Edited version of private advice

Authorisation number: 1052331891966

Date of advice: 11 April 2025

Ruling

Subject: CGT - deceased estate

Issue 1: CGT - legal v beneficial

Question 1:

Did 100% of the equitable ownership of the property transfer from the deceased directly to their Estate after they died?

Answer

Yes.

Issue 2:Deceased estate

Question 2

Will the Commissioner exercise the discretion under section 118-195 of Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain or capital loss you made on the disposal?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

The deceased and Y purchased a property as joint proprietors.

The deceased and Y separated.

No formal court order or financial agreements were made.

Y signed a statutory declaration confirming that they had relinquished their part ownership of the property at the time Y separated from the deceased.

The property title remained in joint names despite the statutory declaration.

You supplied a copy of the signed statutory declaration in the application.

The deceased passed away on X X 20XX.

The deceased died intestate.

The deceased and Y remained on the title when the deceased died.

The property was the deceased's main residence and not used to produce income.

The property remained vacant and was not occupied by any person as their main residence before it was sold.

The property size is less than 2 hectares.

During X 20XX, you applied for Probate.

The Probate Office issued a Requisition requesting the filing of a Third-Party Surety Guarantee for Z's share in the estate.

The Affidavit of Administrators in setting out all beneficiary details and addresses indicated that the address known for Z was a year old.

Affidavits detailing Z's current address were prepared and filed with the Probate Office.

You as the Trustees were granted probate.

The Trustees and Y signed a Deed of Family Arrangement (the deed) effecting the transfer of legal title of the property into the estate, for which Y took no consideration.

You received title as Trustees for the estate.

You listed the property for sale.

You signed a contract of sale for property.

The property settled.

You have fully administered the estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Issue 1: CGT - legal v beneficial

Question 1

Did the deceased hold 100% of the equitable ownership interest in the property at the date of death?

Answer

Yes.

Summary

The Commissioner is satisfied that the deceased had 100% equitable ownership interest in the property and consequently the property forms part of the deceased estate.

Detailed reasoning

Section 102-20 of the (ITAA 1997) provides that you make a capital gain or capital loss as a result of a CGT event occurring to a CGT asset that you have an ownership interest in. For this reason, it is important to establish who is the owner of a CGT asset at the time a CGT event occurs.

An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner that will have a CGT event upon disposal of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Legal vs beneficial (equitable) ownership

In Australia, the principle of indefeasibility operates which is a process of title to real property by registration, by which a person holds title against the world. 'Indefeasible title' is subject to some exceptions, such as equitable rights against the person who holds such a title.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial and legal ownership are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner.

The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other.

Trusts may be of three kinds: express, constructive, or resulting.

Express Trust

An express trust is one intentionally created by the owner of the property in order to confer a benefit upon another. It is created by express declaration, which can be affected by some agreement or common intention held by the parties to the trust.

For an express trust to be created it is necessary that there is certainty of the intention to create a trust, subject matter, and the objection of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the create or transfer of interests in land except if evidenced in writing.

Constructive Trusts

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity consider it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is dependent upon the order of the court.

Resulting or implied trusts

On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price.

A resulting trust arises by operation of law and fall into two broad categories. One such category is where someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money.

If an individual purchases and then pays for property, but the legal title is transferred to another person at their direction, the presumption of a resulting trust arises, the property is held in trust for them. The law presumes that the purchaser, as the person providing the consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the others name.

However, there are instances where this application may not apply. This is where the property is transferred to the purchaser's immediate family, such as a spouse or a child. In such circumstances, the presumption of a resulting trust is replaced by the 'presumption of advancement'.

Presumption of advancement

A presumption of advancement is an equitable principle where a person puts property in the name of a spouse, child or other person. The presumption only applies to transfers and purchases made by people in particular relationships, such as parents and their children.

The presumption of advancement operates to prevent a resulting trust from arising because the relationship between the relevant parties provides a reason against presuming a trust. The presumption operates on the hypothesis that, because a certain relationship exists between 2 parties, a benefit provided by one party to the other at the cost of the first was intended to be provided by way of 'advancement'. Commissioner of Taxation v. Bosanac [2021] FCAFC 158 at paragraph 27.

In Commissioner of Taxation v Bosanac (No 7) the argument of a resulting trust versus the presumption of advancement was discussed at length. The court outlined the following principles:

•                     ...Although it is referred to as a presumption of advancement, the dominant approach in Australia is that it is strictly not a presumption.

•                     Rather it is a description of certain circumstances, being the existence of particular relationships, where the presumption of a resulting trust does not arise.

•                     Generally, the court will look to the dealings, documents and communications at the time of the purchase to determine whether there was intention to retain a beneficial interest. However, evidence of the dealings between the parties after the time of purchase may be a relevant factor.

The presumption of advancement may be rebutted by evidence of the actual intention of the purchaser at the time of purchase. Evidence is required to demonstrate that the purchaser did not intend the property to be a gift to the other party by reason of their relationship.

It was explained in Calverley v Green 56 ALR 483, Dean J said (at p 500):

'It is simply that there are certain relationships in which equity infers that any benefit which was provided for one party at the cost of the other has been so provided by way of "advancement" with the result that the prima facie position remains that the equitable interest is presumed to follow the legal estate and to be at home with the legal title or, in the words of Dixon CJ, McTiernan, Fullagar and Windeyer JJ in Martin v Martin (1959) 110 CLR 297 at 303, that there is an "absence of any reason for assuming that a trust arose".'

