Edited version of private advice

Authorisation Number: 1052251264803

Date of advice: 21 May 2024

Ruling

Subject: Main residence exemption - deceased estate

Question 1

Are there any income tax consequences of the right to occupy permitted to Individual A under the Will of the deceased individual?

Answer

No.

Question 2

Will a full main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply on the sale of the property by the Trustee of a deceased estate where an individual who was granted, under the will, a right to occupy the dwelling?

Answer

Yes.

Question 3

Will the Commissioner exercise the discretion in subsection 118-195 of the ITAA 1997 to extend the 2-year time period to dispose of the dwelling?

Answer

Yes.

This ruling applies for the following period:

XX/XX/20XX to XX/XX/20XX

The scheme commenced on:

XX/XX/20XX to XX/XX/20XX

Relevant facts and circumstances

1.            Probate was granted by the Court on XX/XX/20XX that states the deceased died on XX/XX/19XX and the administration of the real and personal estate of the deceased was granted by the Court to ABC (First Trustee).

2.            The Will of the deceased provided the following.

(a)           the deceased resided at 'the property' in Australia (the dwelling).

(b)           the following members of 'the family' are beneficiaries of the estate.

-               Individual B

-               Individual C

-               Individual D.

3.            Under the Will, the deceased granted a right to occupy the dwelling to a person (Individual A) until the person died or vacated the dwelling, following which the Trustee will dispose the dwelling and divide the proceeds among specified members of the family.

4.            The Will did not grant Individual A legal or equitable right to the property or require Individual A to enter into a legal agreement in respect to the occupancy of the property.

5.            The deceased acquired the property before 20 September 1985, and it was always their main residence.

6.            Individual A moved into the property shortly after probate was granted.

7.            The dwelling was Individual A's main residence until vacating the property on XX/XX/20XX. Individual A had no other main residence during that time.

8.            The dwelling was not used in whole or in part for income producing purposes during the deceased ownership or while it was occupied by Individual A.

9.            Individual A did not pay any rent for living at the property and no payment was made by Individual A for the right to occupy.

10.         Following the dwelling being vacated by Individual A, the Trustee had to do the following before being able to sell the property:

(a)           had to undertake necessary cleaning and repairs due to the dwelling going into a state of disrepair due to the decline in Individual A's health and state of mind

(b)           apply to the court to have a new trustee appointed, and

(c)           apply to the Tribunal to deal with Individual A's possessions.

11.         These matters caused a major delay in the selling of the property. A real estate agent was engaged on XX/XX/20XX to sell the property and a contract of sale was entered into on XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 subsection 118-195(1)

Income Tax Assessment Act 1997 paragraph 118-195(1)(a)

Income Tax Assessment Act 1997 paragraph 118-195(1)(b)

Income Tax Assessment Act 1997 paragraph 118-195(1)(c)

Income Tax Assessment Act 1997 subsection 118-195(2)

Income Tax Assessment Act 1997 paragraph 118-130(1)(c)

Income Tax Assessment Act 1997 subsection 128-15(2)

Reasons for decision

All references are to the ITAA 1997 unless otherwise stated.

Question 1

Are there any income tax consequences of the right to occupy permitted to Individual A under the Will of the deceased individual?

Summary

The granting of right does not trigger CGT event D1 to happen and there are no other tax consequences in relation to this right, as it could not be assigned.

Detailed reasoning

1.            The Commissioner's view on the consequences of creating a right to reside in property for life is contained in Taxation Ruling 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/14).

2.            Paragraph 105 of Taxation Ruling TR 2006/14 states:

A right to reside in property for life (or a term of years) is not equivalent to a legal or equitable life interest. The right is a mere personal right which cannot be assigned. CGT event D1 in section 104-35 happens when such a right is granted. These arrangements should be contrasted with mere informal family arrangements where relatives may reside at each other's dwellings for a period but where there is no intention to create legal relations. In these circumstances CGT event D1 will not happen. Paragraph 105 of TR 2006/14 explains that CGT event D1 will happen when a personal right to reside in a property for life, or a term of years, is granted by way of a legal agreement. However, CGT event D1 will not happen in the contrasting situation where an informal arrangement is in place in which relatives may reside at each other's dwellings for a period of time but there is no intention to create legal relations.

