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Edited version of private advice
Authorisation Number: 1052079032036
Date of advice: 18 January 2023
Ruling
Subject: CGT - deceased estate
Question 1
Does a taxable capital gain arise in the hands of the estate on the disposal of the property?
Answer
The estate is likely to have a taxable capital gain. However, the estate can reduce it by claiming a partial main residence exemption under section 118-200 of the Income Tax Assessment Act 1997 for the period when Person B was entitled to treat the property as Person B's main residence.
Question 2
What are the correct dates to use to calculate capital gains on the disposal of the property including for what periods can any capital gains be disregarded?
Answer
The estate can claim a partial main residence exemption under section 118-200 of the Income Tax Assessment Act 1997 treating the property as Person B's main residence from Date D until Date F.
The first element of cost base will be the property's market value on Date D.
This ruling applies for the following period:
1 July XXXY to 30 June XXXX
The scheme commences on:
1 July XXXY
Relevant facts and circumstances
1. Person A became registered as the sole owner of property on a date (Date C) before the CGT took effect on 20 September 1985.
2. At all relevant times the property was a residential block which was smaller than 2 hectares and had a residential house on it.
3. Person A used the property as Person A's sole main residence continuously between Date C and Person A's death on a date (Date D) sometime after the CGT took effect on 20 September 1985.
4. The people named as executors under Person A's will received a Grant of Probate for the deceased estate.
5. Person A's will granted Person B a right to reside in or to rent the property for Person B's life.
6. Person B has confirmed to the executors of Person A's estate that Person B:
• lived in the property from Date D until Date E
• vacated the property some years later and rented it to other people for some years
• didn't own any residence from Date E until Date F
• Person B purchased a new residence under a contract which settled on Date F.
7. The trustees entered a contract for sale of the property with a buyer on Date G. The contract settled on Date H when legal title transferred to the buyer. The buyer was arm's length from the estate and wasn't a beneficiary under Person A's will.
Relevant legislative provisions
Income Tax Assessment Act 1997
Section 4-5
Section 102-5
Section 104-10
Section 108-5
Section 110-25
Section 116-20
Section 116-30
Section 118-115
Section 118-120
Section 118-130
Section 118-135
Section 118-140
Section 118-145
Section 118-147
Section 118-195
Section 118-200
Section 128-10
Section 128-15
Income Tax Assessment Act 1936
Former section 160J
Former section 160T
Former section 160X
Former section 160Y
Reasons for decision
In these reasons:
- hyphenated legislative provisions (eg, section 118-200) and Divisions (eg, Division 118) are in the Income Tax Assessment Act 1997
- unhyphenated legislative provisions (eg, former section 160X) refer to provisions in the Income Tax Assessment Act 1936 as in force at Person A's death.
Summary
8. CGT event A1 happened to the trustees when they sold the property during the XXXX income year on the contract date of Date G.
9. The estate will need to calculate a capital gain or loss from the sale because full exemptions aren't available.
10. The property isn't a pre-CGT asset in the trustees' hands. Former subsection 160X(5) deems them to have acquired it from Person A on Person A's death on Date D for market value.
11. The full main residence exemption isn't available. For deceased estates, section 118-195 requires that either:
• the estate transfers the dwelling within two years of the deceased's death, or
• the dwelling was the main residence for a qualifying individual from the death until the estate's interest in the dwelling ended.
12. Here, the property was sold many years after Person A's death, and Person B can't treat the property as Person B's main residence for some of that period.
13. However, the trustees can claim a partial main residence exemption based on the period when we've treated the property as Person B's main residence. Section 118-200 says the capital gain or loss is multiplied by the non-residence proportion of the period from the death until the estate's ownership ends.
14. We've decided to treat the property as Person B's main residence from Person A's death (Date D) until the date he or she acquired a new property (Date F). We think it appropriate to treat Person B's new property as Person B's main residence once he or she acquired it.
