Private ruling: Capital Gains Deceased Estate - main residence exemption
Date of advice: 10 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2015

Ruling: Q1: Does a capital gains Tax (CGT) event happen when you enter into a contract to sell a dwelling? | A1: Yes | Q2: Will a capital gain or capital loss for all beneficiaries be disregarded if the deceased's main residence (the house) is sold before the end of the beneficiary's right to occupy? | A2: Yes | Q3: Will the Commissioner allow an extension of the exemption past the end of the beneficiary's right to occupy? | A3: No | Q4: If the house is not sold before the end of the beneficiary's right to occupy, will any gains be eligible for a partial CGT exemption? | A4: Yes Issue 2 | Q5: Is the cost base of the shares sold by the trustee of the Estate (the estate) passed on from the cost base of the deceased? | A5: Yes | Q6: Where beneficiaries are not presently entitled to income from the estate will CGT (if any) be payable by the estate? | A6: Yes

Relevant facts and circumstances: The Deceased died in 20XX. Probate was granted in 20XX. The deceased had a number of children, who are all equal beneficiaries. The executor of the will is a beneficiary. The estate included some small parcels of shares and a house. The house was purchased before 20 September 1985 and is a pre-CGT asset. The house was the main residence of the deceased. One beneficiary lived in the house with the deceased. The house remains their main residence. The will includes a right for the beneficiary to occupy the house for up to five years from the date of death. The property was transferred into the name of the executor (as executor/trustee) in 20XX. A small parcel of shares were also part of the estate and were sold in the 20XX-YY income year. The estate lodged a tax return for the 20WW-XX year comprising of income from dividends and interest.

Relevant legislative provisions: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) | Section 103-10 of the ITAA 1997 | Subdivision 115-A ITAA 1997 | Section 118-130 of the ITAA 1997 | Section 118-145 of the ITAA 1997 | Section 118-195 of the ITAA 1997 | Section 118-200 of the ITAA 1997 | Section 128-15 of the ITAA 1997