3.            Individual A was granted a right to reside in the property that was the deceased's main residence. The deceased Will stated that Individual A has the right to live in the property until they vacate or being deceased. The Will did not grant Individual A any other rights in respect to the property, e.g., right to income nor was there a transfer of any ownership interest to Individual A, nor any intention to create legal relations. The right to reside in the property is considered a mere personal right. Additionally, Individual A was not required to make any payments for the right to reside in the property and there was no intention by the parties to enter into an agreement to formalise the arrangement. Accordingly, the granting of a personal right will not trigger CGT event D1 to happen, and there are no other tax consequences in relation to this right, as it could not be assigned.

Question 2

Will a full main residence exemption under Subdivision 118-B apply on the sale of the property by the Trustee of a deceased estate where an individual who was granted, under the will, a right to occupy the dwelling?

Summary

It is considered that the delay in the Trustee disposing of the deceased dwelling was due to factors that were regarded as exceptional and beyond the control of the Trustee. Therefore, the Trustee is granted an extension of time to dispose of the dwelling up to when the property was sold by the Trustee. Accordingly, a full main residence exemption is available to the Trustee under subsection 118-195(1) to disregard the capital gain made from the sale of the property by the Trustee.

Detailed reasoning

1.            Subdivision 118-B provides an exemption for a capital gain or capital loss from certain CGT events that happen in relation to your main residence. Where you acquired the dwelling as a trustee of a deceased estate, subsection 118-195(1) provides that capital gains or capital losses from one of the specified CGT events[1] relating to the dwelling or your ownership interest in it are disregarded if:

(a)          you are an individual and the interest passed to you as a beneficiary, or you owned it as the trustee of the deceased estate, and

(b)          the dwelling was disposed of within 2 years of the deceased's death or was used as a main residence in one of the ways listed in the table at paragraph 118-195(1)(b), and

(c)          the deceased was not an excluded foreign resident before his or her death.

2.            Subsection 128-15(2) provides that the legal personal representative, or beneficiary, is taken to have acquired the asset on the date the deceased person died. The trustee of a testamentary trust is treated in the same way as a legal personal representative.[2]

3.            In the present case, the deceased was an Australian resident who acquired the dwelling before 20 September 1985. The dwelling was the deceased's main residence up to the time they died, at which time the legal ownership in the dwelling passed to the Trustee.[3] Therefore, the requirements in paragraph118-195(1)(a) and (c) are satisfied.

4.            According to Item 2 in the table in paragraph 118-195(1)(b), a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling that the deceased person acquired before 20 September 1985 is disregarded if the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

(a)          the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased), or

(b)          an individual who had a right to occupy the dwelling under the deceased's will, or

(c)          if the CGT event was brought about by the individual to whom the ownership interest passes as a beneficiary - that individual.

5.            The Will of the deceased granted 'Individual A' a right to occupy the dwelling until such time that person vacates or being deceased. The Will then specified that when this happened, the Trustee is to dispose of the dwelling and equally divide the proceeds among surviving members of the family.

6.            Pursuant to the Will, Individual A moved into the dwelling shortly after probated was granted. Throughout the trustees' ownership period, the dwelling was occupied by Individual A as their home until they vacated the dwelling. No part of the dwelling was used to produce income while it was occupied by Individual A.

7.            Under paragraph 118-130(1)(c), a taxpayer acquires an 'ownership interest' in a dwelling when the taxpayer acquired the right to occupy the dwelling, which for Individual A was at the time of the deceased's death. Therefore, Individual A would fall within one of the listed individuals referred to in Item 2 in the table in paragraph 118-195(1)(b) and the deceased's dwelling is treated as her main residence from the time of the deceased's death until its disposal by the trustee.

8.            After Individual A vacated the dwelling, the Trustee could not sell the dwelling for several months due to the following:

(a)           had to undertake necessary cleaning and repairs due to the dwelling going into a state of disrepair due to the decline in Individual A's health and state of mind

(b)           apply to the court to have a new trustee appointed, and

(c)           apply to the Tribunal to deal with Individual A's possessions.

9.            Once these matters were dealt with, the Trustee proceeded to sell the dwelling as soon as it was practically possible.

10.          Having regards to the circumstances and the guidelines outlined in Practical Compliance Guidelines PCG 2019/5 Capital gains tax and deceased estates - the Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate, the Commissioner considers that the factors causing the delay were exceptional and beyond the control of the Trustee: see Example 1. Therefore, an extension of time will be granted for the Trustee to dispose the dwelling up to XX/XX/20XX when the sales contract was signed. Accordingly, a full main residence exemption is available to the Trustee under subsection 118-195(1).

[1] Subsection 118-195(2).

[2] Practice Statement PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust.

[3] Subsection 128-15(2).