Edited version of private advice

Authorisation Number: 1052225205369

Date of advice: 6 March 2024

Ruling

Subject: CGT - deceased estate

Question 1

Is the Capital Gains Tax (CGT) A1 disposal event on the disposal of the Property A included on the tax return of the Deceased for the period up until her death in the 20XX income year?

Answer

Yes.

Question 2

Are the costs of the sale of Property A paid by the Executor included in the relevant elements of the cost base of the Property?

Answer

Yes, you will need to apply the allowable costs to the relevant element of the cost base.

Question 3

Does section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997) about changing main residence apply in regard to the sale of Property A?

Answer

No.

Section 118-140 of the ITAA 1997 is not applicable in this situation.

The capital gain is calculated under section 118-200 of the ITAA 1997. The Executor can apply section 118-145 (absence rule) for the period of 3 days taking into consideration the time between vacating Property A and moving into the Property B.

Question 4

Is any capital gain or loss in regard to Property A or Property B on the death of the Deceased and on the transfer of property title to the Executor disregarded?

Answer

Yes.

Any gain on the death and transfer to the Executor is disregarded under section 128-10 of the ITAA 1997.

Question 5

Is the gain on the sale of Property B within 2 years of death disregarded under section 118-195 of the ITAA 1997?

Answer

Yes.

Question 6

Are the Executor of the Estate and the non-resident beneficiary assessable on the capital gain of the Estate made in respect of the Property B sale?

Answer

No.

Question 7

Are the Executor of the Estate and the non-resident beneficiary assessable on the capital gain of the Estate made in respect of the Property A sale?

Answer

Yes.

Any capital gain on Property A calculated under section 118-200 of the ITAA 1997 and included in the net income of the Estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), is assessable to the Executor under section 98 of the ITAA 1936 and assessable to the beneficiary under section 115-215 of the ITAA 1997.

Question 8

Is the Estate required to lodge a tax return for the year of death (20XX income year) or the year to 30 June 20XX reflecting any of the above-mentioned transactions?

Answer

Yes.

The Estate is required to lodge a tax return in both income years in respect to the sale of Property A.

Question 9

Is the beneficiary required to lodge a tax return for the year to 30 June 20XX when they received payments from the Estate?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 20XX, the Deceased purchased a property (Property A).

Property A is less than 2 hectares in size.

Property A was the deceased's main residence from the date of acquisition.

On XX XX 20XX, the Deceased purchased a second property (Property B).

Property B is less than 2 hectares in size.

From the date of acquisition, Property B was used to produce assessable income.

On XX XX 20XX, Property B ceased being used as an investment property.

Between XX XX 20XX and XX XX 20XX, Property B remained vacant.

The Deceased made a decision to relocate to the Property B, she had previously resided in [STATE] and had a network of friends.

On XX XX 20XX, the Deceased vacated Property A.

On or around XX XX 20XX, the Deceased moved into the Property B.

Property A became the Deceased's main residence.

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

A 10% deposit was paid to the Deceased for the sale of Property A.

Between XX XX 20XX and XX XX 20XX, the Deceased passed away, and left a will (the Will).

XX XX 20XX is the recorded date of death for the deceased, for tax purposes.

Property B was the Deceased's main residence at the date of death.

The Deceased was a resident of Australia for tax purposes.

The Will provided that the Estate was left to the Deceased's relative (Person A).

Person A is a non-resident of Australia.

The Estate of the Deceased included the two properties.

The Executor of the Will is Person A's husband (Person B).

Person B is a non-resident of Australia.

The Estate of the Deceased is a non-resident of Australia.

At the time of the Deceased's passing, Property B was subject to a mortgage of approximately $XXX,XXX.

On XX XX 20XX, the Property A settled.

The original Sale Contract on Property A remained unchanged, although settlement was extended to allow the Executor to complete administration of the Estate.

Foreign Resident Capital Gains Withholding (FRCGW) was withheld and paid from the sale of Property A.

The Deceased did not apply for a FRCGW clearance certificate prior to the sale due to her sudden passing after signing the sale contract for Property A.

The Deceased would have been eligible to apply for the FRCGW clearance certificate on the sale of Property A.

Part of the proceeds from the sale of Property A were used to pay out the mortgage on the Property B.

