Edited version of private advice

Authorisation Number: 1052403623830

Date of advice: 02 June 2025

Ruling

Subject: CGT - deceased estate

Question 1

Will the Deceased Estate be liable for Capital Gains Tax under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of the property?

Answer 1

Yes

Question 2

Will the first element of the cost base for the Executor of the Estate under section 128-15 of the ITAA 1997 be market value at date of death of the deceased?

Answer 2

Yes

Question 3

Does the main residence exemption under section 118-195 of the ITAA 1997 apply?

Answer 3

No, but a partial main residence exemption applies under section 118-200 of the ITAA 1997

Question 4

If the answer in question 1 is yes, will the Commissioner exercise his discretion under subsection 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax income of the estate in accordance with section 99 of the ITAA 1936?

Answer 4

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased purchased rural land ("the property") in around 19XX. The Deceased then built a residence on the property.

The Deceased married their spouse and they raised their family on the property.

The Deceased died in 20XX.

After the Deceased's death, their Spouse remained living at the property. It had been their principal place of residence and continued to be the Spouse's principal place of residence until the Spouse's death.

There were disputes among the siblings in relation to the entitlement of the estate's assets. A court proceeding was initiated by the late Spouse which was settled by the parties seeking Orders from the Supreme Court by consent.

The Deceased's Spouse had a right to reside in the property until their death pursuant to the Deceased's Will and confirmed in the consent order.

The title to the property remained in the Deceased's sole name from purchase (before 20 September 1985) until after their death.

After the probate the Deceased's Will had been granted, a transmission application to the executors was registered by the relevant State Land Registry Services.

The executors recorded on the title for the property were the Deceased's Spouse and three children as joint tenants.

After the Spouse's death, a notice of death was registered by the Land Registry Services to remove their name. The title is held in the names of the three surviving executors.

The size of the land is approximately X hectares.

According to probate, upon the Spouse's death, the property will be held on trust for their children as tenants in common. One of the Children is now deceased and their children (the Deceased's grandchildren) are the beneficiaries of their estate.

The sealed orders made with consent of the parties were issued and have changed the terms of the Deceased's will in regard to the property as follows:

"Upon the death of the Plaintiff, the property ... or the net proceeds derived from the same, together with any remaining capital or income earned thereon, shall be held by the estate of the deceased for:

1. The second defendant as to a X share

2. The third defendant as to a X share

3. The Deceased's Grandchild 1 as to a X share

4. The Deceased's Grandchild 2 as to a X share"

Approximately two and a half years after the Deceased's death, a Deed of Family Arrangement was entered into which agreed that two of the Deceased's children and two of their Grandchildren wish to include the Deceased's third child as a recipient of some of the sale proceeds. As a result, the family has agreed that the sale proceeds will be divided as follows:

•                Child 1 X

•                Child 2 X

•                Child 3 X

•                Grandchild X

•                Grandchild X

There had been disagreements between the beneficiaries in relation to the market value of the property which has resulted in a delay in transferring the property.

Approximately X years after the deed was entered into, the executors obtained a valuation from a registered valuer who valued the property at $XXXXX. The executors have now agreed to sell the property to 3 of the Beneficiaries for an agreed amount.

The valuer also provided a valuation as at the Deceased's date of death for $XXXXX.

No property is being acquired by or lent to the deceased estate.

No loans have been made by the deceased estate.

The income of the deceased estate is derived only from assets held or deemed to belong to the deceased estate as at the Deceased's date of death.

There are no special rights or privileges attached to any property of the deceased estate.

No other property was acquired prior to the date of death of the Deceased that was for any purpose other than the enjoyment of the Deceased during their lifetime.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1997 section 104-75

Income Tas Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 subsection 118-200(2)

Income Tax Assessment Act 1997 section 128-15

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

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 subsection 128-20(1)

Reasons for decision

Question 1

A CGT asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the ITAA 1997.

Any capital gain or loss made by the trustee of the deceased estate when the asset passes to a beneficiary of the deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997. However, the beneficiary will be the relevant taxpayer if a CGT event happens to the asset after it has passed to the beneficiary.

