Edited version of private advice

Authorisation Number: 1052161960332

Date of advice: 31 August 2023

Ruling

Subject: CGT - dwellings acquired from deceased estates

Question 1

Did Property 1 pass from the Estate of Person A to Beneficiary B of the Estate in accordance with section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the capital gain made by the Estate on the transfer of Property 1 to Beneficiary B disregarded in accordance with subsection 128-15(3) of the ITAA 1997?

Answer

Yes

Question 3

Is Beneficiary B treated as having acquired Property 1 on the date of death of Person A pursuant to the operation of subsection 128-15(2) of the ITAA 1997?

Answer

Yes

Question 4

Is the first element of the cost base of Property 1 in the hands of Beneficiary B, equal the cost base of Property 1 in person A's hands at the date of death?

Answer

Yes

Question 5

Is Beneficiary B entitled to a partial main residence exemption in accordance with section 118-200 of the ITAA 1997, with adjustment via section 118-205 of the ITAA 1997, in relation to the sale of Property 1?

Answer

Yes

Question 6

Is Beneficiary B entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 1 in accordance with section 115-100 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

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

On XX/XX/20XX, Person A died, leaving a Will.

Under the terms of the Will, Person A appointed the 3 children, as the Executors of the Will.

On XX/XX/20XX, the Executors of the Estate of Person A (Executors) were granted probate of the Will.

In accordance with the Will, the 3 children were also the residuary beneficiaries, (Beneficiary A, Beneficiary B and Beneficiary C) giving them each a one-third interest in the residuary estate, which included properties and cash.

The Executors, by mutual verbal agreement shortly after the death of Person A agreed to transfer the properties to themselves, being the residuary beneficiaries, in accordance with the relevant clauses of the Will and the wishes of Person A as follows:

•         Beneficiary A received Property 2

•         Beneficiary B received Property 1, and

•         Beneficiary C received Property 3.

It was not until Beneficiary C was seeking to sell Property 3 in 20XX that any steps were undertaken to transfer the properties to each residuary beneficiary.

The Executors commenced winding up the Estate in 20XX and Property 3 was transferred to Beneficiary C in accordance with that process.

In 20XX, Beneficiary A died before the other properties could be transferred.

With the delay in the administration of the Estate of Beneficiary A, Property 2 was not transferred to that Estate until XX/XX/20XX.

Following the death of Beneficiary A, the remaining 2 beneficiaries continued in their role as Executors.

Property 1 was appropriated under Person A's Will to Beneficiary B on XX/XX/20XX.

The Estate of Person A has not yet been fully administered and is expected to be completed in the current year.

Property 1

Property 1 has been in the family since 19XX and acquired by Person A's spouse in 19XX (before 20 September 1985), passing to Person A following spouse's death in 19XX (post 20 September 1985) and remained their main residence until XX/XX/XXXX.

In 19XX, Person A acquired Property 2 which became the main residence until their death in 20XX.

Beneficiary B commenced residing in Property 1 from XX/XX/19XX without paying any rent, but did pay all rates, capital improvements, maintenance and other expenses relating to the property.

Although Beneficiary B occupied the property as their main residence from 20XX, there was no entitlement to claim a principal place of residence exemption from land tax while Person A was alive and maintained both the legal and beneficial title.

Following the death of Person A, Beneficiary B became aware following legal advice that that an exemption from land tax may be available and in 20XX an application was made to the Chief Commissioner of State Revenue/Office of State Revenue. The exemption was granted on a retrospective basis to the 20XX year with and refunds issued for those earlier years.

The land tax exemption was granted on the basis that the property was occupied by the beneficiary of the property under the Estate in accordance with a Private Ruling from Revenue NSW dated 20XX with the transfer of Property 1 declared subject to nominal due of $50 under Section 63(1)(a)(iii) of the Duties Act 1997, being an appropriation of the property of the deceased person (as referred to in section 46 of the Trustee Act 1925) in or towards satisfaction of the beneficiary's entitlement under the trusts contained in the will of the deceased person or arising on intestacy.

To give effect to an in specie distribution on account of Beneficiary B's entitlement as a residuary beneficiary, the Executors transferred Property 1 to Beneficiary B by way of transmission out of the residuary estate on XX/XX/20XX.

On XX/XX/20XX a contract for the sale of Property 1 was entered into by Beneficiary B giving rise to CGT event A1.

Property 1 has remained the main residence of Beneficiary B at all times since moving in on XX/XX19XX and will continue until the settlement occurs.

Beneficiary B has not used, and will not use, any other property as their main residence during this period.

