Edited version of private advice

Authorisation Number: 1052195805788

Date of advice: 22 November 2023

Ruling

Subject: CGT - deceased estate - deed of assignment

Question

Question 1

Can you disregard any capital gain or loss made upon transferring the 1/3 ownership interest in the property bequeathed to Beneficiary 1 in accordance with the original terms of the deceased's will under section 128-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you disregard any capital gain or loss made upon transferring the 2/3 ownership interest in the property which Beneficiary 2 and Beneficiary 3 assigned to Beneficiary 1 in accordance with the terms of the deed of assignment under section 128-15 of the ITAA 1997?

Answer

No.

Question 3

Can you disregard any capital gain or loss made upon the transfer of the part of the 2/3 ownership interest in the property acquired by the deceased prior to September 20, 1985, which Beneficiary 2 and Beneficiary 3 assigned to Beneficiary 1 in accordance with the terms of the deed of assignment under section 118-195 of the ITAA 1997?

Answer

Yes.

Question 4

Can you disregard any capital gain or loss made upon the transfer of the part of the 2/3 ownership interest in the property acquired by the deceased after September 20, 1985, which Beneficiary 2 and Beneficiary 3 assigned to Beneficiary 1 in accordance with the terms of the deed of assignment under section 118-195 of the ITAA 1997?

Answer

No.

Question 5

Does Beneficiary 2 incur CGT on receiving their share of the $100,000 from Beneficiary 1?

Answer

Yes.

Question 6

Does Beneficiary 3 incur CGT on receiving their share of the $100,000 from Beneficiary 1?

Answer

Yes.

This ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased acquired a 50% ownership interest in a residential property (the property) prior to September 20, 1985, with their spouse as joint tenants.

The property is less than 2 hectares.

The deceased's spouse died, and their 50% ownership was acquired by the deceased through right of survivorship.

The property was the deceased's main residence from the time it was purchased until they moved into an aged care facility on a permanent basis more than ten years before the deceased's death.

The property was rented for a period of more than six years before the deceased's death.

The deceased elected to apply the absence rule for six years after the property started to be used to produce assessable income.

The deceased died, leaving a will appointing an entity as executor and trustee.

Probate was granted less than twelve months after the deceased's death.

Under the will, the deceased gifted the property in equal shares between their three relatives, Beneficiary 1, Beneficiary 2, and Beneficiary 3 (the beneficiaries).

An agreement between the beneficiaries was entered into less than two years after the deceased's death, whereby Beneficiary 1 (the recipient) would pay a sum of money to Beneficiary 2 and Beneficiary 3 (the assignors) to transfer their two-thirds interest in the property to the recipient.

In consideration of the recipient's payment, the assignors relinquished all interest in the property.

The deed of assignment states that on settlement of the estate (including payment of all costs relating to administration, legal, government imposts and taxes, including capital gains tax by the assignors and recipient) the trustee will distribute the right, title and interest to the recipient.

The terms of payment will be complied with between the assignors and the recipient.

Transfer of title for the property occurred less than two years after the deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-205

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1936 section 95

Reasons for decision

Question 1

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die passes to their legal personal representative or to a beneficiary in a deceased estate.

Under subsection 128-20(1) of the ITAA 1997, an asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset:

(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 subsection 128-15(3) of the ITAA 1997, any capital gain or capital loss that the legal personal representative makes if an asset passes to a beneficiary in accordance with subsection 128-20(1) of the ITA 1997 is disregarded.

Application to your situation

The capital gain or loss incurred when the part of the ownership interest passed to Beneficiary 1 under the terms of the will is disregarded under subsection 128-15(3) of the ITA 1997. Therefore, no CGT is incurred by the LPR on this 1/3 interest in the property.

Question 2

As mentioned above, subsection 128-20(1) of the ITAA 1997 provides that an asset may pass to a beneficiary in a deceased estate under a deed of arrangement if:

              i.                the beneficiary entered into the deed to settle a claim to participate in the distribution of the 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.

In your case, the consideration of a sum of money paid by Beneficiary 1 to Beneficiary 2 and Beneficiary 3 is beyond a variation or waiver of a claim, therefore the 2/3 ownership interest Beneficiary 1 obtained as a result of the variation under the deed of arrangement does not meet the requirements of subsection 128-20(1) of the ITAA 1997.

Any capital gain or loss you incurred in transferring the remaining 2/3 ownership interest in the property to Beneficiary 1 under the deed of arrangement cannot be disregarded under subsection 128-15(3) of the ITAA 1997.

Question 3

Section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen in relation to a dwelling that was a deceased person's main residence and was not being used to produce assessable income just before they died or was acquired by the deceased before 20 September 1985.

Any capital gain or loss on a dwelling acquired by an individual as a beneficiary of a deceased estate or by a trustee of a deceased estate is fully exempt if:

(a) the dwelling was the deceased's main residence just before the deceased's death and was not then being used to produced assessable income, or it was a pre-CGT property of the deceased; and

(b) the dwelling was disposed of within two years of the deceased's death, or it was, from the time of the deceased's death until the disposal, the main residence of:

•                     the deceased's spouse;

•                     an individual who had a right to occupy the dwelling under the will; or

•                     a beneficiary.

In your case, the dwelling was disposed of within two years of the deceased's death. Therefore, you can disregard any capital gain or loss made upon the transfer of the part of the 2/3 ownership interest acquired by the deceased prior to September 20, 1985, to Beneficiary 1 under the terms of the agreement.

Question 4

Section 118-145 of the ITAA 1997 allows an individual to continue to treat a dwelling which has ceased to be their main residence as their main residence. If the dwelling is not used to produce assessable income and the individual does not treat another dwelling as their main residence, the taxpayer can apply this indefinitely as provided by subsection 118-145(3) of the ITAA 1997, however subsection 118-145(2) of the ITAA 1997 provides that if the dwelling is used to produce assessable income, they can continue to treat their former main residence as their main residence for a maximum period of 6 years from the time at which it was first used to produced assessable income.

The deceased's dwelling was being used to produce income for a period of time which was longer than 6 years, which prevents the deceased from deeming the dwelling to be their main residence at the time of their death under subsection 118-145(2) of the ITAA 1997. As the dwelling was not the deceased's main residence at the time of death, section 118-195 of the ITAA 1997 will not apply to disregard the capital gain or loss made on the transfer of the part of the 2/3 ownership interest in the property acquired by the deceased after September 20, 1985, to XX in accordance with the terms of the deed of assignment.

Therefore, you cannot disregard the capital gain or loss you make on transferring this part of the ownership interest in the property to Beneficiary 1.

Question 5

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You dispose of an asset if a change of ownership occurs from you to another entity. The surrender of a trust interest by a beneficiary constitutes an A1 disposal event as there is a change of ownership of the interest from one party to another. Where an interest in the property is surrendered or released the Commissioner considers that CGT event A1 is the applicable event, as there is a change in ownership of the interest from party to another, rather than a mere ending of it (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, paragraph 66).

A capital gain is made if the proceeds from the disposal are more than the cost base of their interest in the trust. They make a capital loss if those capital proceeds are less than the reduced cost base of the trust interest. Consequently, when Beneficiary 2 assigned their interest in the estate, CGT even A1 happened under section 104-10 of the ITAA 1997.

Question 6

In the same circumstance as Beneficiary 2, when Beneficiary 3 assigned their interest in the estate, CGT even A1 happened under section 104-10 of the ITAA 1997.