Taxation Determination TD 2004/3 Income Tax: capital gains: does an asset 'pass' to a beneficiary of a deceased estate under section 128-20 of the Income Tax Assessment Act 1997 if the beneficiary becomes absolutely entitled to the asset as against the trustee of the estate? provides the Commissioner's view on the operation of section 128-20 of the ITAA 1997. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes 'passing' dependent upon the acquisition of legal ownership. While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, the TD explains that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee.

CGT event E5 in section 104-75 of ITAA 1997 does not happen when a beneficiary becomes absolutely entitled to an asset that a deceased person owned at the time of their death.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides the Commissioner's view on the application of those words in the context of the Capital Gains Tax provisions. In order for the beneficiary to become absolutely entitled to the asset as against the trustee, the beneficiary must have a vested and indefeasible interest in the entire trust asset so that they have the ability to call for the asset to be transferred to them or transferred at their direction (Saunders v. Vautier (1841) 49 ER 282).

In the case of land, paragraph 54 of TR 2004/D25 explains:

54. ... the requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied if there are multiple beneficiaries in respect of a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, the asset to which the provisions refer is the land and no beneficiary in this case is entitled to the whole of it...

If no beneficiary is absolutely entitled to the trust asset, and a CGT event occurs to the trust asset, section 106-50 of the ITAA 1997 will not apply and the Trustee will be liable for any capital gain or loss.

Application to your circumstances

In these circumstances, the relevant asset is the property. The dispute over the terms of the will, and specifically in relation to the property has resulted in the Executor agreeing to sell the property under a power contained in the will and distribute the proceeds to the Beneficiaries. As the Executor has chosen to sell the property under the power of sale in the will, and distribute the proceeds to the Beneficiaries, the Beneficiaries did not "become the owner" of the Property under the Deed of Family Arrangement for the purpose of paragraph128-20(1)(d) of the ITAA 1997.

In addition, as there are multiple beneficiaries entitled to a share of the property, no singular beneficiary is absolutely entitled against the trustee to the asset.

Therefore, the property has not passed to the named beneficiaries for the purpose of section 128-20 of the ITAA 1997.

When the property is sold by the Executor, the Executor of the Estate will derive a capital gain or loss. The proceeds of the sale to the beneficiaries will be a cash distribution from the Estate after the capital gain has been realised and not assessable to the beneficiaries.

Question 2

Section 128-15 of the ITAA1997 provides for what happens to an asset that was owned by the deceased just prior to death and which devolves to their LPR. Subsection 128-15(2) of the ITAA 1997 states that the LPR is taken to have acquired the asset on the day the deceased died. The table in section 128-15 of the ITAA 1997 shows modifications to the cost base and reduced cost base and item 4 in the table states that the first element of the assets cost base if the asset was acquired by the deceased before 20 September 1985 is the market value of the asset at the date of death.

Application to your circumstances

In these circumstances, the Deceased acquired the property before 20 September 1985 and owned the property just before their death. When the property devolved to the LPR being the executor of the deceased estate, the first element of cost base for the LPR becomes the market value of the property at the date of death.

Question 3

Section 118-210 of the ITAA 1997 provides that adjacent land to a building only attracts the main residence exemption if the land (including the land on which the dwelling is built) is two hectares or less.

Subsection 118-195 (1) of the ITAA 1997 provides that a capital gain or loss that is made from a CGT event in relation to a dwelling is disregarded if you owned the asset as the trustee of the deceased estate, and the deceased acquired the asset before 20 September 1985, and the dwelling was occupied from the deceased's death until the trustee's ownership interest ends by the spouse of the deceased immediately before death.

Section 118-200 of the ITAA 1997 states that you only get a partial main residence exemption if you owned the dwelling as the trustee of a deceased estate and section 118-195 of the ITAA 1997 does not apply. The capital gain or loss is worked out using the following formula in subsection 118-200(2) of the ITAA 1997:

CG or CL amount x (non main residence days/total days)

Section 118-200 of the ITAA 1997 states that "total days" for the purpose of this calculation if the deceased acquired the asset before 20 September 1985 is the number of days in the period from death until your ownership as Trustee ends.

