Private ruling: Capital gains tax - deceased estate
Date of advice: 8 November 2018
Published: January 2019
Ruling period: 30 June 20XX
Date scheme commenced: 1 June 19XX

Ruling: Q1: Did a capital gains tax event occur on the properties in the years when each of the two beneficiaries reached the relevant ages of X and X years of age? | A1: No | Q2: Will a capital gains tax event occur when the trustee transfers property A to a single beneficiary? | A2: Yes | Q3: Can the trustee disregard the capital gain or capital loss when property A is transferred to a single beneficiary? | A3: Yes | Q4: Will a capital gains tax event occur when the trustee transfers property B to a single beneficiary? | A4: Yes | Q5: Can the trustee apply a partial exemption under section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce the capital gain or capital loss when property B is transferred to a single beneficiary? | A5: Yes

Relevant facts and circumstances: The deceased passed away 19XX, leaving a will and two codicils. At the date of death (DOD), property A was the deceased’s main residence and the deceased named two beneficiaries for the residual estate. The will provided for the trustee to acquire a dwelling for the occupation by the beneficiaries. The Will was amended to have the residual estate divided into two parts. The first part of the distribution was to be paid to each of the beneficiaries when they reached the age of X years and the second part of the distribution was to be paid when they reached the age of X years. The youngest beneficiary resided in property A until 20XX, at which point they departed Australia and still remain out of the country. Property A was tenanted by a family friend rent free for five years. For four years property A produced income. Post DOD the trustee of the deceased’s estate purchased property B for the eldest beneficiary, and treated this dwelling as their main residence until 20XX. The youngest beneficiary reached the age of X in 20XX. The eldest beneficiary has moved back into property A, and is treating this dwelling as their main residence since 20XX. The trustee is considering transferring a property to each beneficiary as per their consent in 100% satisfaction of their entitlement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-23 | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 118-210 | Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15

Reasons for decision: Detailed Reasoning - Questions 1, 2 and 3: Section 104-75 of the ITAA 1997 provides that a CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which division 128 applies, such as a deceased estate) against the trustee, disregarding any legal disabilities the beneficiary may be under. A beneficiary is absolutely entitled to an asset of a trust as against the trustee if the beneficiary is: ● absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and ● able to direct the trustee how to deal with the asset. A beneficiary of a deceased estate does not have an interest in any asset of the estate and cannot be considered to be absolutely entitled to the estates assets until the administration of the estate is complete (Taxation Ruling IT 2622). Taxation Ruling TR 2018/6 explains the Commissioners views about the immediate income tax consequences of a trust vesting. Paragraph 13 of TR 2018/6 states - The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting). Paragraph 14 of TR 2018/6 states - Further, where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes. Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Land is rarely considered to be a fungible asset. Section 128-15(3) of the ITAA 1997 says any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded. In this case, the deceased executed a Will in 19XX and appointed a sole executor and trustee to act in accordance with the instructions for the two named beneficiaries. This included the residue and remainder of the real estate that the trustee was to hold upon trust for the beneficiaries once they lived to attain the ages of X and X years. The youngest beneficiary may have attained the age of X on 20XX, but neither beneficiary could be considered absolutely entitled to property A, as the asset is not fungible. Accordingly, no capital gain event occurred on this date. Once the trustee transfers property A to either beneficiary, a CGT event will occur and the capital gain or capital loss can be disregarded under subsection 128-15(3) of the ITAA 1997. | Detailed Reasoning - Questions 4 and 5: Similarly to above, neither beneficiary could be considered absolutely entitled to property B, regardless of them reaching the relevant ages. Section 104-85 of the ITAA 1997 provides that CGT event E7 happens when the trustee disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital. Once the trustee transfers property B to either beneficiary, CGT event E7 will occur. Section 118-210 of the ITAA 1997 applies if you are the trustee of a deceased estate and, under the deceased's Will; you acquire an ownership interest in a dwelling for occupation by an individual. A partial exemption is available if the dwelling is the individual’s main residence for only part of the period using the formula provided in subsection 118-210(4) of the ITAA 1997. The Commissioner expresses the view in TD 1999/74 that the connection required for acquisition under a deceased’s Will is not a strict one. For example, it will be sufficient if the interest is acquired in accordance with the terms of the Will. The trustee purchased property B post DOD for a beneficiary to occupy in accordance with the Will. This asset was not owned by the deceased before their death and the capital gain or capital loss cannot be disregarded under Division 128 of the ITAA 1997. Given property B was acquired by the trustees for occupation by a beneficiary under the will, any resulting capital gain can be reduced under a partial exemption under subsection 118-210(4) of the ITAA 1997.