15. This means the trustees should calculate the capital gain using Date F to the settlement date (Date H) as the relevant non-residence period.
16. The first element of cost base will be determined using the property's market value at Person A's death on Date D.
Detailed reasoning
17. Very broadly, there are tax consequences when CGT events happen to CGT assets.
• Division 102 includes net capital gains from CGT events in your assessable income.
• Broadly, 'you' means entities recognised by tax laws generally, which includes individuals and trusts. In tax legislation, the trustee acting in their capacity as trustee is recognised as an entity. See sections 4-5 and 960-100.
• CGT events are listed in Division 104; each CGT event prescribes specific conditions about when they happen.
• Most CGT events happen to CGT assets.
• CGT assets include property, and legal and equitable rights that aren't property. See section 108-5. A note to that section says examples of CGT assets include land and buildings
• If CGT events happen, you may make a net capital gain or loss from the event. Generally, you make a capital gain when the capital proceeds exceed the cost base. You make a capital loss when the reduced cost base exceeds the capital proceeds. Broadly, capital proceeds include the money and market value of property you receive (or are entitled to receive) when an event happens. See section 116-20. Cost base includes the money and market value of property you provide (or are required to provide) to acquire a CGT asset, and some other costs. See section 110-25.
• Capital gains or losses can be disregarded or reduced if exemptions or concessions apply. One exemption is a 'main residence exemption' which disregards part or all of a capital gain or loss from a CGT event happening to a dwelling.
Has a CGT event happened? Yes. CGT event A1 happened on Date G. Ownership changed from the executors to the buyer under a contract entered on that date.
18. CGT event A1 happens when an asset changes ownership from one entity to another.
• Subsection 104-10(1) says it happens if you dispose of a CGT asset.
• Subsection 104-10(2) says you dispose of an asset if a change of ownership occurs from you to another entity. It clarifies that a change of ownership doesn't occur if you stop being the legal owner but continue to be the beneficial owner.
• By implication, a change in ownership will happen if you continue to be the asset's legal owner, but stop being the beneficial owner. This reasoning was approved in the Full Federal Court decision in Ellison v Sandini.[1], and noted in the ATO's Decision Impact Statement.[2]
• The time of the event is when you enter the contract for the disposal, or if there's no contract, when the change of ownership occurs. See subsection 104-10(4).
19. The ATO view is that a trustee who holds assets for the benefit of life interest and remainder owners is, for CGT purposes, the relevant 'owner' of the trust assets. See TR 2006/14[3] at paragraph 187.
20. CGT event A1 happened on Date G. Following TR 2006/14, the trustees will be treated as owning the asset for CGT purposes.[4] Ownership changed when they sold it to an arms' length buyer on Date H. The time of the event is when they entered the contract on Date G.
21. This ruling doesn't address the CGT consequences for the trustees or Person B when the testamentary trust was created.[5]
22. For completeness, CGT events may have also happened to Person B when the trustees sold the property, but they're unlikely to have practical consequences. Just for example, CGT event C1 under section 104-20 (about loss or destruction of CGT assets) may have happened because Person B would have lost rights to occupy or rent the property.[6] CGT events happening to Person B only be significant if Person B received any capital proceeds from the trustees for losing these rights on the sale.
Will there be a capital gain? Probably. The trustees will have a capital gain if the proceeds from the sale are more than the cost base. The cost base will be the asset's market value on Person A's death at Date D.
23. Subsection 104-10(4) says you make a:
• capital gain if the capital proceeds from the disposal are more than the asset's cost base
• you make a capital loss if those capital proceeds are less than the asset's reduced cost base.
24. Capital proceeds generally are the money and value of property received from a CGT event.
• Subsection 116-20(1) says the capital proceeds from a CGT event are the total of the money and market value of any other property you received (or are entitled to receive) in respect of the event happening.
