Edited version of private advice

Authorisation Number: 1051972792750

Date of advice: 7 November 2022

Ruling

Subject: Deceased estate - right to occupy

Question

If the trustee grants Child 1 the right to occupy the deceased's main residence pursuant to clause 14.2(i) of the testamentary discretionary trust deed, will Child 1 have a 'right to occupy the dwelling under the deceased's will' for the purpose of item 2(b) in column 3 of the table in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No,Child 1 does not have a 'right to occupy the dwelling [being the deceased's main residence] under the deceased's will' for the purpose of item 2(b) in column 3 of the table in subsection 118-195(1) of the ITAA 1997.

This ruling applies for the following period:

1 July 20YY to 30 June 20YY

1 July 20YY to 30 June 20YY

Relevant facts and circumstances

This private ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are different from these facts, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

•         Mr X (the deceased) died on DD MM YYYY.

•         Probate of the deceased's will was granted to Child 1 and the deceased's solicitor in MM YYYY.

•         The residue of the deceased's estate is left to the 2 of the deceased's children, Child 1 and Child 2 (in each case via a testamentary discretionary trust). The residue includes the deceased's main residence.

•         Child 1 has a desire to hold and not the deceased's main residence. They have been living there for X years and intends to continue to occupy the property as their main residence.

•         Child 1 and Child 2 have agreed in principle that Child 1 will buy the other sibling's 50% interest in the main residence from the deceased's estate. This means that following finalisation of the deceased's estate, Child 1 will own a 50% interest in the property directly. The remaining 50% interest in the property will be owned by the trustee of Child 1's testamentary discretionary trust.

•         There is no clause in the deceased's will that expressly gives an individual the right to occupy the property (or any other property).

•         Clause XX of Annexure 1 to the deceased's will (being the testamentary discretionary trust deed) states:

o   'Without limiting paragraph XY, the Trustees will have the power to do any of the following at any time, in any part of the world and on any terms as the Trustees deem fit in their absolute discretion:

(i) (Occupation and use of property) allow any Beneficiary to occupy, have custody of or use any chattels or immovable property for the time being forming part of the Trust Fund, on any terms or conditions as to inventories, repair, replacement, insurance, outgoings or otherwise that the Trustees deem fit and so that the Trustees will not be liable for any loss or damage that may occur to any such property during, or by reason of, any such occupation, custody or use except insofar as that loss or damage is occasioned by the conscious and wilful default or gross negligence of the Trustees;'

The scheme commences on:

1 July 20YY

Relevant legislative provisions

Subsection 118-195(1) Income Tax Assessment Act 1997

Detailed reasoning

Legislative background

1. Subsection 118-195(1) of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was the deceased's main residence just before they died and was not being used to produce assessable income (for dwellings acquired on or after 20 September 1985), or was acquired by the deceased before 20 September 1985.

2. The main residence exemption in subsection 118-195(1) of the ITAA 1997 is provided in limited circumstances. Among these include item 2(b) of column 3 of the table in subsection 118-195(1) which provides a main residence exemption if:

... the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of: ...

(b) an individual who had a right to occupy the dwelling under the deceased's will;

The meaning of 'right to occupy the dwelling under the deceased's will'

ATO interpretative decisions

3.              ATO ID 2003/109 explains the meaning of this term for the purposes of subsection 118-195(1) of the ITAA 1997 as follows:

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.

4.             ATO ID 2003/109 dealt with a situation whereby the deceased's will did not expressly grant a right to occupy a dwelling to a beneficiary. Instead, the executor and beneficiaries entered into a separate agreement to grant the beneficiary a right to occupy the dwelling. It was determined that this was insufficient to satisfy subsection 118-195(1) of the ITAA 1997. The beneficiary did not have a right to occupy the dwelling under the deceased's will; the right to occupy the dwelling arose by virtue of the separate agreement.

5.             In ATO ID 2004/882, the deceased's will expressly granted a right to occupy the dwelling to a beneficiary for a period of up to 18 months. After this period, the beneficiary continued to occupy the dwelling pursuant to an agreement between the trustees and beneficiaries until it was sold. It was determined that a partial exemption was available, reflecting the 18-month period in which the beneficiary occupied the dwelling under the deceased's will for the purposes of subsection 118-195(1) of the ITAA 1997 as a proportion of the total occupation period.

6.             On the basis of the above ATO interpretative decisions, the ATO view in relation to whether an individual has a 'right to occupy a dwelling under the deceased's will' pursuant to item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997 is satisfied where the deceased's will expressly grants a right to occupy the dwelling to the individual. A separate agreement negotiated between the trustee and beneficiaries to grant a right to occupy will not suffice.

Other ATO view documents

Paragraphs 1 and 3 of Taxation Determination TD 1999/74 Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997? (TD 1999/74)

7.             Paragraphs 1 and 3 of TD 1999/74 state:

1. In its context in subsection 118-210(1) of the Income Tax Assessment Act 1997, the preposition 'under' requires a connection between the trustee's acquisition of an ownership interest in a dwelling and the deceased's will. The connection required is not a strict one. ...

3.    The trustee also acquires an interest under the deceased's will if they acquire it in pursuance of the will or under the authority of the will (Evans v. Friedmann (1981) 53 FLR 229 at 238).

8.             In the Commissioner's view, the statutory context of item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997(1) requires that the meaning of the words 'under the will' cannot be considered without reference to the meaning of the phrase 'right to occupy the dwelling under the deceased's will', as explained above.

9.             Further, in Evans v Friedmann, the Federal Court considered the meaning of the word 'under' in a different legislative context, that being, in the context of the phrase 'under an enactment' in the Administrative Decisions (Judicial Review) Act 1997 (Cth).

Paragraph 21 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14)

10.          Paragraph 21 of TR 2006/14 states:

21. Importantly (in the context of this Ruling), a trustee of a trust may be able to disregard a capital gain or loss from certain CGT events happening to a dwelling occupied by an individual who was given a right to occupy the dwelling under the deceased's will: sections 118-195 and 118-210.

11.          In the Commissioner's view, this paragraph does not settle the meaning of the phrase 'right to occupy the dwelling under the deceased's will'. It does not provide any guidance as to whether its meaning, as explained above, can be extended to a discretion conferred on the trustee of a testamentary trust to grant a right to occupy the dwelling to a beneficiary. Further, the paragraph is qualified by the word 'may'.

12.          The ATO Interpretative Decisions noted in paragraphs 3 to 6 above were not withdrawn as a result of TR 2006/14 and were published prior to publication of the TR 2006/14. It is the Commissioner's view that the ATO Interpretative Decisions and the statements in the TR 2006/14 can co-exist and are not inconsistent.

Conclusion

13.          In summary, the Commissioner adopts an interpretation of the meaning of the phrase 'right to occupy the dwelling under the deceased's will' (for the purpose of item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997) that limits its application to specific named persons in the deceased's will. It does not extend to a trustee exercising a discretion to create a right to occupy the dwelling in favour of a beneficiary under a testamentary trust.

14.          Therefore, the Commissioner has determined that Child 1 does not have a right to occupy the dwelling [being the deceased's main residence] under the deceased's will for the purpose of item 2(b) of column 3 of the table in subsection 118-195(1) of the ITAA 1997.