the CGT asset on trust for an absolutely entitled beneficiary.

Draft Taxation Ruling TR 2004/D25 (TR 2004/D25) discusses the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the ITAA 1997.

Paragraphs 21 and 22 of TR 2004/D25 state that a beneficiary has all the interests in a trust’s asset if no other beneficiary has an interest/s in the asset. Such a beneficiary will be absolutely entitled to that asset as against the trustee for CGT purposes if the beneficiary can, ignoring any disability, terminate the trust in respect of that asset by directing the trustee to transfer the asset to them to transfer it at their direction.

Requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied if there are multiple beneficiaries in respect of a single asset, such as a property, as those beneficiaries would be entitled to a part of the asset and not the whole of the asset.

A beneficiary that is absolutely entitled to a CGT asset as against the trustee will be treated as the owner of the asset if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA 1997 stating that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset.

Then, the beneficiary and not the trustee will be required to account for any capital gain or capital loss made on the disposal of the asset in the calculation of their net capital gain or loss to be included in their taxable income.

Because the beneficiary is the relevant taxpayer, that capital gain or capital loss is included in the beneficiary’s income calculation and is not included in the net income of the trust under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936).

CGT consequences of creating life and remainder interest in a property

Taxation Ruling TR 2006/14 (TR 2006/14) discusses the consequences of creating life and remainder interests in property and of later events affecting those interests. It is stated in the Ruling that the death of the person by whose life a life interest is measured will cause the life interest to end. Upon the death of the life interest, there will be no CGT consequences for the remainder owner, who will not acquire any asset from the life interest owner, instead the remainder owner’s interest is merely enlarged with no additional amount being included in the first element of the cost base of the remainder owner’s asset.

Paragraph 63 of TR 2004/D25 states that a remainderman will not be absolutely entitled until the death of the life tenant, or the surrender by the life tenant of their interest. Until then the remainderman cannot demand the transfer of the whole of the asset to them because it would defeat the interest of the life tenant.

In the context of a trust involving a life tenant and remainder beneficiary, Taxation Determination TD 93/35 indicates that a remainder beneficiary may become absolutely entitled to an asset on the death of a life tenant.

Whether or not a remainder beneficiary becomes absolutely entitled to an asset at the time of death of a life tenant, or, if more than one life tenant at the time of death of the last surviving life tenant, will depend on the terms of the particular trust deed.

Note that CGT events E5 to E7 do not apply to a trust to which Division 128 of the ITAA 1997 applies.

A beneficiary of a deceased estate does not have an interest in any asset of the estate, and therefore cannot be considered absolutely entitled to any of the estate’s assets, until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased’s debts and liabilities have been paid.

Passing of asset to beneficiary of deceased estate

Division 128 of the ITAA 1997 deals with the effect of death, and sets out what happens when a capital gains tax (CGT) asset that a deceased person owned just before their death devolves to their legal personal representative, or passes to a beneficiary in their estate.

Section 128-10 of ITAA 1997 provides that when a person dies any capital gain or loss that results from CGT assets they owned just before their death can be disregarded.

Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative or beneficiary is taken to have acquired the asset on the day the deceased person died. Any capital gain or capital loss that the legal personal representative makes if the assets passes to a beneficiary is disregarded (subsection 128-15(3) of the ITAA 1997).

Section 128-20 of the ITAA 1997 provides that a CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary 'becomes the owner' of the asset under the will of the deceased person, or in one of the other ways outlined in that provision. This is supported by the comments in Taxation Determination TD 2004/3 which states that an asset can pass to a beneficiary either by the transfer of legal ownership to the beneficiary or, if the beneficiary becomes absolutely entitled to the asset as against the trustee. This applies regardless of whether the asset is later transferred to the beneficiary. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes passing dependent on the acquisition of legal title.

Any capital gain or capital loss made by the trustee of a deceased estate, or legal personal representative (LPR), is disregarded if an asset of the estate passes to a beneficiary in accordance with section 128-20 of the ITAA 1997 and the CGT event occurs after it has passed.

For the purposes of applying Division 128 of the ITAA 1997, trustees of testamentary trusts are treated in the same way as a LPR (Law Administration Practice Statement PS LA 2003/12).

