Edited version of private advice

Authorisation Number: 1051982854358

Date of advice: 15 June 2022

Ruling

Subject: CGT - main residence (deceased estate, CGT beneficiaries)

Question

Can the capital gain or loss from the sale of the Property to Child A be disregarded by the deceased estate?

Answer

No

This private ruling applies for the following period:

Income year ended 30 June XXXX

Income year ended 30 June XXXX

The scheme commences on:

XX April XXXX

Relevant facts and circumstances

On XX April XXXX, the Deceased purchased a Property for $XXX,XXX.XX.

The Property was the Deceased's main residence.

The Deceased passed away several years ago. The Deceased was an Australian tax resident.

The Deceased left a Will but was misplaced for several years after the date of death. The Will named Person A and Person B as Executors.

A copy of the Draft Affidavit of Delay filed for Person A and Person B was provided.

Probate was granted on XX July XXXX to the joint executors appointed under the Will.

The Will directs the Trustees to distribute the residuary estate to the spouse and children of the Deceased in equal shares in tenants in common.

X beneficiaries of the Will were not agreeable to the proposed transfer of various properties as summarised in the Probate.

After a dispute, which took a very long time to resolve, a Settlement Agreement (Agreement) was agreed between the Parties. The Agreement dated XX/XX/XXXX is partly reproduced below:

Recitals to the Agreement include:

The Property is to be sold to Child A on the following terms within X period after the date of this Agreement:

1. the purchase price is to be the current market value of the Property determined as follows:
   1. Child B to nominate X registered valuers;
   2. Child A to choose one of the X registered valuers
   3. Child B and Child A jointly instruct the chosen valuer to determine the current market value of the Property (the valuation date being the date of inspection of the Property by the chosen valuer)
2. Within X business days of the market value of the Property being determined Child A and the Executors will enter into a contract for sale of the Property (the Contract).
3. such contract to contain the usual terms and conditions of contracts for sale of land in State A.
4. The date for completion of the Contract will be X after earlier of the following:
   1. the day that Child A receives an amount of dividends (in total) from the voluntary liquidations, that is equal to or exceeds the balance of the purchase price under the Contract; or
   2. the day that Child A receives the last of the dividends from the voluntary liquidations.
5. For the avoidance of doubt, from the date of the Contract, Child A will be considered to have taken early possession of the Property, and standard clause 18 of the Law Society Contract for Sale will apply. Child A will pay all outgoings of the Property but shall not be required to pay any rent or licence fee.

The Executors are to apply the proceeds received from the sale of the Property as follows:

1. the Executors shall be paid their proper costs of administering the Estate
2. the Executors shall pay all the governmental taxes, duties and other imposts payable in connection with the Estate and/or its administration;
3. the Executors may retain such reasonable sum from the proceeds of sale as they consider necessary for the purpose of making the payments required;
4. the balance is to be distributed expeditiously among all Beneficiaries equally; and
5. any money retained that the Executors reasonably conclude is not, or is no longer, necessary for the purpose of making payments required to be distributed.

A copy of the front page of the Contract for the sale and purchase of the Property shows Vendor Person A and Person B as joint Executors of the Estate, Purchaser Child A, Price $X,XXX,XXX, Contract date XX/XX/XXXX.

Child A and his family moved into the Property some time ago before the Deceased passed away. They are still residing in the Property.

The Property has never been income producing.

Child A has never paid rent to the Deceased.

Child A was not granted a right to occupy the dwelling under the Will.

Child A pays for the utilities, Council rates, insurance and upkeep of the Property. Child A has the receipts and tax invoices.

A recent Council Rates notice is addressed to the Deceased. The name on the Property had not been changed nor notified to the Council so as to reflect the deceased's Estate.

The Estate has not been fully administered. Liquidation of the Estate's group of companies is in the process of liquidation.

A letter was provided by Person C dated XX/XX/XXXX has been reproduced in part as follows:

• Child A arranged a solicitor to peruse the contract of sale and the legal matters in respect of the purchase. When the sale was completed, Child A organised the property to be painted, carpets replaced, installation of a central heating system and tradespeople for the repairs on the property.
• Child A's parents were elderly. The deceased requested for Child A and family to move into the Property.
• Child A moved into the Property prior to the deceased's death.
• The intention of the deceased was for Child A to take over the residence after death.
• The Property was Child As principal place of residence prior to the passing of the deceased.
• Child A did not have any other home to this date and all utility bills of the property have been in Child A's name, all family documents are at the Property as they do not have another place of residence.
• Child A paid no rent to the estate, paid all the bills of the property and the up keeping of the property.
• The Estate has been complex as there were X other companies with assets that were recently sold and a liquidator appointed to wound up the entities.
• A market price had to be placed on the Property to ascertain Child A's balance of the estate distribution with the other X beneficiaries.

A Statutory Declaration dated XX/XX/XXXX from Person B and a Statutory Declaration dated XX/XX/XXX from Person A

A copy of the Deed of Mutual Recission of Contract rescinds the Contract for the sale and purchase of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 118-195

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

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Subsection 128-20(2)

Reasons for decision

A capital gain or loss is made as a result of a CGT event happening to a CGT asset (section 102-20 of the ITAA 1997).

CGT event A1 occurs when your ownership interest in a CGT asset is transferred to another entity (section 104-10 of the ITAA 1997).

Beneficiaries and CGT assets

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative or to a beneficiary in a deceased estate.

Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the legal personal representative (LPR) makes if the asset passes to a beneficiary in your estate is disregarded.

Under section 128-20 of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

1. under your will, or that will as varied by a court order; or
2. by operation of an intestacy law, or such a law as varied by a court order; or
3. because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or
4. under a deed of arrangement if:
   1. the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and;
   2. any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other *CGT assets that formed part of your estate.

