Edited version of private advice

Authorisation Number: 1052236606118

Date of advice: 16 April 2024

Ruling

Subject: CGT - deceased estate

Question 1

Can your capital losses be utilised against capital gains in the deceased's 'date of death' tax return?

Answer

No.

Question 2

Can you claim a credit for the relevant year of income for the foreign resident capital gains withholding tax?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased died on XX XX 20XX. Extract of Death Certificate was provided indicating the deceased passed away in Country C.

The deceased was Country B national and a resident of Australia for tax purposes.

The deceased migrated to Australia in 20XX.

The deceased died intestate.

An application for letters of administration was made by Person A on XX XX 20XX.

A copy was provided of the Grant of Letters of Administration made to Person A on XX XX 20XX by the Supreme Court of State A.

Person A is not an Australian resident for tax purposes.

Control and management of the deceased estate is outside of Australia.

A copy of the list of assets held by the deceased at date of death included the following properties:

Australian properties:

•         The deceased acquired their main residence located at XX XX, XX (Property 1) on XX XX 20XX.The property was sold on XX XX 20XX for $XX with a settlement date of XX XX 20XX.

Foreign resident capital gains withholding was withheld from the sale of Property 1 of $XX

The capital gain from the disposal of Property 1 was included in the net income of the estate in the deceased's estate trust return for the income year ended XX June 20XX.

•         An investment property located at XX XX, XX (Property 2). The property was acquired by the deceased on XX XX 20XX. A copy of the sale contract dated XX XX 20XX was provided showing sale price $XX and settlement date of XX XX 20XX.

Foreign resident capital gains withholding was withheld from the sale of Property 2 of $XX.

The capital loss from the disposal of Property 2 was included in the net income of the estate in the deceased's estate trust return for the income year ended XX June 20XX.

Foreign properties:

•         The deceased acquired an investment property located at XX XX, XX (Property 3) on XX XX 20XX as a joint tenant with Person A.

The deceased's ownership interest in Property 3 was transferred to the joint tenant.

The property was leased, but the deceased received nil rental income and made no contribution to the property loan, its management or maintenance. Under Country B's law the deceased's ownership interest transfers to the joint tenant on the date of the deceased's death. The title transfer will be completed once application for Country B probate registration is finalised.

•         The deceased acquired an ownership interest in a property located at XX, XX XX (Property 4) on XX XX 20XX as tenants in common with Person B and Person C.

The deceased's ownership interest in Property 4 was transferred to the tenants in common in equal shares.

The property was leased, but the deceased received nil income and made no contribution to the property loan, its management or maintenance. Under Country B laws of intestacy, the deceased's ownership interest will transfer to Person B and Person C in equal shares once application for Country B probate registration is finalised.

The trust tax return was lodged for the deceased's estate on XX XX 20XX for the income year ended XX XX 20XX. The Capital Gains Tax (CGT) schedule shows current year capital losses applied and net capital losses carried forward.

The deceased held bank accounts in both Australia and Country B.

The deceased owned a motor vehicle.

The deceased held XX Life insurance with Person A as beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 100-20

Income Tax Assessment Act 1936 Section 855-10

Income Tax Assessment Act 1997 , Section 104-215

Income Tax Assessment Act 1997 , Section 110-25

Income Tax Assessment Act 1997 , Section 110-55

Income Tax Assessment Act 1997 , Section 115-120

Income Tax Assessment Act 1997 , Section 118-210

Income Tax Assessment Act 1997 , Section 128-10

Income Tax Assessment Act 1997 , Section 128-15

Income Tax Assessment Act 1997 , Section 260-140

Income Tax Assessment Act 1997 , Section 855-20

Income Tax Assessment Act 1997 Section 995-1(1)

Taxation Administration Act 1953, Section 18-25

Legislative Instrument F2016L01396

Reasons for decision

Question 1

Can your capital losses be utilised against capital gains on foreign property in the deceased's 'date of death' tax return?

Answer

No.

Summary

Any capital losses of the deceased estate cannot be passed onto the deceased and applied in the deceased's 'date of death' tax return.

Conversely, any capital loss incurred by the deceased cannot be carried forward for use by the deceased estate. If the losses cannot be deducted or applied in the date of death tax return, they will lapse.