• There are modified rules that apply in some situations. For example, if you receive no capital proceeds from a CGT event, you're taken to have received the market value of the CGT asset. See section 116-30.
25. The general cost base rules (in Divisions 110 and 112) are modified for assets acquired on death.
26. Division 128 is about the capital gains consequences for CGT events happening on death. Broadly:
• capital gains and losses from CGT events that happen to your assets when you die are disregarded: see section 128-10
• when a CGT asset you owned just before dying devolves to your legal personal representative, they're taken to have acquired the asset on the day you died: see subsections 128-15(1) and (2)
The table in section 128-15 sets the cost base in the hands of the legal personal representative. Item 3 says that the first element of cost base for a dwelling that was your main residence just before you died is the market value on the day you died. Item 4 says the same applies to assets you acquired before 20 September 1985.
27. There were similar rules in the Income Tax Assessment Act 1936 that applied to disposals before 1997. The effect of paragraph 160X(5)(a), as in force on Person A's death on Date D,[7] was that where:
• a person died after 20 September 1985, and
• they had acquired the asset before that date, and
• the asset passed to the legal personal representative,[8]
then the legal personal representative was deemed to have acquired it for market value consideration on the date of the person's death.
28. Section 160X was subject to former section 160Y,[9] which had exceptions. Broadly, these included where the beneficiary was:
• a tax-exempt person,
• a trustee of a complying superannuation fund, ADF, or PST, or
• the beneficiary was a non-resident and the asset wasn't a taxable Australian asset.
Taxable Australian assets included land or buildings situated in Australia: see former section 160T.[10]
29. Here, the first element of the estate's cost base for the property is deemed to have been the property's market value on the date Person A died. Person A acquired the asset on Date C, which is before the CGT, and died on Date D, which is after the CGT. Section 110-25 says that the first element is the money paid or market value of property given to acquire the property. Former subsection 160X(5) deemed the executors to have acquired the property for market value consideration on the day Person A died. That market value consideration was deemed to have been paid, so it becomes part of the cost base.
30. The trustees will have a capital gain if the capital proceeds from the sale exceeded the property's cost base.
Does the estate qualify for the pre-CGT exemption? No. It's deemed to have acquired the property when Person A died on Date D.
31. Capital gains from disposing pre-CGT assets are disregarded. Subsection 104-10(5) says a capital gain or capital loss is disregarded where you acquired the asset before 20 September 1985.
32. The estate doesn't qualify for this exemption. Former subsection 160X(5), as in force on Date D, said when a person holding a pre-CGT asset died, and it passed to their legal personal representative, they were deemed to have acquired it on the date the person died. Person A died on Date D, so the executors will be treated as having acquired the property that date. It won't be treated as a pre-CGT asset in their hands.