The remaining proceeds of Property A were transferred to Person A as sole beneficiary of the Estate.

In XX 20XX, the Property B Title was transferred to the Executor.

On XX XX 20XX, a Contract of Sale was signed for the sale of Property B.

On XX XX 20XX, Property B settled.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 115-215

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Issue

Question 1

Is the Capital Gains Tax (CGT) A1 disposal event on the disposal of the Property A included on the tax return of the Deceased for the period up until her death in the 20XX income year?

Answer 1

Yes.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

Under section 104-10 of the ITAA 1997, CGT Event A1 happens when you dispose of a CGT asset. Subsection 104-10(3) of the ITAA 1997 explains that the time of the event is:

(a)  When you enter into the contract for the disposal; or

(b)  If there is no contract - when the change of ownership occurs.

For CGT Events, where the timing of the event occurs before the deceased's death, a 'date of death' tax return can be lodged including any capital gains and losses.

You can search our website (www.ato.gov.au) for QC 40481 which provides further information around completing a final tax return for the deceased person.

Question 2

Are the costs of the sale of Property A paid by the Executor included in the relevant elements of the cost base of the Property?

Answer 2

Yes, you will need to apply the allowable costs to the relevant element of the cost base.

Detailed reasoning

Where an expense relates to a CGT asset and cannot be claimed as a deduction, it may be able to be included as part of the cost base of the CGT asset.

Section 110-25 of the ITAA 1997 provides the general rules regarding cost base. The cost base consists of five elements:

•         Acquisition costs (the money you paid, or are required to pay, in respect of acquiring it)

•         Incidental costs

•         Non-capital ownership costs which are not deductible elsewhere

•         Amounts which increase or preserve the value of the asset

•         Amounts incurred in establishing, preserving, or defending your title to the asset, or right over the asset.

Expenditure is capital in nature where it is made with a view to bring into existence an asset or advantage that is of enduring benefit. Capital expenditure is characterised by the fact that it is usually a one-off payment and establishes, replaces or enlarges the income producing asset.

Question 3

Does section 118-140 of the Income Tax Assessment Act 1997 (ITAA 1997) about changing main residence apply in regard to the sale of Property A?

Answer 3

No. Section 118-140 of the ITAA 1997 is not applicable in this situation.

The Executor can apply section 118-145 (absence rule) for the period of 3 days taking into consideration the time between vacating Property A and moving into Property B.

The capital gain is calculated under section 118-200 of the ITAA 1997.

Detailed reasoning

Changing main residence

Subsection 118-140(1) explains that when you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of:

(a)  6 months ending when your ownership interest in your existing main residence ends; or

(b)  The period between the acquisition of the new ownership interest and the time when the ownership referred to in paragraph (a) ends.

Subsection 118-140(2) details that subsection (1) only applies if:

(a)  Your existing main residence was your main residence for a continuous period of at least 3 months in the 12 months ending when your ownership interest in it ends; and

(b)  Your existing main residence was not used for the purpose of producing assessable income in any part of that 12 month period when it was not your main residence.

Absence Rule

Section 118-145 of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. If you make the choice, you cannot treat any other dwelling as your main residence while you are applying this section, except if section 118-140 (about changing main residences) applies.

Partial exemption for deceased estate dwellings

You get a partial exemption as provided in subsection 118-200(1) of the ITAA 1997 if:

(a)  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

(b)  Section 118-195 does not apply.

Subsection 118-200 (2) provides the relevant calculation. You calculate your capital gain or capital loss using the formula:

CG or CL amount × Non-main residence days ÷ Total days

Question 4

Is any capital gain or loss in regard to Property A or Property B on the death of the Deceased and on the transfer of property title to the Executor disregarded?

Answer 4

Yes. Any gain on the death and transfer to the Executor is disregarded under section 128-10 of the ITAA 1997.

Detailed reasoning

Division 128 of the ITAA 1997 explains the rules that apply when a taxpayer dies, and a CGT asset owned just before death devolves to the taxpayer's legal personal representative (LPR) or passes to a beneficiary in the estate.

Section 128-10 of the ITAA 1997 states that when you die, a capital gain or capital loss from a CGT event that results for a CGT asset you owned just before dying is disregarded.

