Edited version of private advice

Authorisation Number: 1051514143799

Date of advice: 22 May 2019

Ruling

Subject: Capital gains tax

Question

Is any capital gain or capital loss Beneficiary A made from the sale of this interest in Property A disregarded?

Answer

Yes

This ruling applies for the following period:

20XX-XX income year

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

The First Deceased died some XX years ago.

The First Deceased was survived by a spouse (the Second Deceased) and two children (Beneficiary A and Beneficiary B). They were the only people entitled to share in the proceeds of the First Deceased's Estate.

Probate of the First Deceased's Will was granted to an Executor.

The Executor died some years later and probate of this Will was granted to a company.

All parties entered into an agreement some XX years ago to finalise the First Deceased's Estate. The agreement provided that the company was to pay the net proceeds from the sale of a property held in the Estate to the Solicitor's trust account.

Further, the parties agreed that the entire net proceeds were to be gifted to the Second Deceased to be used to acquire a residence. In doing so, the Second Deceased agreed that the whole of the estate upon the Second Deceased's death would be payable equally to Beneficiary A and Beneficiary B.

The Second Deceased used the funds to acquire Property A (land with a dwelling). The land area of Property A is less than two hectares.

At the time of settlement of Property A, the solicitor recommended that Beneficiary A and Beneficiary B register their names on the title to ensure that the Second Deceased's Estate would be protected in the event of the Second Deceased's death and declining mental capacity.

The Second Deceased occupied Property A as the main residence from purchase until moving into a nursing home some five years ago and then started renting it.

Any benefits arising from Property A were held solely for the Second Deceased. That is, at all times the Second Deceased had a vested, indefeasible and absolute entitlement to Property A as against Beneficiary A and Beneficiary B acting in their capacities as bare trustees.

The Second Deceased was solely responsible for payment of all property expenses and receipt of all rental income, with Beneficiary A and Beneficiary B having no beneficial ownership in Property A and required to act in accordance with the Second Deceased's wishes regarding Property A.

The Second Deceased chose to continue to treat Property A as the main residence after moving out of it. (The Second Deceased made the absence choice.)

Some two years ago, the Second Deceased died with Property A forming part of the Second Deceased's Estate.

Property A was transferred to Beneficiary A and Beneficiary B as beneficiaries of the Second Deceased's Estate and then sold and the net proceeds were split equally between Beneficiary A and Beneficiary B in accordance with the Second Deceased's Estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Subsection 118-190(3)

Income Tax Assessment Act 1997 Subsection 118-190(4)

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Summary

Any capital gain or capital loss Beneficiary A made from the sale of this interest in Property A is disregarded.

Detailed reasoning

CGT event A1 happened due to the sale of Beneficiary A's interest in Property A in the 2017-18 income year.

Any capital gain or capital loss Beneficiary A made from the sale of this interest in Property A is disregarded because:

·         Beneficiary A is an individual and the interest passed to the Beneficiary as a beneficiary in the Second Deceased's Estate

·         The Second Deceased acquired the ownership interest after 20 September 1985 and Property A was the main residence just before the Second Deceased died and was not then being used for the purpose of producing assessable income, and

·         Beneficiary A's ownership interest ended within two years of the Second Deceased's death.

The Second Deceased's ownership for capital gains purposes

Property A was actually owned by the trustees of a trust with the Second Deceased as sole beneficiary of this trust. The trust was wound up and Property A transferred to the Second Deceased's Estate on the Second Deceased's death.

The capital gains provisions treated the Second Deceased as the owner of Property A for capital gains purposes as the Second Deceased was the absolutely entitled beneficiary of it as against the trustees.

The Second Deceased treating Property A as the main residence using the absence choice

The Second Deceased has made the absence choice to Property A which applied from the date vacated until the Second Deceased's death meaning that Property A was the Second Deceased's main residence for capital gains purposes just before the Second Deceased's death.

The Second Deceased's use of Property A to earn assessable income during this period is ignored for capital gains purposes because the absence choice was in effect.