Private ruling: Capital gains tax - testamentary trust
Date of advice: 16 February 2026
Published: 7 April 2026
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is Person D specifically entitled to the capital gain made on the sale of Property 2 by the Y Testamentary Trust (the Trust) under section 115-228 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the Trustee for Y Testamentary Trust (the Trustee) the relevant taxpayer who will be assessed in their capacity as trustee on the capital gain made by the Trust on the sale of Property 2? | A2: Yes. | Q3: Is the Trustee entitled to a partial main residence exemption under section 118-200 of the ITAA 1997 on the capital gain in relation to the Trust's original xx% ownership interest in Property 2? | A3: Yes. | Q4: Does section 118-210 of ITAA 1997 apply to exempt a portion of the capital gain made by the Trustee on the sale of the xx% ownership interest in Property 2 acquired by the Trustee from Person B on XX/XX/XXXX, which reflects the time that Person C used Property 2 as their main residence? | A4: Yes.

Relevant facts and circumstances: Person A passed away on XX/XX/XXXX. Person A was an Australian tax resident on the date they died. Under clause X of their will, Person A established a life interest trust (being the Y Testamentary Trust [the Trust]) in favour of their child, Person C as follows: I GIVE all my interest in the properties known as Property 1 and Property 2 to my Trustees on trust for PERSON C for their life, and after their death, to such child or children of PERSON C as shall survive them and attain eighteen years in equal shares. Person A's will provided the Trustee with broad discretionary powers to deal with trust property for the benefit of the beneficiaries, including the power to sell and use the proceeds to acquire other trust property. The terms of the will do not include a definition of income. The will also does not include an income recharacterisation or income equalisation clause. Person C has only one child, being Person D. Both trustees were Australian tax residents in the 202X income year. At their death Person A owned the following residential properties: (a) 100% of Property 1; and (b) 50% of Property 2 as tenants in common with their sibling, Person B in equal shares. Person A and Person B acquired Property 2 on XX/XX/XXXX for $X from an unrelated third party. Property 1 was Person A's main residence. The probate values for these properties (dated XX/XX/XXXX) were as follows: (a) Property 1 - $ X; and (b) 50% of Property 2 - $X. An independent valuation of Property 2 dated XX/XX/XXXX valued Property 2 at $X. A few years after Person A's death, the family had discussions on how best to allocate these properties. These discussions resulted in it being decided that: (a) Property 2 was best suited for Person A's child, Person C and their family (comprising their late spouse, and their child, Person D, since it had a bigger house and a larger backyard); and (b) Property 1 was best suited option for Person B to own and live in as the property block was smaller and easier to maintain. The Trustee then sought advice from the family solicitor (who were the same solicitors who drafted Person A's will) on how to implement this decision in accordance with the law and the terms of the will. This led to the following actions. On XX/XX/XXXX: (a) Person B transferred their 50% interest in Property 2 to the Trust for $X and ad valorem duty of $X was paid; and (b) the Trust transferred 100% of Property 1 to Person B for $X and ad valorem duty of $X was paid. These transfers formed part of a family arrangement under which the Trust ended up owning 100% of Property 2 and Person B ended up with 100% of Property 1. The primary motivation for these transfers was so that: (a) Person C and Person D (being the beneficiaries of the Trust) ended up obtaining 100% use of Property 2 as their family home; and (b) Person B ended up with 100% of Property 1 to use as their family home. To implement these transactions the Trustee exercised their broad discretionary powers under the will to: (a) acquire Person B's share of Property 2 for Person C and their family to use as their family home as this was for Person B's maintenance, advancement and benefit; and (b) sell Property 1 to Person B in order to acquire Person B's share of Property 2 for Person C's maintenance, advancement and benefit. There was a period before Person C and their immediate family moved into Property 2 on XX/XX/XXXX to use as their home. The sole material asset of the Trust in the 202X income year was 100% of Property 2. On XX/XX/XXXX, the Trustees entered into a contract to sell Property 2 for $X. Person C used Property 2 as their main residence from XX/XX/XXXX to the time