Reasons for decision: Detailed Reasoning - Question 1: Summary When you enter into a contract to sell the house, a CGT event will have taken place. Detailed Reasoning Capital gains tax (CGT) is the tax you pay on certain gains you make. You may make a capital gain or a capital loss as a result of a CGT event (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common event happens if you dispose of an asset to someone else, for example if you sell your dwelling. The sale of your dwelling constitutes CGT event A1 (section 104-10 of the ITAA 1997). CGT event A1 happens when the contract is signed, rather than when the sale settles. However it is important to note that the ownership interest does not end until the sale has settled. This can create timing issues between when the CGT event occurs and when the beneficiaries are eligible for exemptions from CGT. In your situation you acquired the house as the executor of the estate. The house was acquired by the deceased before 20 September 1985. Therefore, the house acquires a first element cost base of the house's market value on the date of death and is taken to have been acquired by the executor at the date of death. | Detailed Reasoning - Question 2: Summary If the CGT event happens to the house while it is still the beneficiary's main residence and before the beneficiary's right to occupy has ended, any capital gain or loss on the sale of the house will be disregarded. This exemption will apply to all beneficiaries. Detailed Reasoning For as long as the beneficiary with the right to occupy continues to treat the house as their main residence, up until the end of the right to occupy, any gain or loss on the sale of the house will be disregarded for CGT purposes. Under the will, the right to occupy ends five years after the death of the deceased. Section 118-195 of the ITAA 1997 states that a capital gain or loss will be disregarded if it arises from a CGT event in relation to an ownership interest in a dwelling that you received as beneficiary of a deceased estate or as trustee of a deceased estate, and the deceased acquired ownership before 20 September 1985, and the dwelling is the main residence of an individual with a right to occupy the dwelling under the deceased's will from the time of death till the dwelling is sold. The entire capital gain or loss is disregarded for all beneficiaries, not just the beneficiary with the right to occupy. Even if the beneficiary with the right to occupy moves out of the house before the five year right to occupy is up, provided they do not acquire a new main residence they may continue to treat the house as their main residence. However, in order for all the beneficiaries to be eligible for the full exemption, the sale must be finalised before the right to occupy ends - it is not enough that the contracts are signed before this point. Section 118-145 ITAA 1997 allows an individual to continue to treat a residence as their main residence for up to six years after they move out, if they do not establish a new main residence. Even if they move out of the house, the beneficiary with the right to occupy will be able to make an absence choice to nominate the house as their main residence. Importantly, subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract. In order to attract the full exemption, the ownership interest must be gone before the period ends. | Detailed Reasoning - Question 3: Summary The end of the right to occupy will be exactly five years after the date of death. The Commissioner has no power to allow an extension of the CGT exemption past the end of the beneficiary's right to occupy. Detailed Reasoning A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a CGT event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon: • who occupied the dwelling after the date of the deceased's death, or • whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, you will be entitled to a full exemption if: • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. The beneficiary occupies the house as their main residence under the terms of the deceased's will. In ATO Interpretive Decision 2004/882 , the Commissioner has considered the question of when the CGT exemption ends, and has found it ends when the right to occupy ends. '… an individual only has a right to occupy a dwelling under the deceased's will for the period specified in the will. An exemption is not available for any part of the trustee's ownership period that a person who had a right of occupancy continues to occupy the dwelling in some other manner…' In the beneficiary's case, the end of the right to occupy will be exactly five years after the date of death. The only discretion the Commissioner has been given to extend the CGT exemption for a deceased estate is around the two year period allowed to dispose of a dwelling. This does not apply in your case. For the other options, the period allowed to dispose of the asset is fixed by the legislation. Given the legislation allows a discretion in one case but not in the others in the same section, it appears likely that the parliament intended there be no discretion in the other cases. | Detailed Reasoning - Question 4: Summary While the beneficiary treats the house as their main residence, the beneficiary with the right to occupy will still be able to access a full exemption for their share of the gain on the sale. The other beneficiaries will have access to a partial exemption. Detailed Reasoning If the beneficiary with the right to occupy continues to treat the house as their main residence but the house is not sold until after the right to occupy has ended, only that beneficiary of the eight will be able to access the full CGT exemption under section 118-195 of the ITAA 1997. The section allows a beneficiary for whom the dwelling is their main residence to disregard the CGT on their share of the gain. This includes if they makes an absence choice as discussed above. The other beneficiaries will be eligible for a partial CGT exemption under section 118-200 of the ITAA 1997. The effect of this section is to make only a percentage of the gain taxable - equal to the number of days between when the beneficiary's residency period ends and the property is sold, divided by the total number of days since the date of death. For example, if the sale of the property settled one year after the beneficiary's right to occupy ended, you would calculate the percentage thus: 2,192 days (6 years) -1,826 days (5 years) divided by 2,192 days (6 years). (Total ownership days - right to occupy days) = Total ownership days (2,192-1,826) = 366 = 0.16697 = 16.7% 2,192 2,192 The remaining beneficiaries would be taxed on the taxable percentage of the gain since the date of death. As all the beneficiaries will have acquired their ownership interests in the dwelling more than twelve months before you disposed of it, the remaining beneficiaries will also be able to reduce any capital gain you will make by the 50% discount allowable under subdivision 115-A of the ITAA 1997. If the house was valued at $575,000 at the date of death, and sold for $1,075,000 six years later, the taxable gain would be: = ($1,075,000 - $575,000) x 16.7% x 50% x 7 / 8 = $36,531. The individual beneficiaries (excluding the beneficiary with the right to occupy) shares would each be: $36,531 / 7 = $5,218 . | Detailed Reasoning - Question 1: Summary The shares are transferred to the estate with the cost base the deceased had just before death. Detailed Reasoning The cost base of shares that were purchased after 20 September 1985 (post-CGT assets) and are transferred to the trustee or beneficiary of an estate will be the cost base of the shares immediately before the date of death. The cost bases of the shares will be the same as they were for the deceased. In order to determine this, it will be necessary to establish when they were purchased and how much for, and whether any other costs were incurred in holding them. Expenditure that is incurred by an executor in relation to the sale of the shares can also be included in the cost base of the shares. Examples would include brokerage and cost of transfer. Other costs incurred in establishing the estate's right to the assets, such as costs of confirming the validity of the deceased's will, will also form part of the cost base, apportioned across the estate's assets. Section 128-15 of the ITAA 1997 sets out the rules for determining the cost base of assets that are transferred to an estate. | Detailed Reasoning - Question 2: Summary The shares were sold in the 20XX-YY income year. If the estate has not been fully administered by the end of the 20XX-YY income year, any CGT will be payable by the estate, not the beneficiaries. If the house is sold and the estate is wound up in the same year, the beneficiaries are assumed to be liable for any CGT. If it can be demonstrated that the capital gain was made before the estate was fully administered, the CGT may be payable by the estate. Detailed Reasoning When the beneficiaries are not presently entitled to the income of the estate, any tax will be paid by the estate. When the beneficiaries become presently entitled to the income, the beneficiaries will pay any tax due. The executor determines when the beneficiaries are presently entitled. Taxation Ruling No. IT 2622 states that a beneficiary cannot be presently entitled until an estate is fully administered. However, when the estate is fully administered and all debts have been provided for, beneficiaries may become fully entitled, even before the estate has been wound up. Where a beneficiary is presently entitled to income from the estate, the beneficiaries will be responsible for paying any taxes on that income. To be presently entitled they must have an indefeasible, absolutely vested interest in the income. They must also be able demand immediate payment of the income. Generally beneficiaries are not presently entitled to the income of a deceased estate during the administration of the estate. The income usually belongs to the estate and not the beneficiaries. The executor, at their discretion, may pay income of the estate to beneficiaries. At this point, the beneficiaries become presently entitled to the income paid to them, and liable for any tax payable. An estate will continue until such time as the executor fully administers the affairs of the estate. There is no time limit on the life of an estate. Taxation Ruling No. IT 2622 says that an estate does not have to be wound up to be fully administered, but the residue of the estate must be fully ascertainable. While the house is unsold, provided the beneficiaries have not had their share of the house transferred to their own names, the estate will not be fully administered. If the house is not sold or transferred to the beneficiaries until after the right to occupy ends, the estate will continue until that time. An estate may need to lodge tax returns. The three year rule allows an estate's first three tax returns to be lodged with access to concessional tax rates. This will generally be a return from the time of death till the end of the financial year that the death occurs in, and the following two financial years. If the estate continues past the end of the third financial year, subsequent income will be taxed at special estate rates. The net income of an estate, and whether any beneficiary is presently entitled is determined on the last day of the income year. Beneficiaries will be taxed on all the income of the estate they are presently entitled to, and the estate will be taxed on the rest. Where an estate is wound up during a financial year, where it is possible to demonstrate income was earned before or after the estate was finalised, the income can be apportioned between the estate and the beneficiaries. When the estate pays tax on income, the remainder of that income is added to the capital or corpus of the estate. No further tax should be payable on the subsequent distribution of the estate's capital.