Capital losses made by a trust cannot be distributed to the trust's beneficiaries. The trust can carry forward its losses and deduct them from capital gains in future years.

Any tax owing must be provided for before distributing the estate's assets to the beneficiaries. If this is not done, the trustee may be personally liable for any tax owing.

Detailed reasoning

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the capital gains tax (CGT) consequences that arise from a deceased estate. Under section 128-10 of the ITAA 1997, when a person dies, any capital gain or capital loss that results from a CGT asset the person owned just before dying devolving to their legal personal representative or that pass to a beneficiary is disregarded.

The term 'legal personal representative' (LPR) is defined in subsection 995-1(1) ITAA 1997 and relevantly includes, 'an executor or administrator of an estate of an individual who has died...'

For Australian tax purposes, the Commissioner treats a LPR such as an executor or administrator as a trustee and will treat the deceased estate as a trust estate.

Where the sole trustee is a foreign resident and the trust is controlled and managed outside of Australia, the trust is not a resident trust estate for Australian taxation purposes.

Any CGT consequences are deferred until there is a subsequent disposal by the LPR or beneficiary.

Foreign properties

An exception to this general rule applies where a CGT asset passes to a beneficiary who is a foreign resident and is explained in section 104-215 of the ITAA 1997 about other CGT events. If the asset passes to a beneficiary who is a foreign resident, CGT event K3 only happens if the deceased was an Australian resident just before dying and the asset in the hands of the foreign resident is not taxable Australian property.

Taxable Australian property is defined in section 855-20 of the ITAA 1997 and includes real property situated in Australia. The properties situated in XXXX would not be considered taxable Australian property. The passing of these assets in specie to the non-resident beneficiaries would trigger CGT event K3.

If CGT event K3 occurs and it has not otherwise been disregarded under a provision in the Income Tax Assessment Acts, then any gain or loss made will be included in the deceased's final tax return.

Practice Statement Law Administration 2003/12: Capital gains tax treatment of the trustee of a testamentary trust (PSLA 2003/12) confirms the Commissioner's longstanding administrative practice of not recognising any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

An asset will 'pass' to a beneficiary if they become the owner of the asset by operation of intestacy law (paragraph 128-20(1)(b) of the ITAA 1997).

In this case the deceased died intestate, and the process for intestacy is regulated under the relevant intestacy provisions in XX law. The transfer of the XX assets will be in satisfaction of their interests in the deceased's estate and are taken to have 'passed' under section 128-20 of the ITAA 1997 when the transfers are effected.

CGT event K3 is taken to have happened immediately before the death and the deceased. CGT event K3 applies to the deceased rather than the estate.

Section 104-215(4) of the ITAA 1997 states that a capital gain arises to the deceased taxpayer if the market value of the asset on the day of death is greater than the asset's cost base while a capital loss will arise if the market value of the asset on the day of death is less than the asset's reduced cost base.

As a result of the operation of section 104-215(4) of the ITAA 1997 any capital gain or capital loss forms part of the tax return for the deceased taxpayer to the date of death. This means:

a)    a capital loss can be used to offset any capital gains of the deceased;

b)    any unused capital losses of the deceased which cannot be used by the trustee or beneficiaries of the deceased estate can be utilised against a capital gain; and

c)    the deceased may be entitled to the CGT general discount which is not available to a foreign resident.

Any capital gain on the transfer of the deceased's ownership interests in Country B properties can be offset by capital or income losses of the deceased which would otherwise have expired at death.

Any capital gain on the transfer of the deceased's ownership interests in Country B properties forms part of the tax return for the deceased taxpayer to the date of death.

A capital loss of a deceased person may be offset against any capital gain of the person in the final individual tax return. Any unrecouped net capital loss lapses on the death of the taxpayer. (Taxation Determination TD 95/47 Income tax: capital gains: how is a net capital loss treated if it is unrecouped by a taxpayer at the date of his or her death?). A capital loss cannot be used by the trustee or beneficiaries of the estate.

In your case, the deceased was an Australian resident just before dying, and the properties situated in Country B are not taxable Australian property; therefore, CGT event K3 will happen if these assets pass in-specie to a foreign resident beneficiary. Accordingly, any capital gain or capital loss that happens in relation to these assets would need to be included in the deceased's final return.