of settlement of its sale which occurred on XX/XX/XXXX. Broadly, the gross capital gain made by the Trust on the sale of Property 2 (Property 2 Capital Gain) is estimated to be approximately $X before the application of any CGT concession. The Property 2 Capital Gain covers both the 50% share of Property 2 inherited from Person A and the 50% share of Property 2 acquired from Person B. This calculation of the Property 2 Capital Gain is a broad estimate as the actual cost bases for these shares of Property 2 will need to be confirmed with a compliance tax agent. The Property 2 Capital Gain was the only assessable income derived by the Trust in the 202X income year. No trust property representing the Property 2 Capital Gain has been paid or applied for the benefit of a beneficiary of the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 115-228 | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 section 118-210 | Income Tax Assessment Act 1936 section 97 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A

Reasons for decision: Summary: Is Person D specifically entitled to the capital gain made on the sale of Property 2 by the Y Testamentary Trust (the Trust) under section 115-228 of the Income Tax Assessment Act 1997 (ITAA 1997)? No. | Detailed Reasoning - Reasoning: The capital gains tax streaming provisions in Subdivision 115-C of the ITAA 1997 ensure that a beneficiary of a trust who is 'specifically entitled' to a capital gain made by the trustee (a 'trust capital gain') will be assessed on it. Section 115-228 of the ITAA 1997 states that for a beneficiary to be specifically entitled to a capital gain, the financial benefit that is referable to the capital gain must be: • received, or reasonably be expected to be received, by the beneficiary; and • recorded, in its character as referable to the capital gain, in the accounts or records of the trust no later than 2 months after the end of the income year. ATO Interpretative Decision 2013/33 (ATO ID 2013/33) concluded that after the death of the life tenant, a remainder beneficiary of a trust created over a deceased's estate by their will, was specifically entitled to capital gains made by the trustee. The ATO ID stated that the remainder beneficiary could reasonably be expected to receive all of the financial benefit referable to capital gains made by the trustee after the death of the life tenant. It also stated that the will which created the trust meets the description of a record of the trust in which is recorded the financial benefit that the remainder beneficiary is expected to receive in its character as a benefit referable to the capital gain - the will records the remainder beneficiary's entitlement to the asset. In contrast to ATO ID 2013/33, the life interest owner in the present case, being Person C, has not passed away. Although Person C is Person D's parent, it is still possible for Person D to pre-decease Person C and if that occurs Person D will never receive the financial benefit that is referable to the Property 2 Capital Gain. Consequently, we do not consider that Person D is specifically entitled to the Property 2 Capital Gain. | Detailed Reasoning - Question 2: Is the Trustee for Y Testamentary Trust (the Trustee) the relevant taxpayer who will be assessed in their capacity as trustee on the capital gain made by the Trust on the sale of Property 2? | Detailed Reasoning - Answer: Yes. | Detailed Reasoning - Reasoning: Liability for a trust's taxable income (including income according to ordinary concepts and statutory income) in an income year is allocated to the trust's beneficiaries in proportion to their present entitlement to the 'income' of the trust [section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)] . If there are no beneficiaries presently entitled to the 'income' of the trust, the trustee will be assessed on the trust's taxable income under either section 99 or 99A of the ITAA 1936. There is an exception if a beneficiary is specifically entitled to a capital gain which was discussed further above. As the deceased's will does not contain a definition of 'income', the 'income' of the Trust is determined by ordinary concepts. The Property 2 Capital Gain is not income according to ordinary concepts. The Trust did not derive any income according to ordinary concepts during the 20XX income year. That is, although the Trust had taxable income consisting of the Property 2 Capital Gain, it did not have 'income'. As the Trust did not have 'income', no beneficiary could be presently entitled to 'income'. Also, as discussed further above, it is not considered that a beneficiary was specifically entitled to the Property 2 Capital Gain. Therefore, the Trustee will be assessed on the Trust's taxable income which consists