Private ruling: Capital gains tax and deceased estates
Published: June 2015
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Can you disregard the capital gain on the sale proceeds of the deceased's main residence under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: The deceased passed away in 19XX. The deceased inherited their main residence (the property) in 19YY on the death of their spouse. The property had been the family home and the deceased's main residence since the early 1950's. The deceased's Will left the property to their spouse (who predeceased them) to be held on trust and providing them with a life interest to occupy the property until their death. As the deceased's spouse predeceased them, the property became 'residue' under the terms of the Will. The residue of the estate was bequeathed to the children in equal shares as tenants in common. The property was transferred to Z children as joint tenants in their capacity as executors in 19AA. The other child was a "substituted executor with leave reserved" as they had diminished intellectual capacity. Their name does not appear on the title deed as executor. One of the children was living in the property prior to the deceased's death and continued to live in the property as their main residence for over 20 years, until the property was sold. This child did not pay any rent or occupation fee to reside in the property. The other children did not consent to this child continuing to live in the property after the deceased passed away. All expenses relating to the property, such as rates, repairs and water rates were shared equally between all children until the property was sold. A title search completed in particular years shows the property owners continued to be listed as Z children as joint tenants in their capacity as executors, as per the 19AA transfer. The property transfer form completed at the time of the sale of the property in the particular years, listed the Z children as joint tenants as the transferors. The property was never used to produce income.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 118-195(1). | Income Tax Assessment Act 1997 section 118-210.

Reasons for decision: Summary: Under subsection 118-195(1) of the ITAA 1997 a capital gain you make from a capital gains tax (CGT) event is disregarded, in relation to a dwelling (in your circumstances) that: • was acquired by the deceased before 20 September 1985 • you owned as the trustee of a deceased estate; and • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of an individual who had a right to occupy the dwelling under the deceased's Will. ATO Interpretive Decision ATO ID 2003/109 considers whether a trustee of a deceased estate can disregard a capital gain from the sale of the deceased's main residence under subsection 118-195(1) of the ITAA 1997. The facts in ATO ID 2003/109 are similar to your case in that: • the ownership of the dwelling passed to the trustee as the deceased's executor • under the deceased person's will, the deceased's residuary estate was to benefit five individuals • the dwelling formed part of the residuary estate and • the executor and the beneficiaries agreed that until the dwelling was sold it could be occupied by one of the beneficiaries. The reasons for decision in ATO ID 2003/109 state that: 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). In this case, the beneficiary had no right under the will to reside in the house. The beneficiary resided in the house because the executors and other beneficiaries so agreed. This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (see Certoma, GL 1987, The Law of Succession in New South Wales , The Law Book Company, Sydney, p. 117) As the beneficiary did not have a right to occupy the dwelling under the will, the trustee cannot disregard the capital gain made on the disposal of the dwelling. In your case, your interest in the property passed to you as executor of the deceased estate. The deceased acquired their ownership interest in the property in 19YY. You disposed of the ownership interest in the property in a particular years. There were no living individuals given the right to occupy the dwelling under the deceased's Will. You are therefore not entitled to disregard any of the capital gain of the sale proceeds of the property under subsection 118-195(1) of the ITAA 1997.