Relevant legislative provisions

Income Tax Assessment Act Section 115-10

Income Tax Assessment Act Paragraph 115-10(a)

Income Tax Assessment Act Section 115-15

Income Tax Assessment Act Section 115-20

Income Tax Assessment Act Section 115-25

Income Tax Assessment Act Section 115-30

Income Tax Assessment Act Subsection 115-30(1)

Income Tax Assessment Act Section 115-100

Income Tax Assessment Act Section 115-105

Income Tax Assessment Act Section 118-195

Income Tax Assessment Act Section 118-200

Income Tax Assessment Act Subsection 118-200(2)

Income Tax Assessment Act Section 118-205

Income Tax Assessment Act Subsection 118-205(2)

Income Tax Assessment Act Subsection 128-15(2)

Income Tax Assessment Act Subsection 128-15(3)

Income Tax Assessment Act Subsection 128-15(4)

Income Tax Assessment Act Section 128-20

Income Tax Assessment Act Subsection 128-20(1)

Income Tax Assessment Act Paragraph 128-20(1)(a)

Income Tax Assessment Act Paragraph 128-20(1)(c)

Income Tax Assessment Act Subsection 995-1(1)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Did Property 1 pass from the Estate of Person A to Beneficiary B, in accordance with section 128-20?

Summary

Property 1 passed to Beneficiary B as a beneficiary of the Estate in accordance with subsection 128-20(1).

Detailed reasoning

Subsection 128-20(1) states:

A CGT asset passes to a beneficiary of the estate if the beneficiary becomes the owner of the asset in following circumstances:

(a)          under your will, or that will as varied by a court order; or

(b)          by operation of an intestacy law, or such a law as varied by a court order; or

(c)           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

(d)          under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate' and

(ii) 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.

Under the terms of the Will, Beneficiary B was also one of the Executors and a residuary beneficiary of the Estate of Person A, being entitled to a one-third share of the residuary estate, comprising property and cash.

Beneficiary B began residing in Property 1 as their main residence in 19XX. Following the death of Person A, and consistent with the wishes of their late parents, the Executors recognised and agreed that Property 1 would be treated as Beneficiary B's and that it would be appropriated pursuant to the power given to them under the terms of the Will.

In accordance with terms of Person A's Will, Property 1 was transferred by the Executors to Beneficiary B on XX/XX/20XX in satisfaction of their one third interest in the residuary estate. Therefore, Property 1 passed to Beneficiary B in accordance with paragraphs 128-20(1)(a) and (c).

Question 2

Is the capital gain made by the Estate of Person A on the transfer of Property 1 to Beneficiary B disregarded in accordance with section 128-15(3)?

Summary

Any capital gain or capital loss made on the disposal of Property 1 by the Estate of Person A to Beneficiary B is disregarded in accordance with subsection 128-15(3).

Detailed reasoning

Subsection 128-15(3) states:

Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary is disregarded.

The concept of a 'legal personal representative' (LPR) is central to the operation of Division 128 because the LPR is responsible for administering the estate of the deceased. The term is defined in subsection 995-1(1) to mean (as relevant for the purposes of deceased estates) 'an executor or administrator of an estate of a person who has died'.

As Property 1 was transferred by the Executors to Beneficiary B, any capital gain or capital loss made by the Executors from passing Property 1 to Beneficiary B will be disregarded under subsection 128-15(3).

Question 3

Is Beneficiary B treated as having acquired Property 1 on the date of death of Person A pursuant to the operation of subsection 128-15(2)?

Summary

Beneficiary B is taken to have acquired Property 1 on the date of death of Person A pursuant to the operation of subsection 128-15(2).

Detailed reasoning

Section 128-15(2) states:

The legal personal representative or beneficiary, is taken to have acquired the asset on the day you die.

As Property 1 passed to Beneficiary B, as a beneficiary of Person A's Will, Beneficiary B is taken to have acquired Property 1 on the day Person A died.

Question 4

Is the first element of the cost base of Property 1 in the hands of Beneficiary B, equal the cost base of Property 1 in Person A's hands at the date of death?

Summary

The first element of the cost base of Property 1 in the hands of Beneficiary B, will equal the cost base of the Property 1 in Person A at the date of their death.

Detailed reasoning

The table in subsection 128-15(4) sets out the cost base rules of a CGT asset in the hands of the legal personal representative or beneficiary.

Person A acquired Property 1, from their spouse's Estate on XX/XX/19XX the date spouse died.

As Person A's spouse acquired Property 1 prior to September 1985, item 4 in the table in subsection

128-15(4) states that Person A acquired Property 1 equal to the market value on the day spouse died.

Following the death of Person A, Beneficiary B is taken to have acquired Property on Person A's date of death.[1] In determining the first element of the cost base / reduced cost base for Property 1, item 1 in the table in subsection 128-15(4) states that, for Property 1, Beneficiary B receives the first element of the cost base / reduced cost base of Property 1 on the day Person A died.

Question 5

Is Beneficiary B entitled to a partial main residence exemption in accordance with section 118-200, with adjustments via section 118-205, in relation to the sale of Property 1?