Subsection 104-10(1) of the ITAA 1997 states that a CGT event A1 happens when you dispose of an asset.

Subsection 104-10(2) of the ITAA 1997 states that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of the law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continues to be its beneficial owner.

When the Deceased passed away, they stopped being the owner of the assets and the assets devolved to the Executors of the Estate. Accordingly, CGT event A1 occurred for the Deceased on their death and the CGT assets transferred to the Executors.

Any capital gain or capital loss on the Deceased's passing, will be disregarded pursuant to section 128-10 of the ITAA 1997 on the transfer to the Executor.

Question 5

Is the gain on the sale of Property B within 2 years of death disregarded under section 118-195 of the ITAA 1997?

Answer 5

Yes.

Detailed reasoning

A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

If the property was acquired by the deceased after 20 September 1985, the property must have been the deceased's main residence and not used to produce assessable income just before their death. Your ownership interest ends at the time of settlement of the contract of sale.

Subsection 118-190(4) explains the use of a dwelling for producing assessable income and that if a dwelling or your ownership interest in a dwelling passed to you as a beneficiary of the deceased estate, or you owned it as the trustee of a deceased estate, you ignore any use of the dwelling for the purpose of producing assessable income before the deceased's death if:

•      The dwelling was the deceased's main residence just before death; and

•      It was not being used for that purpose just before death, or any use of that purpose just before the death was ignored because of subsection (3).

Taxation Determination TD 1999/70 supports s118-190(4) and provides that if a dwelling passes to you as a beneficiary or as a trustee of a deceased estate then any capital gain or capital loss from a CGT event that later happens to the dwelling, can be disregarded despite having used the dwelling for income producing purposes if:

•         The deceased acquired the dwelling on or after 20 September 1985;

•         The dwelling was the deceased's main residence just before their death and was not then being used for income producing purposes; and

•         Your ownership interest in the dwelling ends within 2 years of the deceased's death.

Question 6

Are the Executor of the Estate and the non-resident beneficiary assessable on the capital gain of the Estate made in respect of the Property B sale?

Answer 6

No.

Question 7

Are the Executor of the Estate and the non-resident beneficiary assessable on the capital gain of the Estate made in respect of the Property A sale?

Answer 7

Yes. Any capital gain or capital loss on the disposal of Property A is assessable income.

The capital gain on Property A calculated under section 118-200 of the ITAA 1997 and included in the net income of the Estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), is assessable to the Executor under section 98 of the ITAA 1936 and assessable to the beneficiary under section 115-215 of the ITAA 1997.

Detailed reasoning

A capital gain from the disposal of taxable Australian property (real property) by a non-resident trust estate cannot be disregarded. Any net capital gain is included in the trust's net income for the income year, calculated in accordance with subsection 95(1) of the ITAA 1936.

Section 95(1) of the ITAA 1936 states that the net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under the Act as if the trustee were a taxpayer in respect of that income and were a resident.

Subsection 98(2A) of the ITAA 1936 explains that where a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate is a non-resident at the end of the income year and is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate, then subsection 98(3) of the ITAA 1936 applies in respect of an amount of net income which is required to be assessed and would be liable to pay tax, in respect of the amount of net income.

The Trust income is assessable pursuant to section 98 of the ITAA 1936. If the trust estate's net income includes a net capital gain, subdivision 115-C of the ITAA 1997 affects the assessment of the trustee.

For each capital gain of the trust, subdivision 115-C treats a beneficiary (whether or not the beneficiary is a non-resident) as having an extra capital gain worked out according to section 115-215. That capital gain is taken into account in calculating the beneficiary's net capital gain for the income year.

The purpose of subsection 115-215(1) of the ITAA 1997 is to ensure the appropriate amounts of the trust estate's net income attributable to the trust estates capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so:

•      The beneficiary can apply capital losses against gains; and

•      The beneficiary can apply the appropriate discount percentage to gains (if eligible).

Question 8

Is the Estate required to lodge a tax return for the year of death (20XX income year), or the year to 30 June 20XX reflecting any of the above-mentioned transactions?

Answer 8

Yes.

The Estate is required to lodge a tax return in both income years in respect of the sale of Property A.