Basic concepts about the main residence exemption
33. There are a few defined terms we need to explain and apply about the main residence exemption. See Table 1.
Table 1: relevant defined terms about the main residence exemption
|
Concept |
Summary of relevant rules |
Applying them to this scenario |
|
Dwelling |
A dwelling includes a unit of accommodation that's a building which consists wholly or mainly of residential property. It includes any land immediately under it, and up to 2 hectares of adjacent land used primarily for private or domestic purposes in association with the dwelling. See sections 118-115 and 118-120. |
The property is a dwelling: it's a residential property which is smaller than 2 hectares, and it was used as a residence by Person A, then Person B, and then other tenants. |
|
Ownership interest |
Ownership interest includes (for land) a legal or equitable interest in it, or a right to occupy it. The ownership interest begins when you obtain legal ownership, or an earlier time if you received a right to occupy it at an earlier time. If you have a contract for the happening of the CGT event, you have an interest in the land or dwelling until your legal ownership ends. See section 118-130. |
The trustees have an ownership interest because they were legal owners. Their ownership interest ended on settlement of the sale contract on Date H. It doesn't matter that the CGT event is deemed to happen earlier. The CGT event happened on Date G when the contract was entered - see subsection 104-10(3). But the ownership interest ends when legal ownership transfers. That happened on settlement, not the contract date. (The trustees' ownership interest would have begun when they received the grant of probate. Nothing turns on this because section 118-200 calculates the period using the deceased's death.) Person B also had an ownership interest in the property. He or she had a right to occupy it from Person A's death until the settlement date on Date H. |
|
Main residence |
'Main residence' isn't defined. ATO web-guidance[11] says generally a dwelling is your main residence if you and your family live in it, your personal belongings are in it, you use it as your address (eg, mail or government agencies), and it's connected to services. The length of time you stay in the dwelling and your intention to occupy it as your home may also be relevant. Section 118-135 says that if a dwelling becomes your main residence by the time it was first practicable to move in after you acquired your ownership interest in it, it's treated as your main residence from when you acquired the interest. |
The property was Person B's main residence until Date E. He or she lived in it and had no other property during that period. Person B may be able to treat the estate's property as his or her main residence for some time after that under extended rules. See the 'absence rule' below. Person B bought a residence on Date F. It would have become his or her main residence from that date if they moved in as soon as practicable afterwards. |
|
The absence rule |
You can treat a dwelling as your main residence for CGT purposes after it stops being your main residence. Section 118-145 allows you to choose to continue to treat it as your main residence indefinitely unless you use it for producing assessable income. If you use it for producing assessable income, you can treat it as your main residence for up to six years. The period resets each time the dwelling becomes your main residence again. (Note the general rule doesn't apply where the absence is covered by the rules in section 118-147, applying where the property was lost or destroyed.) ATO web-guidance[12] says that you can't treat more than one residence as your main residence, except for up to 6 months if you move house. |
Person B can choose to treat the estate's property as Person B's main residence for up to 6 years after he or she stopped living in it. Person B left the property on Date E and started renting it out. The maximum period Person B can treat it as his or her main residence is 6 years, ending 6 years after Date E. However, he or she bought a new property on Date F. We assume Person B treated the new property as a new residence by default from that date. (If Person B chose to treat the existing property as his or her main residence, Person B may have a partial capital gain if he or she sells Person B's new property. It seems unlikely that Person B would choose to treat the estate property as Person B's main residence when he or she acquired another property, since he or she wouldn't have direct CGT consequences for the estate's property.) Therefore, the estate property stopped being Person B's main residence on Date F. |
|
Changing main residences |
There's a rule which allows you to treat two dwellings as your main residence while you move house. Section 118-140 says that if you acquire an ownership interest in a dwelling that is to become your main residence, and you still have an ownership interest in a former residence, you can treat both as your main residence for a period. That period is the shorter of: • the 6 months ending when you lose your ownership interest in the existing residence, or • the period between acquiring the ownership interest in the new residence and losing the ownership interest in the existing residence. This rule only applies if: • the existing main residence was your main residence for at least 3 months in the year before losing the ownership interest in the existing residence, and • you didn't use your existing residence to produce assessable income for any period in that year when it wasn't your main residence. |
This rule doesn't apply to Person B. Person B had an ownership interest (a right to occupy) in the property up until Date H. Person B rented it out from Date E until Date H. It wasn't Person B's main residence during the year before the trustees sold the property (either in fact, or under the 6-year extension rule), and it was used to produce assessable income. This means Person B can't treat both properties as Person B's main residence for any period. |
Does the estate qualify for the (full) main residence exemption? No. Person B wasn't entitled to treat the property as Person B's main residence when the property was sold.
34. There's a full main residence exemption for qualifying capital gains and losses available to deceased estates, but it isn't available here. Section 118-195 sets out the requirements to qualify. Broadly, the ownership interest must either have ended within 2 years after the death, or the dwelling must have been the main residence for a qualifying individual from the death until the ownership interest ended. The estate doesn't qualify because the property was transferred many years after the death, and it was Person B's main residence for only part of that period. See Table 2 for more detail.