Summary

Beneficiary B is entitled to a partial main residence exemption in accordance with section 118-200, with adjustments pursuant to section 118-205, in relation to the sale of Property 1.

Detailed reasoning

Section 118-200 describes when a partial exemption for deceased estate dwellings applies and provides a formula for calculating a capital gain or loss made when a partial exemption applies.

Broadly, a partial exemption applies if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate, and section 118-195 does not apply.

Section 118-195 sets out when a capital gain or capital loss your make from a CGT event that happens in relation to an ownership interest is disregarded. As Person A did not use Property 1 as their main residence just before their death and Beneficiary B Susan's ownership interest in Property 1 did not end within 2 years of Person A's death, section 118-195 cannot apply.

In determining whether a partial exemption applies to disregard any capital gain or capital loss Beneficiary B made from the sale of Property 1, the following formula in subsection 118-200(2) is to be used:

(Capital gain or Capital loss amount × Non-main residence days) ÷ Total days

Non-main residence days' is the sum of:

(a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

(aa) if the deceased acquired the ownership interest on or after 20 September 1985 and, just before the deceased death, the deceased was an excluded foreign resident - the number of remaining days in the deceased's ownership period; and

(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of the individual referred to in item 2, column 3 of the table in section 118-195.

'Total days' is:

(a) if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership period ends; or

(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership period ends.

Section 118-205 states that you must adjust the formula in subsection 118-200(2) if the ownership interest of the deceased individual referred to in section 118-200 (the most recently deceased) passed to the individual on or after 20 September 1985 as a beneficiary in, or the individual owned it as trustee of, a deceased estate. As Beneficiary B is taken to have acquired Property 1 on X/XX/XXX, Beneficiary B must use the formula in section 118-200 as adjusted by section 118-205.

'Non-main residence days' are calculated according to subsection 118-205(2) as follows;

Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the dwelling was not the main residence of one or more of:

(a)          an individual who owned the dwelling at the time of the individual's death; or

(b)          an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c)           an individual who had a right to occupy the dwelling under a will; or

(d)          an individual to whom an ownership interest in the dwelling *passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

'Total days' are calculated according to subsection 118-205(2), as follows:

Add to the component total days in the formula the fewer of:

(a)          the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

(b)          the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

In calculating the amount of partial main residence exemption that will apply to the sale of Property 1, Beneficiary B will need to apply the formulas in sections 118-200 and 118-205, including the following information:

•                     the date that Property 1 was acquired by Person A's spouse till the date the property ceased to be their main residence.

•                     the date Person A acquired the property under the Estate of Person A's spouse until the date the property passed to Beneficiary B (on the date of death of Person A).

•                     the dates Beneficiary B used Property 1 as their main residence, and

•                     the contract date for the sale of Property 1 by Beneficiary B.

Question 6

Is Beneficiary B entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 1 in accordance with section 115-100?

Summary

Beneficiary B is entitled to a discount percentage of 50% on the balance of the capital gain made from the disposal of Property 1 in accordance with section 115-100.

Detailed reasoning

Division 115 sets out the conditions in which an entity may be entitled to a discount capital gain including the discount percentage.

To be a discount capital gain, the capital gain must meet the requirements of sections 115-10, 115-15, 115-20 and 115-25.

As Beneficiary B is an individual, Beneficiary B will meet the requirement in paragraph 115-10(a).

When Beneficiary B disposed of Property 1 by a contract of sale on XX/XX/20XX, CGT event A1 happened on this date, resulting in the requirement in section 115-15 being satisfied.

As indexation of the cost base will not be used, the requirement in section 115-20 is satisfied.

Section 115-25 states that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event and section 115-30 operates to effect time of acquisition of CGT asset in certain circumstances.

Although Beneficiary B is treated as having acquired her ownership interest in Property 1 on the date of Person A's death, item 4 in the table in subsection 115-30(1) states that a CGT asset that passed to the acquirer as the beneficiary of a deceased individual's estate (except one that was a pre-CGT asset of the deceased immediately before his or her death) acquires the asset when the deceased acquired the asset, therefore this is the date Person A acquired Property 1.

A contract of sale has been entered into by Beneficiary B.

Based on the information received, Beneficiary B will be treated as having held an ownership interest in Property 1 for more than 12 months prior to the date of the CGT event A1 occurring.

Therefore, Beneficiary B has met all the above requirements for the capital gain made from the sale of Property 1 to be a discount capital gain.

Section 115-100 determines the discount percentage that is to apply to the discount capital. For an individual, the discount percentage is set at 50%, so long as the individual is not a foreign or temporary resident pursuant to section 115-105.

As Beneficiary B is not a foreign or temporary resident, Beneficiary B is entitled to a discount percentage of 50% on the amount of capital gain made on the sale of Property 1 that is not eligible for the partial main residence exemption.

[1] Subsection 128-15(2)