of the Property 2 Capital Gain. See the accompanying Administration Discretion decision letter for whether the Trustee is assessed under section 99 or 99A of the ITAA 1936. | Detailed Reasoning - Question 3: Is the Trustee entitled to a partial main residence exemption under section 118-200 of the ITAA 1997 on the capital gain in relation to the Trust's original 50% ownership interest in Property 2? | Detailed Reasoning - Answer: Yes. | Detailed Reasoning - Reasoning: The trustee of a deceased estate may be entitled to a partial CGT exemption under section 118-200 of the ITAA 1997 where they dispose of an ownership interest in a dwelling that had been owned by the deceased and section 118-195 of the ITAA 1997 does not apply. ATO Interpretative Decision 2006/34 (ATO ID 2006/34) confirmed that: The words 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. This was because item 2(b) in the table in subsection 118-195(1) of the ITAA 1997 refers to an individual who had a right to occupy the dwelling under the deceased's will (that is, a life tenant) and a life tenancy can only arise after the administration of an estate has been completed. Consequently, the 'trustee of a deceased estate' must include the trustee of a testamentary trust in order to give effect to the intended legislative policy. The formula in section 118-200 of the ITAA 1997 that provides a partial CGT exemption takes into account the number of days that the dwelling was the main residence of an individual referred to in the table in subsection 118-195(1) of the ITAA 1997, including an individual referred to in item 2(b). Therefore, for the same reasons as set out in ATO ID 2006/34, 'the trustee of a deceased estate' also includes the trustee of a testamentary trust for the purposes of section 118-200 of the ITAA 1997. In the present case, the Trustee is entitled to a partial main residence exemption for its original 50% ownership interest in Property 2 under section 118-200 of the ITAA 1997 for the days that Property 2 was Person C's main residence because: • that 50% ownership interest in Property 2 had been owned by the deceased • Person C had a life interest in relation to it which meant they had a right to reside in the property; and • section 118-195 of the ITAA 1997 does not apply. | Detailed Reasoning - Question 4: Does section 118-210 of ITAA 1997 apply to exempt a portion of the capital gain made by the Trustee on the sale of the 50% ownership interest in Property 2 acquired by the Trustee from Person B on XX/XX/XXXX, which reflects the time that Person C used Property 2 as their main residence? | Detailed Reasoning - Answer: Yes. | Detailed Reasoning - Reasoning: The trustee of a deceased estate may be entitled to a CGT exemption under section 118-210 of the ITAA 1997 where they dispose of an ownership interest in a dwelling that they acquired under the deceased's will for occupation by an individual. For similar reasons to those discussed in relation to sections 118-195 and 118-200 of the ITAA 1997, 'the trustee of a deceased estate' also includes the trustee of a testamentary trust for the purposes of section 118-210 of the ITAA 1997. The Commissioner expresses the view in Taxation Determination TD 1999/74 Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997? that the connection required for acquisition under a deceased's will is not a strict one. It states that the acquisition may be in pursuance of the will or under the authority of the will but does not have to be in strict conformity with the will or expressly by force of the will. In the present case, the Trustee has been provided broad discretionary powers under the will to deal with, and acquire, trust property for the benefit of the beneficiaries. As stated in TD 1999/74, for the purposes of subsection 118-210(1) of the ITAA 1997, the connection required between the acquisition and the will is not a strict one and it is sufficient if the acquisition is made under the authority of the will. As the broad discretionary powers provided to the Trustee by the will were used to acquire the remaining 50% ownership interest in Property 2, it was acquired by the Trustee under the authority of the will. Also, although Person C did not immediately move into the property, the remaining 50% ownership interest was acquired by the Trustee for the purpose of Property 2 becoming Person C's family home. As Property 2 was not Person C's main residence for the entire period the Trustee owned the 50% ownership interest it acquired from Person B, the Trustee will be entitled to a partial CGT exemption as calculated using the formula set out in subsection 118-210(4) of the ITAA 1997. The partial CGT exemption will reflect the time that Person C used Property 2 as their main residence.