(It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your *legal personal representative)

A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LPR transfers it under a power of sale (subsection 128-20(2) of the ITAA 1997).

Application to your situation

As referenced above, Division 128 of the ITAA 1997 contains the rules that apply when an asset owned by a person just before they die, passes to their LPR or to a beneficiary in a deceased estate. A CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your LRP transfers it under a power of sale.

The Property was listed as an asset owned solely by the deceased.

We considered the Deed and whilst it rescinds the Contract, it does not change the Agreement. Child A will receive full ownership interest in the Property by buying it from the deceased estate, subject to a payment by Child A.

A buyer of an asset who is a beneficiary under the Will does not acquire the asset in their capacity as a beneficiary but as a purchaser. Therefore, the Property does not pass to Child A as a beneficiary as Child A is purchasing the asset from the deceased estate under the Agreement.

The requirements of section 128-20 of the ITAA 1997 are not satisfied. Therefore the trustees are unable to disregard any capital gain or loss made on the disposal.

Main residence requirements

Under section 118-195 of the ITAA 1997, a capital gain or capital loss that you make from a CGT event that happens to a dwelling is disregarded if you are an individual and the interest passed to you as a beneficiary in a deceased estate or you owned it as the trustee of a deceased estate, and:

• The deceased acquired their ownership interest in the dwelling prior to 20 September 1985, or
• The deceased acquired their ownership interest on or after 20 September 1985 and the dwelling was their main residence just before they passed away and was not then being used to produce income;

And either one of the following conditions also applies:

• Item 1 - Your ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner; or
• Item 2 - The dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:
  1. the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or
  2. An individual who had a right to occupy the dwelling under the deceased's Will; or
  3. If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary-that individual

Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contact of sale and not at the time of entering the contract.

Application to your situation

The Property was acquired by the Deceased after 20 September 1985 and was being used as the Deceased's main residence just before they passed away. The Property was not then being used to produce income.

The ownership interest did not end within two years of the deceased's death. The Property will not be sold for a very long time after the Deceased's death.

The residents of the Property at the time of the deceased's death were Child A and family. No persons had a right to occupy the Property under the Deceased's Will.

Item 2(c) only applies to a CGT event which happens to an individual to whom the ownership interest 'passed' as a beneficiary, within the meaning of section 128-20 of the ITAA 1997. Item 2(c) cannot apply where the relevant ownership interest did not 'pass' to the individual as a beneficiary, but as a purchaser (see section 128-20(2) of the ITAA 1997)

Therefore, the requirements of the full main residence exemption under section 118-195 of the ITAA 1997 are not met.

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 Income tax: capital gains: 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 Income Tax Assessment Act 1997 provides the Commissioner's view on what is meant by absolute entitlement.

TR 2004/D25 states at paragraph 10 that:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset.

At paragraph 13 of TR 2004/D25 it states that a beneficiary of a deceased estate cannot be absolutely entitled to a CGT asset prior to completion of its administration.

Further, paragraph 23 to 25 of TR 2004/D25 highlights the situation where there are multiple beneficiaries.

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

• the assets are fungible;
• the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and
• there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. See Explanation paragraphs 80-126.

Land is rarely fungible because each parcel of land is unique (paragraph 94 of draft TR 2004/D25). Real estate is traded based on the actual sale price, not the sale price per unit. This is because the value of one part of the land may, for example have better views and access to the main street than another part of the land and therefore be worth more. Unlike fungible commodities, parcels of real estate do not have equal value.

In summary, the 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.

Application to your situation

Based on the information provided, we cannot determine from the Will or the Agreement that there is a clause clearly stating that Child A, as a beneficiary, will become absolutely entitled to the Property.

The transfer of the ownership interest was also not 'brought about' by Child A, but rather by the trustees of the deceased estate and the other beneficiaries by agreement.

We acknowledge Child A and family have resided in the Property for a considerable amount of time as the principal place of residence. We also recognise the financial contributions made by Child A to the running and upkeep of the property.

However, we are not satisfied Child A is absolutely entitled to the asset as against the trustees. We do not consider Child A to already be the owner of the asset for CGT purposes.

Conclusion

A CGT event A1 will happen when the legal title of the Property is transferred through the sale to Child A.

Any capital gain from this GCT event happening is not disregarded under Division 128 of the ITAA 1997. The ownership interest did not pass to Child A as a beneficiary under the deceased's Will or the Agreement in the ways set out in section 128-20 of the ITAA 1997.

Child A is not absolutely entitled to the Property as against the trustees. The beneficiaries are equally entitled to the Property. We have determined that the deceased estate is considered to be the owner of the Property for CGT purposes.

Therefore, any capital gain or loss that will be made by the trustees on the sale of the Property to Child A would form part of the deceased estate's net income.

Other issues to consider

A 50% discount of any capital gain can be used by an individual or a trust (in accordance with sections 115-10 and 115-100 of the ITAA 1997), meaning a deceased estate may be eligible for the discount. In order to utilise the discount, the capital gain must also meet sections 115-20 and 115-25 of the ITAA 1997. In brief, these provisions state the cost base of the asset cannot be indexed, and the asset needs to be acquired at least 12 months prior to sale.

Applied to your circumstances, the first element of the cost base will be market value as at the date of death, and the trustees, are deemed to have received the Property as at this date. As this date was more than 12 months ago, the requirement is satisfied for utilising the 50% capital gain discount.

The cost base consists of five elements, as listed in Section 110-25 of the ITAA 1997. These elements are added together to calculate the cost base. Further information regarding calculating the cost base can be viewed on ato.gov.au quick code 66022 Cost base of assets.