Edited version of private advice

Authorisation Number: 1052063636766

Date of advice: 20 December 2022

Ruling

Subject: CGT - testamentary trust

Question

Are you entitled to the exemption under section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) for the sale of the 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 early 19XX.

The deceased's will is dated late 19XX.

Probate was granted to you, and you administered the estate. You were nominated as the trustee for the testamentary trust.

The will authorised the trustee to use the corpus of the trust for the benefit of the beneficiary, Person A.

The main asset of the estate was the deceased's former dwelling.

In early 19XX a deed of arrangement was agreed to by the trustee, the beneficiary and X remainder beneficiaries.

The deed provided the beneficiary with a right to occupy the deceased's former home. It also provided you the authority to sell the dwelling and use the proceeds to buy a replacement dwelling. On the decease of the beneficiary, the dwelling or replacement dwelling will be used for the benefit of the remainder beneficiaries.

The deceased's dwelling was sold mid-20XX.

You purchased a new dwelling in late 20XX and were registered on the title.

The dwelling was the beneficiary's residence from the time it was acquired until late 20XX. At this time the beneficiary moved into a rental dwelling.

The dwelling was listed for sale in late 20XX and settled early 20XX.

The dwelling was never used to produce assessable income.

The land the dwelling is located on is less than 2 hectares.

No capital improvements have been carried out since the dwelling was acquired.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-210

Reasons for decision

Section 118-210 of the ITAA 1997 provides that 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.

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.

In 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? the Commissioner has stated that the term 'under the will' does not require that the connection under the will be a strict one, so long as it is in accordance with the terms, in pursuance of and under the authority of the will.

However, where a trustee is acting in accordance with the terms set out in a document or agreement other than the will, it cannot be sustained that the trustee is acting 'under the deceased's will'. In Caratti v Commissioner of State Revenue [2017] WASCA 128, the Supreme Court held that pre-testamentary or post-testamentary arrangements do not amount to a right granted under the terms of a will.

A trustee may also have general rights under the relevant State Trustee Act to purchase a dwelling for the occupation by an individual. Relevantly, section 11 of the Trustees Act 1958 (Vic) provides the trustee power to purchase a dwelling house as residence for beneficiary. The authority for this action is the relevant State Trustee Act and not the deceased's will.

Application to your circumstances

In your case, you and the beneficiaries agreed to a deed of arrangement which gave the beneficiary the right to occupy the deceased's former dwelling. It also provided that that you would be able to sell the dwelling and use the proceeds to buy another dwelling for the beneficiary if they requested.

The purchase of the replacement property and its subsequent sale were actions taken by you after the deed of arrangement had come into effect and were taken in accordance with that arrangement.

Therefore, you acquired an ownership interest in the dwelling under the deed of arrangement and did not acquire it under the deceased's will. As such, section 118-210 of the ITAA 1997 will not apply. You will not be able to disregard any of the capital gain or loss you made on the disposal of the dwelling.