Detailed reasoning

Pursuant to section 98 of the ITAA 1936, where a beneficiary of a trust is presently entitled to a share of the income of a trust estate, then the trustee of the trust estate shall be assessed and liable to pay tax.

You will need to lodge a tax return to:

•         Record the CGT event that occurred in relation to the NSW Property in the 20XX income year; and

•         To record section 98 of the ITAA 1936 regarding the assessable income, taxed in the hands of the Executor; and

•         To obtain a refund of the FRCGW amount in the 20XX year.

Question 9

Is the beneficiary required to lodge a tax return for the year to 30 June 20XX when they received payments from the Estate?

Answer 9

Yes.

Detailed reasoning

Although the trustee, rather than the beneficiary, would normally be taxed on the beneficiary's share of the trust net income pursuant to subsections 98(2A) and 98(3) of the ITAA 1936, in your circumstances any capital gain attributed to the non-resident beneficiary, is required to be reported in an Australian income tax return in accordance with section 115-215 of the ITAA 1997.

We have considered Taxation Determination TD 2022/12 - Income tax: is the source concept in Division 6 of Part III of the Income Tax Assessment Act 1936 relevant in determining whether a non-resident beneficiary of a resident trust, or trustee for that trust, is assess on an amount of trust capital gain arising under Subdivision 115-C of the Income Tax Assessment Act 1997?

TD 2022/12 provides:

•         The source concept in Division 6 of Part III of the ITAA 1936 is not relevant in determining whether an amount of a trust capital gain is assessable to a non-resident beneficiary or trust.

•         Capital gains are included in the non-resident beneficiaries' net capital gain for the income year under section 115-215 of the ITAA 197. However, the beneficiary is entitled to a refundable tax offset for the tax the trustee pays on their behalf under subsection 98A(2).

Application to your circumstances

Property A

The Deceased acquired the NSW Property on XX XX 20XX, and it was their main residence, it continued to be their main residence until the Deceased relocated to Property B.

The CGT event A1 occurred when the Deceased entered into a contract of sale prior to their passing. A date of death tax return should be lodged covering the period from 1 July of the income year in which the person died, up to the date of death, including any capital gains and losses.

The settlement proceeds along with the FRCGW credit that was withheld by the purchaser will be received in the 20XX income year.

You will not be able to use the 6-month changing main residence absence rule as the Deceased used Property B to produce assessable income and consequently you will not meet the requirement in paragraph 118-140(2)

You meet the requirements to apply s118-145 (absence rule) for a period of 3 days taking into consideration the time between vacating the NSW Property and moving into Property B.

The capital gain is calculated under section 118-200 of the ITAA 1997. You will need to differentiate between the days in the deceased's ownership period and the days in the Executors ownership period.

Property B

The Deceased purchased Property B on XX XX 20XX, it was used as an investment property until XX XX 20XX.

The CGT event on the disposal of Property B is disregarded under section 118-195 of the ITAA 1997. TD 1999/70 confirms subsection section 118-190(4) of the ITAA 1997 in that if the dwelling is the main residence before death, any use of the dwelling for income prior to that is ignored.

Property B was the main residence of the Deceased prior to death, and you have disposed of the ownership interest within two years of the Deceased's passing. Therefore, any capital gain or capital loss on the sale of the QLD property within 2 years of death is disregarded pursuant to section 118-195 of the ITAA 1997.

Obligations for the Estate and the non-resident beneficiary

The capital gain of Property A calculated under section 118-200 and included in the net income of the Estate under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936), is assessable to the Executor under section 98 of the ITAA 1936 and assessable to the beneficiary under section 115-215 of the ITAA 1997.

You cannot disregard a capital gain on taxable Australian property. The Estate will need to lodge an Australian tax return in both the 20XX- and 20XX-income years.

The non-resident beneficiary will be presently entitled to the proceeds from any capital gains on the disposal of Property A and is required to lodge a tax return for the 20XX income year when they receive the payments from the Estate of the Deceased.

The Property B capital gain will be disregarded as the disposal of this property meets section 118-195 of the ITAA 1997.

Division 6E of Part III of the ITAA 1936 prevents double taxation by ensuring capital gain amounts are disregarded in determining the trust income and net income that may be assessed through the ordinary operation of Division 6 of Part III of the ITAA 1936.