Edited version of private advice

Authorisation Number: 1052372254374

Date of advice: 14 March 2025

Ruling

Subject: CGT - deceased estate

Question 1

Was the Property occupied, from the date of death of the late taxpayer until its disposal, as the main residence of an individual who had the right to occupy the property under the late taxpayer's Will for the purpose of item 2(b) in column 3 of the table in subsection 118-195(1) of the Income Tax Assessment Act 1997?

Answer 1

Yes.

Question 2

If so, can the Trustee for the Estate of the late taxpayer disregard any capital gain or capital loss from the disposal of the Property pursuant to subsection 118-195(1)?

Answer 2

Yes.

This ruling applies for the following period:

For the income year 20XX

Relevant facts and circumstances

The late taxpayer passed away several years ago in 20XX, with probate finalised soon after in 20XX.

As at the date of death, the assets of the late taxpayer included a home (Property), which was their main residence. The late taxpayer purchased the Property before 20 September 1985.

The late taxpayer was a resident of Australia for taxation purposes just before the date of their death.

The terms of the Will made by the late taxpayer provided, amongst others, that beneficiary A could occupy the Property for their lifetime. beneficiary A could request the Trustee to sell the Property. The proceeds of the sale of the Property are to be used to providing a replacement property for beneficiary A.

Upon the death of beneficiary A, the Trustee is to hold the Property or the new property on trust for the Late Taxpayer's residuary estate. The Vesting date of the Will is beneficiary A's death. Upon the Vesting Date, the late taxpayer's residuary estate is to be divided amongst the named residuary beneficiaries

At the request of beneficiary A, it was decided to sell the Property with the Property being sold in the income year 20XX.

The Property was the main residence of beneficiary A from the date of the late taxpayer's death until the date of the sale of the Property. Further, the Property was not used to produce assessable income at any time from the date of the late taxpayer's death until the date of the sale of the Property.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 subsection 118-210(6)

Income Tax Assessment Act 1997 subsection 118-110(4)

Reasons for decision

Section 118-195(1) outlines the CGT treatment of dwellings acquired from a deceased estate. Relevantly, it provides that a capital gain or capital loss may be disregarded where a CGT event happens to a dwelling which is owned by the trustee of a deceased estate if either:

(1)           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 (item 1 of column 2 of the table in subsection 118-195(1)); or

(2)           the property was acquired by the deceased before 20 September 1985 (item 2 of column 2 of the table in subsection 118-195(1)),

and one of the following conditions is satisfied:

a)            the trustee's ownership interest in the dwelling ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner (item 1 of column 3 of subsection 118-195(1)

b)            from the deceased's death until the trustee's ownership interest ends, the dwelling was the main residence of one or more of the following persons:

(i)            the spouse of the deceased immediately before death (item 2(a) of column 3 of subsection 118-195(1); or

(ii)            an individual who had a right to occupy the dwelling under the deceased's will (item 2(b) of column 3 of subsection 118-195(1); or

(iii)            an individual who brought about the CGT event and the ownership interest in the dwelling passed to that individual as beneficiary (item 2(c) of column 3 of subsection 118-195(1).

ATO ID 2003/109 considers the operation of subsection 118-195(1) and relevantly states:

An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238).

An exclusion from the CGT exemption is provided in paragraph 118-195(1)(c). This provision applies where the deceased was an 'excluded foreign resident' just before their death - see subsection 118-210(6). Under subsection 118-110(4), an excluded foreign resident is an individual who has been a foreign resident for a continuous period of more than six years.

The term 'foreign resident' is defined in section 995-1 to mean a person who is not an Australian resident under subsection 6(1) of the Income Tax Assessment Act 1936.

Subsection 118-195(2) specifies the CGT events to which the exemption applies. The specified CGT events includes CGT Event A1 under section 104-10. CGT Event A1 happens if you dispose of a CGT asset.

Application to your circumstances

The late taxpayer acquired ownership interest in the Property before 20 September 1985, and therefore item 2 of column 2 of the table is satisfied.

In relation to item 2(b) of column 3, the Property was the main residence of beneficiary A.

Under the terms or with the authority of the late taxpayer's Will, beneficiary A was conferred with the right to occupy the Property for their lifetime until either the Property was sold by the Trustee at the request of beneficiary A (in which case a replacement property would be purchased for beneficiary A), or upon beneficiary A's death, in which case the Property (forming part of the residuary trust) would revert to the residuary beneficiaries.

Therefore, as beneficiary A did have the right to occupy the Property and it was their main residence from the date of the late taxpayer's death until the sale of the Property, it is considered that item 2(b) of column 3 is also satisfied.

Further, the capital gain or loss made by the Trustee arose from a CGT event listed in subsection 118-195(2); specifically CGT event A1 under section 104-10 occurred upon the sale of the Property.

As the late taxpayer was an Australian resident for taxation purposes at the time of their death, the exclusion from the CGT exemption provision relating to 'excluded foreign residents' in paragraph 118-95(1)(c) does not apply.

Consequently, as the terms of subsection 118-195(1) have been met, the Trustee is entitled to disregard any capital gain or capital loss made on the disposal of the Property.