The ATO considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

When determining legal v beneficial ownership, our starting point, is that the beneficial ownership of the property is the same as the legal ownership.

To establish occasions where legal and beneficial ownership are not the same (i.e. a trust), there needs to be evidence to rebut the standard presumption that legal and equitable interests are the same. In the absence of clear and compelling evidence to the contrary, the property is considered to be owned by the people registered on the title.

In the circumstances you have outlined, there is no constructive trust as there has been no court or tribunal hearing which determined a constructive trust is in existence.

For the other two types of trust, clear contemporaneous evidence is required in order to either establish that there was an express trust or to rebut the presumption of advancement such that a resulting trust may have arisen.

To determine if you have beneficial ownership of the property, the facts and circumstances surrounding the property's purchase are considered in light of the relationship of the parties involved. We consider the intent of the parties when the property was purchased as well as evidence of the dealings between the parties both initially and after purchase. There are extremely limited circumstances where we would consider that an informal trust exists.

Application to your circumstances

You have provided documents and evidence which illustrate the abandonment of any ownership interest in the property by the deceased's former spouse Y, in favour of the deceased a short duration after the property was jointly purchased.

The deceased had the full beneficial ownership of the property. There is no dispute between the parties as to the property being part of the estate of the deceased and hence being beneficially owned by the deceased at the time of their death.

The Commissioner is satisfied that the deceased had 100% equitable ownership interest in the property and consequently the property forms part of the deceased estate.

Issue 2: Deceased estate

Question 2

Will the Commissioner exercise the discretion under section 118-195 of ITAA 1997 to allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain or capital loss you made on the disposal?

Answer

Yes.

Summary

The words 'trustee of a deceased estate' as used in section 118-195 of the ITAA 1997 are not limited to a legal personal representative but include the trustee of a testamentary trust. A CGT A1 event will occur for the trustees of the deceased estate under section 104-10 of ITAA 1997 when they dispose of the property. The timing of CGT A1 event will occur when the trustees enter into a contract to sell the property.

Detailed reasoning

Section 128-15 of the ITAA 1997 states that a Capital Gains Tax (CGT) asset owned by a deceased person that devolves to a legal personal representative, or beneficiary of the deceased estate, is taken to have been acquired on the day the deceased died.

A capital gain or capital loss may be disregarded where a capital gains tax event happens to a dwelling if you owned it as the trustee or beneficiary of the deceased estate.

Section 118-195 of the ITAA 1997 provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate if:

•                     the property was acquired by the deceased before September 1985, or

•                     the property was acquired by the deceased on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income,

and

•                     your ownership interest ends with two years of the deceased's death or within a longer period allowed by the Commissioner, or

•                     the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

-                    the spouse of the deceased immediately before death, or

-                    an individual who had a right to occupy the dwelling under the deceased's Will; or

-                    the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate (PCG 2019/5) outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the two -year period under section 118-195 of the ITAA 1997.

Generally, the Commissioner will allow a longer period where the sale of the dwelling was delayed due to reasons beyond your control.

The executor or trustee of the deceased estate must satisfy 5 conditions to qualify for the safe harbour.

The first condition is that, during the initial 2-year period after the deceased's death, over 12 months are spent addressing one or more of the following circumstances:

•                     the ownership of the dwelling, or the Will, is challenged;

•                     a life or other equitable interest given in the will delays the disposal of the dwelling;

•                     administration of the estate is delayed due to the complexity of the deceased estate;

•                     settlement of the contract of sale of the dwelling is delayed or falls through for reasons outside of the trustee's/beneficiary's control;

•                     restrictions on real estate activities imposed by a government authority in response to the COVID-19 pandemic.

The second condition is that the dwelling must be listed for sale as soon as practically possible after those circumstances are resolved.

Three, the sale must be settled within 12 months of the listing.

Four, the following factors are immaterial to the delay in disposing of the dwelling and would weigh against the Commissioner allowing a longer period:

•                     waiting for the property market to pick up before selling the dwelling;

•                     delay due to refurbishment of the house to improve the sale price

•                     inconvenience on the part of the trustee or beneficiary to organise the sale of the house, or

•                     unexplained periods of inactivity by the executor in attending to the administration of the estate.

The final condition requires that there be no more than an 18-month extension to the 2-year period for disposal.

A trustee or beneficiary of a deceased estate may apply to the Commissioner for an extension of the 2-year time period, where the CGT event happened in 2008-09 or later. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee.

In the event that the safe harbour conditions are not met, the PCG also outlines factors that the ATO may consider when weighing up whether or not to exercise the Commissioner's discretion:

•                     the sensitivity of the trustee's/beneficiary's personal circumstances and/or of other surviving relatives of the deceased;

•                     the degree of difficulty locating all beneficiaries required to prove the will;

•                     any period the dwelling was used to produce assessable income, and

•                     the length of time the trustee/beneficiary held ownership interest in the dwelling.

Paragraph 14 of PCG 2019/5 explains we weigh up all of the factors (both favourable and adverse).

Application to your circumstances

After the deceased passed away, the property passed to you as trustee of the estate. The property was the deceased's main residence until just before they passed away and was not used to produce assessable income at that time.

The property settled more than two years after the deceased's death. Therefore, you require the Commissioner's discretion to extend the two-year period to be eligible for an exemption.

Taking into consideration the complexities of administering both the deceased estate and that the property was sold as soon as practicable after the issues were resolved the Trustees of the estate can disregard any capital loss or capital gain on the sale of Property in accordance with section 118-195 (ITAA 1997).