Australian properties

In order to have a capital gain or loss, a CGT event must occur (subsection 100-20(1) of the ITAA 1997). The most common CGT event is disposal of an asset (CGT event A1). The disposal of the properties situated in Australia by the trustee of the deceased estate will trigger CGT event A1, so that any net capital gain or capital loss from this event will form part of the deceased estate's trust tax return in the same income year that the event happened.

In your case, upon the death of the deceased, the properties situated in Australia transferred to the non-resident trustee. Under section 128-15 of the ITAA 1997 any capital gain or loss made on this transfer is disregarded. The properties are now held by the non-resident trustee on behalf of the non-resident trust estate.

Property 1 was acquired by the deceased after 20 September 1985. The property was the deceased's main residence and was not being used to produce assessable income just before they died. Therefore section 118-195 of the ITAA 1997 disregards capital gains and capital losses made from certain CGT events that happen where the trustee disposes of their ownership interest within two years of the deceased's death and the deceased was not an excluded foreign resident. The cost base is the market value of the dwelling in the day the deceased died.

In your situation, the above conditions have been met. Any capital gain or capital loss incurred on the disposal of the deceased's main residence (Property 1) is disregarded.

Section 128-15(4) of the ITAA 1997 sets out the cost base and reduce cost base of a CGT asset in the hands of the legal personal representative or beneficiary.

Subsection 128-15(4) of the ITAA 1997 states that for assets the deceased acquired after 20 September 1985 (other than a dwelling used as a main residence),the first element of the asset's cost base or reduced cost base in the hands of the legal representative is the deceased's cost base or reduced cost base on the date of death (item 1 of the table in subsection 128-15(4) of the ITAA 1997). That is, the legal representative inherits the deceased's cost base or reduced cost base.

Where the taxpayer owned the dwelling as the trustee of a deceased estate and the conditions for a full exemption are not satisfied, either a partial exemption or no exemption will be available.

Section 115-120 of the ITAA 1997 removes the availability of the CGT discount for non-resident trusts.

In determining liability to Australian tax on capital gains received by a non-resident, it is necessary to consider not only Australian income tax laws but any applicable double tax agreement (DTA).

Country B Convention Article 13 regarding income, profits or gains from the alienation of property.

Article 13 allocates taxing rights between Australia and Country B in respect of income arising from the alienation of real property (as defined in Article 6 of the Convention) and other items of property.

Under Article 13 income or gains derived by a resident of Country B from the alienation of real property in the Australia may be taxed in Australia.

Non-residents of Australia will generally be taxed on income or capital gains from the alienation of real property situated in Australia under the CGT provisions in Part 3-1 of the ITAA 1997.

Question 2

Can you claim a credit for the relevant year of income the foreign resident capital gains withholding tax?

Answer

Yes.

A 12.5% non-final withholding tax obligation applies to the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.

The obligation arises where any vendor of the relevant property is a foreign resident. It consists of a requirement to withhold 12.5% of the first element of the cost base of the asset and paying that amount to the Commissioner at the time of acquisition (i.e., at settlement).

Where the sole trustee is a foreign resident and the trust is controlled and managed outside of Australia, the trust is not a resident trust estate for Australian taxation purposes.

In your case, upon the death of the deceased, the property transferred to the non-resident trustee who manages the estate outside of Australia. Under section 128-15 of the ITAA 1997 any capital gain or loss made on this transfer is disregarded. The property is now held by the non-resident trustee on behalf of the non-resident trust estate.

The vendor will need to lodge a tax return and claim a credit for the withheld amount taken from their sale proceeds, declare any capital gain from the disposal of the asset (or declaring an amount of '0' if there is no capital gain or there was a capital loss).

A credit for the amount withheld for foreign resident capital gains is applicable to the year the contract was signed.

A credit may be refunded in the relevant tax return if they don't have to pay capital gains tax on the sale of the property (for example, because it was a main residence).

In your case, the Foreign Resident Capital Gains Withholding Purchaser payment notifications (PPN) rests against the non-resident trustee. The trustee can apply for credit of the withholding, and additional information should accompany the lodgement confirming the trustee of the intestacy and the relevant PPN lodgement receipt numbers.