Table 2: full main residence exemption for deceased estates in section 118-195
|
Requirement |
Applied to this scenario |
|
The capital gain or loss must be from a CGT event that happens in relation to a dwelling or your ownership interest in it. |
Met. CGT event A1 happened when the trustees sold the property. For Division 118 purposes, the property is a dwelling, and their legal interest in it is an ownership interest. |
|
You must be an individual. You must have either owned the relevant ownership interest in a dwelling as the trustee of a deceased estate, or had it pass to you as a beneficiary under a deceased estate. The ATO view is that the words 'trustee of a deceased estate' includes the trustee of a testamentary trust. This is because the exemption contemplates life interests, which would only arise under a testamentary trust after the estate has been fully administered. See ATO ID 2006/34.[13] |
Met. The trustees are individuals. They owned the property first as trustees of a deceased estate, and then as trustees of a testamentary trust under Person A's will. We treat a testamentary trust as a deceased estate for Division 118 purposes. |
|
At least one of the items in column 2 of the table must be satisfied: 1. if the deceased acquired their ownership interest in the dwelling post-CGT, it must have been their main residence just before death, and not used to produce assessable income 2. the deceased acquired their ownership interest pre-CGT. |
Item 2 is met. Person A acquired Person A's interest in the property on Date C, before the CGT took effect on 20 September 1985. |
|
At least one of the items in column 3 of the table must be satisfied: 1. your ownership interest ends within 2 years of the deceased's death, or a longer period allowed by the Commissioner 2. the dwelling was the main residence of one of the following individuals, from the deceased's death until your ownership interest ends: • spouse of the deceased immediately before the death • individual with a right to occupy the dwelling under the deceased's will[14] • the individual to whom the ownership interest passed as a beneficiary, if the CGT event was brought about by them. |
Item 1 isn't met. The ownership interest ended on settlement on Date H. That's many years after Person A died - more than 2 years. We don't think it appropriate to allow the estate that long to dispose the property. The trustees allowed Person B to live in it or rent it out on a permanent basis - there's no evidence they would have sold or transferred the property earlier, but for special or unusual circumstances. Item 2 isn't met either. Person B had a right to occupy the dwelling under Person A's will. But it wasn't Person B's main residence for the entire period. It stopped being Person B's main residence on Date F. |
Does the estate qualify for a partial main residence exemption? Yes. Person B was entitled to treat the property as Person B's main residence for part of the ownership period.
35. Deceased estates can claim a partial exemption where a dwelling was a qualifying individual's main residence for part of the ownership period. Broadly, section 118-200 says you only get a partial exemption where you are an individual and you either:
• owned the relevant ownership interest in a dwelling as the trustee of a deceased estate, or
• had it pass to you as a beneficiary under a deceased estate, and
• the full exemption (in section 118-195) doesn't apply.
36. The trustees can claim the partial exemption here. They owned the property as trustees for Person A's deceased estate. We concluded at paragraph 34 and Table 2 that the full exemption isn't available.
What are the relevant dates for calculating the estate's partial main residence exemption?
37. There's a formula for calculating the partial exemption for deceased estates. Subsection 118-200(2) says you multiply the gain or loss by the non-main residence period divided by the total period:
|
CG or CL amount |
× |
Non-main residence days Total days |
38. In this formula, where the deceased's ownership interest in the dwelling was pre-CGT:
• the 'non-main residence' days is the period from the death until your ownership interest ends, when the dwelling wasn't the main residence of a relevant individual covered by item 2, column 3 of the table in section 118-195
• the 'total days' is the period from the death until your ownership interest ends.
39. Here, we think the 'non-main residence' period starts on Date F when Person B bought a new house. We explain in Table 3.