Application to your circumstances

The capital gains tax treatment is dealt with in two portions being:

•                Portion 1: the dwelling including the adjacent land up to X hectares;

•                Portion 2: the remaining X hectares of land

In relation to Portion 1, the Deceased died and the dwelling was occupied by their Spouse as their main residence until their death. The dwelling was not occupied from the deceased's death until the trustee's ownership interest ends by the Spouse of the deceased, as the Spouse died in 20XX and the property is being sold in the financial year ending approximately three years later. Therefore, section 118-195 of the ITAA 1997 does not apply.

However, section 118-200 of the ITAA 1997 states that the trustee can have a partial main residence exemption as they owned the dwelling as the trustee of the deceased estate and section 118-195 of the ITAA 1997 does not apply. The non-main resident days will be the number of days in the period from the death until the trustee's ownership interest ends when the dwelling was not the main residence of the Spouse. The capital gain will need to be calculated using the formula:

CG or CL amount x (non-main resident days/days total)

As per the definition of 'non main resident days' in section 118-200 of the ITAA 1997, the non-main resident days will be the number of days in the period from the Deceased's death until the trustee's ownership interest ends when the dwelling was not the main residence of the Spouse.

As per the definition of total days in section 118-200 of the ITAA 1997, the total days will be the number of days in the period from the Deceased's death until the ownership interest of the trustee ends as the asset was acquired by the Deceased before 20 September 1985.

In relation to Portion 2, the entire capital gain will be subject to CGT with any relevant discounts applied.

Question 4

Section 99A of the ITAA 1936 applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to subsection 99A(2) of the ITAA 1936, forms the opinion that it would be unreasonable for section 99A of the ITAA 1936 to apply in relation to the deceased estate for that particular year of income.

Paragraph 99A(2)(a) of the ITAA 1936 states that the types of trust estate in respect of which the Commissioner's discretion may be exercised include a trust estate that resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil.

In exercising the discretion under subsection 99A(2) of the ITAA 1936, the Commissioner will have reference to the factors listed in subsection 99A(3) of the ITAA 1936 as well as relevant case law and the facts and circumstances of a particular case.

The factors listed in subsection 99A(3) of the ITAA 1936 are as follows:

(a) the Commissioner shall have regard to the circumstances in which and the conditions, if any, upon which, at any time, property (including money) was acquired by or lent to the trust estate, income was derived by the trust estate, benefits were conferred on the trust estate or special rights or privileges were conferred on or attached to property of the trust estate, whether or not the rights or privileges have been exercised

(b) if a person who has, at any time, directly or indirectly:

(i) transferred or lent any property (including money) to, or conferred any benefits on, the trust estate; or

(ii) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of the trust estate whether or not the right or privilege has been exercised;

has not, at any time, directly or indirectly:

(iii) transferred or lent any property (including money) to, or conferred any benefits on, another trust estate; or

(iv) conferred or attached any special right or privilege, or done any act or thing, either alone or together with another person or persons, that has resulted in the conferring or attaching of any special right or privilege, on or to property of another trust estate, whether or not the right or privilege has been exercised;

the Commissioner shall have regard to that fact; and

(c) the Commissioner shall have regard to such other matters, if any, as he or she thinks fit.

(3A) For the purposes of the application of paragraph (3)(a) in relation to a trust estate of the kind referred to in paragraph (2)(a), a reference in that first-mentioned paragraph to the trust estate shall be read as including a reference to the person as a result of whose death the trust estate arose.

Application to your circumstances

The estate is a deceased estate that resulted from the Will of the deceased as amended by a court order, therefore satisfying subsection 99A(2) of the ITAA 1936.

No property is being acquired by or lent to the deceased estate.

No loans have been made by the deceased estate.

The income of the deceased estate is derived only from assets held or deemed to belong to the deceased estate as at the Deceased's date of death.

There are no special rights or privileges attached to any property of the deceased estate.

No other property that was acquired prior to the date of death of the Deceased was for any purpose other than the enjoyment of the Deceased during their lifetime.

Having regard to the above matters, and the legislative purpose of section 99A of the ITAA 1936 to prevent the use of trusts for tax avoidance, the Commissioner is of the opinion that it is unreasonable for section 99A of the ITAA 1936 to apply to the Trust in respect of the relevant year.

Therefore, the Commissioner's discretion will be exercised for that income year.