Edited version of private advice

Authorisation Number: 1052310547465

Date of advice: 30 September 2024

Ruling

Subject: CGT - testamentary trust

Question

Can the trustees of the testamentary trust apply subsection 118-210(4) of the Income Tax Assessment Act 1997 to reduce the capital gain or loss the disposal of their ownership interest in the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The deceased passed away in 20XX.

A codicil to the deceased's dated xx xx 20xx, directed that the part of their estate bequeathed to their child be held on trust by the trustees of the estate and applied for the child's benefit and not distributed directly to them.

The trustees for the deceased's estate are the deceased's children.

In xx 20xx a bank account was established for the testamentary trust.

On xx xx 20xx xx xx and the testamentary trust purchased a property at x xx xx xx., with funds provided by xx xx (xx%) and the testamentary trust (xx%).

A certificate of title dated xx xx 2021xx lists the trustees jointly holding a xx per cent ownership interest and xx xx a xx per cent ownership interest in the property.

xx xx passed away on xx xx 20xx.

The property was listed for sale on xx xx 20xx and settlement occurred on xx xx 20xx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-210

Reasons for decision

Section 118-210 of the ITAA 1997 provides that where a dwelling is acquired by a trustee in accordance with the will of the deceased for occupation by an individual, a capital gain or loss resulting from the disposal of the dwelling may be disregarded, or reduced if the relevant individual resides in the property for only part of the period of ownership.

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 provides the Commissioner's view regarding the circumstances in which section 118-210 can apply. Relevantly, paragraph 4 states:

4. The acquisition need not be in strict conformity with the will or expressly by force of the will but, if it is, the requirements of subsection 118-210(1) are, in any case, satisfied.

This guidance confirms that the acquisition of the dwelling for an individual does not need to be expressly stated in the will to meet the requirements of subsection 118-210(1) of the ITAA 1997.

Subsection 118-210(3) of the ITAA 1997 provides that if you receive money or property for a CGT event happening to such a dwelling the trustee does not make a capital gain or capital loss if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event. For the purposes of the provision only those CGT events listed in section 118-210 of the ITAA 1997 are relevant.

Subsection 118-210(4) of the ITAA 1997 provides that if the dwelling was the main residence of the individual during only part of that period, the trustee makes a capital gain or capital loss worked out using the formula:

capital gain or capital loss × non-main residence days ÷ days in that period

The non-main residence days in this formula are the number of days in the period referred to in subsection 118-210(3) of the ITAA 1997 when the dwelling was not the individual's main residence.

In 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) 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.

As such, we regard the following details to be relevant:

•         the trustee's ownership period of the dwelling commenced on the date the purchase contract was settled (see section 118-130 of the ITAA 1997);

•         the dwelling was the main residence of the child from the settlement date of the purchase contract until the date of the child's death;

•         CGT event A1 (a listed event) happened when the trustee entered into the contract to dispose of the dwelling; and

•         the trustee received money for the CGT event.

The trustee will therefore be entitled to a partial main residence exemption in accordance with subsection 118-210(4) of the ITAA 1997. The trustee will be required to calculate any capital gain or capital loss they make on the disposal of the dwelling having regard to the number of days that the dwelling was not the deceased child's main residence (that is, from the date of the child's death until the time the CGT event happened to the dwelling).