Edited version of private advice

Authorisation Number: 1052195332699

Date of advice: 22 November 2023

Ruling

Subject: CGT - deceased estate (testamentary trust)

Question 1

Does subsection 118-210(1) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to you, such that the property was the main residence of the beneficiary of the Testamentary Trust for the period before the property was rented?

Answer

Yes.

Question 2

Does a partial exemption to the Capital Gain apply under subsection 118-210(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

On XX XX 20XX, the Person A prepared a Will (the Will).

The Will instructed that a Testamentary Trust be created.

One of the provisions in the Will, was to the benefit of Person A's daughter (Person B), and Person B's children.

The Will instructed that the first purpose of the Testamentary Trust was to maintain Person B's housing, including purchasing a residence for the purpose of providing that housing.

On XX XX 20XX Person A (the Deceased) passed away.

On XX XX 20XX, the Testamentary Trust purchased a property (the Property) as instructed by the Will of the Deceased.

The Property is less than 2 hectares in size.

Person B resided in the Property until they vacated in early 20XX.

From XX XX 20XX, you derived assessable income when you rented the Property.

On XX XX 20XX, the previous Trustees of the Testamentary Trust retired.

You were appointed as the Trust.

On XX XX 20XX, you entered into a contract to sell the Property.

On XX XX 20XX, the Property settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-210

Income Tax Assessment Act 1997 subsection 118-210(1)

Income Tax Assessment Act 1997 subsection 118-210(2)

Income Tax Assessment Act 1997 subsection 118-210(4)

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset. Its sale is a CGT event under section 104-10 of the ITAA 1997.

The CGT implications for Trustees that acquire a dwelling under a Will in a deceased estate are considered in subsection 118-210(1) of the ITAA 1997. This subsection provides that if the trustee receives money or property from a CGT event happening to a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of a qualifying individual from the time the trustee acquired an ownership interest in it until the time of the event.

Having considered the circumstances of your case, it is accepted that the Property is considered to be the main residence of the beneficiary of the Testamentary Trust. The ownership interest in the Property was acquired by the trust for occupation by those specified in the will of the deceased and meets the requirements of subsection 118-210(1) and in accordance with our view 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?

Calculating the cost base

As detailed in subsection 118-210(2)(b) and subsection 118-210(2)(c):

(b)  The first element of the *dwelling's *cost base and *reduced cost base in the hands of the individual is its cost base and reduced cost base in your hands at the time of the event; and

(c)   The individual is taken to have *acquired it when you did.

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 considers the CGT consequences for each party arising from the creation of life and remainder interests in property. In respect of the life interest and remainder owners, equitable life or remainder interests are acquired when they commence to be owned. Paragraph 25 highlights subsection 110-25(2) of the ITAA 1997, which states that the first element of the cost base is:

(a)  The money you paid, or are required to pay, in respect of *acquiring it; and

(b)  The *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of acquisition).

Therefore, the first element of the cost base and reduced cost base of the property for you as trustee includes the total amount paid to purchase the property.

Where a dwelling is the main residence of the individual during part only of that period, you will be required to calculate any capital gain you make on the disposal of the Property, having regard to the number of days the property was not Person B's main residence. The formula under subsection 118-210(4) of the ITAA 1997 is:

CG or CL amount × Non-main residence days ÷ Days in that period

A partial exemption will apply using the original purchase price of the Property.