Table 3: determining the non-main residence days and total days
|
Non-main residence days |
This starts when we've stopped treating the property as Person B's main residence on Date F and ends when legal ownership transferred to the buyer on Date H. |
|
Total days |
This starts on Person A's death on Date D and ends when legal ownership transferred to the buyer on Date H. |
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[1] Ellison and Another v Sandini Pty Ltd and Others [2018] FCAFC 44; (2018) 263 FCR 460 at 482 [93] (per Jagot J, Siopis J agreeing).
[2] ATO Decision impact statement on Ellison v Sandini Pty Ltd [2018] FCAFC 44.
[3] 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.
[4] Note that Person B's life interest in the property (Person B's right to live in or rent it out) may be treated as a separate CGT asset from Person B's perspective. See TR 2006/14 at paragraph 188.
[5] For completeness, the trustees most likely didn't have any capital gains or losses from the events at and around Person A's death on Date C. Broadly, under the former CGT rules, capital gains and losses were worked out on transactions which were treated as 'disposals' under former section 160M (as opposed to CGT events). Former section 160X said that disposals didn't happen when a person died, or when the asset passed from their legal personal representative to a beneficiary.
[6] The ATO view is that a life tenant's rights to occupy and rent out property may be a CGT asset from their perspective. See TR 2006/14 at paragraph 188.
[7] Subsection 160X(5) as introduced by the Income Tax Assessment Amendment (Capital Gains) Act 1986 (No. 52 of 1986).
[8] Paragraph 160J(a) confirmed that a 'legal personal representative' in this context included an executor of the deceased person's will. See section 160J as introduced by the Income Tax Assessment Amendment (Capital Gains) Act 1986 (No. 52 of 1986) and amended by section 24 of the Taxation Laws Amendment Act (No. 2) 1992 - No. 80, 1992, which took effect on Royal Assent on 30 June 1992: see section 2 for the general commencement date (this wasn't varied by section 67).
[9] Section 160Y as introduced by the Income Tax Assessment Amendment (Capital Gains) Act 1986 (No. 52 of 1986), and amended by section 38 of the Taxation Laws Amendment (Superannuation) Act 1989 (No. 105 of 1989, which took effect on the Royal Assent date of the Taxation Laws Amendment Act (No. 2) 1989 - which was also 30 June 1989, and later amended by section 26 of the Taxation Laws Amendment Act (No. 2) 1992 - No. 80, 1992, which took effect on Royal Assent on 30 June 1992.
[10] Section 160T as introduced by the Income Tax Assessment Amendment (Capital Gains) Act 1986 (No. 52 of 1986), and amended by section 35 of the Taxation Laws Amendment Act 1989 (No. 11 of 1989) <which was retrospective to the 1987 income year - see section 52>; section 50 of the Taxation Laws Amendment Act 1991, (No. 48 of 1991) <which applied to disposals after 6 December 1990 - see subsection 84(11)>, and section 27 of the Taxation Laws Amendment Act (No. 4) 1992, (No. 191 of 1992) <which applied to acts or transactions taking place or events occurring after 25 June 1992 - see subsection 31(4)>.
[11] ATO website (July 2022), Eligibility for main residence exemption | Australian Taxation Office (ato.gov.au) (QC 69710) accessed on 4 January 2023.
[12] ATO website (August 2022), Treating former home as main residence | Australian Taxation Office (ato.gov.au) (QC 66030) accessed on 5 January 2023.
[13] ATO Interpretative Decision ATO ID 2006/34 Income Tax Capital Gains Tax: main residence exemption - testamentary trust - CGT event brought about by individual to whom ownership interest passed.
[14] Note the ATO view is that the right must derive from the will, not a separate agreement or arrangement between the trustees and beneficiaries. See ATO Interpretative Decision ATO ID 2003/109 Capital Gains tax: Deceased estate - main residence exemption and ATO Interpretative Decision ATO ID 2004/882 Income Tax Capital Gains Tax: main residence exemption - deceased estate - right to occupy dwelling for limited period.