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Edited version of private advice
Authorisation Number: 1051645361714
Date of advice: 11 March 2020
Ruling
Subject: Capital gains tax - deceased estate sale of replacement dwelling, not purchased under the terms of the will
Question
Does section 118-210 of the Income Tax Assessment Act of 1997 (ITAA 1997) apply to the sale of the replacement dwelling?
Answer
No
This ruling applies for the following period:
Year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The deceased passed away with a will. At the time of their passing they lived in dwelling A.
The Will created two testamentary trusts: one in relation to dwelling A and the other in relation to the residuary estate. The will did not vest any discretionary powers to the trustees nor give directions for the purchase of dwellings.
The life tenant lived in dwelling A pursuant to the will. However, the dwelling became unsuitable.
The Trustee of the deceased estate sold dwelling A and acquired dwelling B as a replacement dwelling.
The capital proceeds from the sale of dwelling A were not sufficient to meet the cost of the replacement dwelling.
The Trustee of the deceased estate and the life tenant contributed towards the acquisition costs for dwelling B.
The life tenant moved into dwelling B and then later to a nursing home from where she passed away.
Dwelling B was sold subsequently.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 118-210
Income Tax Assessment Act 1997 subsection 118-210(1)
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 section 128-15(2)
Reasons for decision
Summary
It is considered that section 118-210 of the ITAA 1997 does not apply to the sale of the dwelling B as it was not acquired under the authority of the deceased's will.
Detailed reasoning
Subdivision 118-B of the ITAA 1997 contains the rules for situations when capital gains and losses are ignored for main residence dwellings. There are special rules for dwellings that pass from or are owned by a trustee of a deceased estate.
Where a dwelling is acquired by a trustee in accordance with the will of the deceased for occupation by an individual, provided that the dwelling was the individual's main residence for the entire period, any capital gain or loss resulting from the disposal of the dwelling is disregarded (section 118-210 of the ITAA 1997).
In order for a dwelling to be acquired under a will there needs to be a connection between the will and the acquisition of the ownership interest. A life tenancy in the entire estate of the deceased which provides discretion for such portions of the expected share in the capital of the estate for any grandchildren towards the advancement and education of any such grandchild is not related to the purchase by the estate of a dwelling for a beneficiary.
A trustee may have general rights under State Trustee Acts to purchase a dwelling for the occupation by an individual. For example section 11 of the Trustees Act 1958 (Vic) provides the trustee power to purchase a dwelling house as residence for beneficiary. Similarly, section 38 of the Settled Land Act 1958 (Vic) may confer powers of sale and exchange to a life tenant of a settled land. These rights and powers are vested by the state legislations and not the deceased's will.
Therefore where a will is silent as to the right to occupy the dwelling of the deceased or any subsequent dwellings purchased by the trustee for the occupation of an individual, the requirements of section 118-210 of the ITAA 1997 will not be met.
In this situation, the deceased's will did not contain a provision that allowed for the purchase of a dwelling by the trustee for the occupation by any individual. The will of the deceased also did not confer upon the trustee an absolute discretion to deal with certain assets of the estate.
Consequently, it is considered that section 118-210 of the ITAA 1997 does not apply to the sale of the replacement dwelling as it wasn't acquired under the authority of the deceased's will for occupation by a named individual.
You are unable to disregard any capital gain made on the disposal of the replacement dwelling.