Edited version of private advice

Authorisation Number: 1052184441847

Date of advice: 24 October 2023

Ruling

Subject: CGT - deceased estate

Question

Can the trustees of the Estate of the deceased disregard any capital gain arising from the sale of the replacement property in accordance with section 118-210(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Answer

No.

Section 118-210 of the ITAA 1997 does not apply to the sale of the replacement property as it was not acquired under the will.

This ruling applies for the following period:

Year ended XX XXXX 20YY

The scheme commenced on:

XX XXXX 19YY

Relevant facts and circumstances

The deceased passed away on XX XXXX 19YY.

The deceased was living at Property A.

The deceased's will appointed Trustee A as the executor of the estate.

The deceased's will provides a right to occupy within Property A to their daughter Person 1 under clause 3 which states:

I give and devise to my trustee my residence situated and known as Property A aforesaid together with all articles of household domestic or personal use or ornament and all other chattels and effects whatsoever with the exception of money and the securities for money which shall be in or about the said residence at the date of my death upon trust to permit my daughter Person 1 to have the use and enjoyment thereof during her life she paying all rates and taxes and other outgoings thereon and keeping the same in a good and habitable state of repair fair wear and tear and damage by fire storm and tempest excepted and she keeping the same insured against fire to the satisfaction of my trustee and on the death of said Person 1 I direct my trustee to sell the said residence and the said articles of household domestic or personal use or ornament and the said chattels and effects and hold the net proceeds arising from such sale upon trust for such of them my grand-children as shall survive me and if more than one in equal shares absolutely.

Person 1 lived in the Property A as their main residence from just after the date of death of the deceased until the sale of Property A.

Trustee A sold Property A in 19YY subject to a deed of family arrangement.

Trustee A purchased Property B as a replacement for Property A.

Property B is less than two hectares in area and has never been used for income purposes.

Person 1 lived in Property B as their main residence until they moved into an aged care facility in 20YY.

Trustee A passed away on XX XXXX 20YY.

Trustee B was appointed executor of the Estate of Trustee A, therefore becoming the executor and trustee of the deceased estate.

Probate for Trustee A was granted on XX XXXX 20YY.

The land title to Property B was held in Trustee B's name after Trustee A passed away.

The contract for sale was signed for Property B was XX XXXX 20YY and settlement date was on XX XXXX 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-210

Reasons for decision

Section 118-210 of the ITAA 1997 does not apply to the sale of the replacement property as it was not acquired under the deceased's will.

Detailed reasoning

Subdivision 118-B of the ITAA 1997 contains the rules for situations when capital gains and losses are ignored for main residence dwellings. There are special rules for dwellings that pass from, or are owned by, a trustee of a deceased estate.

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 accordance with section 118-210 of the ITAA 1997.

The prerequisite for section 118-210 of the ITAA 1997 applying is stated under subsection 118-210(1) of the ITAA 1997: "This section applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual [emphasis added]".

The issue of when a trustee of a deceased estate acquires an ownership interest under the will of a deceased person is considered 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. In order for a dwelling to be acquired under a will, there needs to be 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.

TD 1999/74 also states that a trustee acquires an ownership interest in a dwelling under the will of a deceased person for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the will, or in accordance with the terms of the will as modified by any court order. 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.

A trustee may also have general rights created under State trustee legislation, such as the Trustee Act 1936 (SA), to purchase a dwelling for the occupation by an individual beneficiary. For example, section 12 of the Trustee Act 1936 (SA) gives the trustee the power to acquire dwelling houses for beneficiaries. These rights and powers are created under the relevant state or territory trustees' legislation and not under the deceased's will.

This issue is considered in the Western Australia Administrative Tribunal case of Caratti v Commissioner of State Revenue [2016] WASAT 85. Before the tribunal the appellant contended that, as trustee, he had given effect to the arrangement by exercising power under the will to postpone the sale of the property and power under s 24 of the Trustees Act 1962 to retain the property as a residence for a beneficiary. This amounted to a right granted under the will to use the property as his residence for as long as he wished, in accordance with s 22(b)(ii)(I) of the Act.

At paragraph [75] of its decision, the Administrative Tribunal stated:

[75] In relation to the applicant's argument concerning s 24 of the Trustees Act, I accept that s 24 of the Trustees Act empowers the trustee to enter into an arrangement to allow a beneficiary to use a house as a residence. However, that is a power of the trustee and there is no duty or obligation on the trustee to provide a place of residence. Therefore, there is no correlative right for a beneficiary under a will to use a property as a place of residence.

As discussed in ATO Interpretative Decision ATO ID 2003/109 Capital gains tax: Deceased estate - main residence exemption, the general rule of construction is that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention.

In your case, clause 3 of the deceased's will created a right of use and occupancy in Property A for Person 1 for as long as they meet certain conditions. This right of occupancy was granted until the death of Person 1 of which the will instructs that the property was to be sold and the proceeds distributed to the named beneficiaries.

The will as it was written did not contemplate that a replacement property would be required during Person 1's lifetime, or that the property would be sold within Person 1's lifetime.

Consequently, it is considered that section 118-210 of the ITAA 1997 does not apply to the sale of the replacement dwelling as it wasn't acquired under the deceased's will for occupation by a named individual, as required by subsection 118-210(1) of the ITAA 1997.

You are unable to disregard any capital gain made on the disposal of the replacement dwelling.