Administration of deceased estates

A fiduciary obligation is assumed by the executor/administrator on the death of the taxpayer in favour of the beneficiaries of the estate. At that time, the beneficiaries of the estate have no interest in the assets of the estate, although they do have a beneficial interest to see that the estate is properly administered.

Even though a will may provide beneficiaries with absolute or indefeasible interests in the assets of an estate, under state laws those interests cannot crystallise at least until probate has been granted.

Taxation Ruling IT 2622 (IT 2622) outlines the income tax liabilities of executors or administrators, and of beneficiaries under the estates of deceased persons during the stages of administration of deceased estates.

For simplicity, Paragraph 6 of IT 2622 illustrates the period of administration of the estate of a deceased person as follows:

DATE OF DEATH

STAGES OF ADMINISTRATION

(i) Burial of deceased.

(ii) Executor appointed by will or administrator appointed by Court.

(iii) Probate applied for and granted by Court.

(iv) Assets vest in executor who pays debts and testamentary expenses:

● Initial stage - net income of estate is applied to reduce debts, etc.

● Intermediate stage - part of the net income of estate that is not required to pay debts, etc., may be paid to beneficiaries.

● Final stage - debts, etc., are paid or provided for in full and net income of estate is available for distribution.

ADMINISTRATION OF ESTATE IS COMPLETE

The administration of the estate does not have to reach the stage where the estate is wound up for beneficiaries to enjoy present entitlement to the income of the estate. Once the executor has provided for all debts incurred by the deceased before his or her death and for debts incurred in administering the estate (ie funeral expenses) and provided for distributions of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy these demands on the estate.

The point may be reached during the intermediate stage of administration of the deceased estate as outlined at Paragraph 6 of the IT 2622 where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor's discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.

Section 97 of the ITAA 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

The net income of the trust estate and whether any beneficiary is presently entitled is determined on the last day of each income year (being 30 June). This means that, on the last day of the income year, a beneficiary who is presently entitled will be assessed on their share of the net income for the whole of the income year.

Application to your situation

The Deceased owned the Property prior to the date they passed away. In accordance with the Deceased’s will the Property was held under a testamentary trust subject to a life interest held by Person A.

In this case the following occurred:

● in accordance with the Deceased’s will when Person A passed away Person B held the remainder interest in the Property. At that time Person B was the only beneficiary who had an interest in the Property; and

● probate was granted a number of years after Person A passed away.

Probate for a deceased estate would in most circumstances have been applied for and granted in a more expedient manner. In this case probate was not granted until a number of years after Person A passed away. Person B became absolutely entitled to the Property at the later of either Person A passing away or when probate was granted.

As discussed above in TR 2004/D25 and IT 2622 and TD 2004/3, a beneficiary of a deceased estate cannot become the owner of assets of the deceased at least until probate is granted. In this case, Person B as the remainderman and sole beneficiary of the Property under the Deceased’s will became absolutely entitled to the Property at the time probate was granted. At that time the Property is viewed as having ceased being an asset of the deceased estate and passed to Person B for CGT purposes.

The subsequent sale of the Property organised by you resulted in a CGT event A1 occurring. Once Person B became absolutely entitled to the Property for CGT purposes, your actions in relation to the Property are deemed to be the actions of Person B under the operation of section 106-50 of the ITAA 1997. As a result, any capital gain or capital loss made on the sale of the Property was made by Person B and not you as it was his asset that was sold for CGT purposes.

The first element of the cost base of the Property is its market value at the date the deceased passed away because it was her main residence at just prior to that time.

Under subsection 128-15(5) of the ITAA 1997, a beneficiary can include in the cost base of the asset any expenditure that the LPR (executor/trustee) would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the date that the trustee incurred it.

There is no taxation obligation for you to provide information about the Property, to Person B. However, we would consider that there is a fiduciary obligation for you as trustee as part of the management and administration of the deceased estate.

It would be reasonable to expect you as a trustee of a deceased estate to provide relevant details of costs incurred in relation to the Property that you know of, or are aware of, to Person B to ensure they can take them into consideration when determining whether a capital gain or capital loss on the sale of the Property has occurred. Such information could include the costs involved with the sale of the asset, gross sale proceeds, costs of transferring the title of the Property, rates incurred in relation to the Property and any other information about expenses that is relevant for Person B to calculate the capital gain or capital loss on the sale of the Property.