Private ruling: Capital gains tax on the sale of property acquired through a deceased estate
Published: October 2011
Ruling period: Year ended 30 June 2006
Date scheme commenced: 1 July 2005

Ruling: Question and Answer | Is any capital gain or capital loss made by the estate of the deceased disregarded? | Yes.

Relevant facts and circumstances: Some time prior to 20 September 1985, the deceased's spouse purchased a property (herein referred to as the property). The property was registered solely in their name. The property consisted of two separate Lots, Lot 1 and Lot 2. A dwelling was already constructed on Lot 2. Lot 1 always remained vacant land and contained a garage for use with the dwelling. The two Lots were never fenced by a common boundary. The dwelling became the main residence of the deceased and their spouse throughout their lives. Some time later the deceased's spouse died. The market value of both Lots at that time is estimated to be a certain amount. Shortly afterwards the deceased became the sole registered proprietor of both Lots by way of a transmission application as a beneficiary of their spouse's estate. The deceased continued to use the dwelling as their main residence. Some years later, another person (person A) commenced living at the dwelling with the deceased. The dwelling became person A's main residence. Some time later the deceased died. They left a Will providing the whole of their estate, including the property, to person A. Person A is the executor and beneficiary of the deceased's Will. Person A continued to reside in the dwelling as their main residence and used the adjacent land as a garage and for their private and domestic purposes. The market value of Lot 1 on the deceased's date of death was a certain amount. The estimated market value of Lot 2 on the deceased's date of death was a larger amount. A market appraisal of the two Lots combined as at the date of the deceased's death was a certain amount. Some time later probate was granted in respect of the estate in favour of person A. Shortly afterwards proceedings were commenced by another person (person B) in the Supreme Court challenging the validity of the Will of the deceased and seeking to revoke the grant of probate that was previously made. Person B obtained ex parte orders restraining the executor in carrying out any further administration of the estate until the completion of the proceedings. Person B and person A (as executor for the estate and in their own capacity) then entered into contested litigation which was listed for hearing. Shortly afterwards person A moved out of the dwelling and thereafter has been residing overseas. Person A has no other main residence and has chosen to continue to treat the property as their main residence in accordance with section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997). Some time later person A and person B entered into a Deed of Settlement whereby person A agreed to charge 50% of the property in favour of person B and person B would permit a transmission application to be registered in person A's name. The Deed then provided for mechanisms relating to the sale of the property and disbursements of the net proceeds of sale. The injunctions previously obtained were dismissed as was the Statement of Claim and the Supreme Court proceedings were disposed of in that fashion. Person B and person A agreed to settle their differences on the basis of: · Consent orders filed in the Supreme Court primarily dismissing person B's claim, · A Deed of Settlement where primarily: - Person B agreed to withdraw the caveat in order to enable the transmission application to effect the transfer of the property into the name of person A; and - Person B received a charge of 50% interest in respect of the property and - The solicitor is to arrange payment of taxes including capital gains tax and lodge any tax return in respect thereof and after payment of taxes and other expenses associated with the maintenance and sale of the property, 50% of the proceeds are payable to Person A and 50% payable to Person B. Some time later the property was transmitted into Person A's name by a transmission application. Shortly afterwards separate titles issued, thereby creating separate title deeds for Lot 1 and Lot 2. From the time of the deceased's death until settlement of the sale of the dwelling, the property was vacant (after Person A left the dwelling and moved overseas) and was not used for any income generating purpose and the expenses relating to the property (such as rates, repairs) were not claimed by any of the parties as a tax deduction. Prior to the sale of the property extensive and significant maintenance work was required because of the overgrowth and lack of maintenance to the property from the deceased date of death until sale. Some time later Lot 2 (the dwelling Lot) sold. You incurred costs of sale, such as legal costs, agent's commission and surveyor's fees for Lot 2. Some time later Lot 1 (the vacant Lot) sold. You also incurred costs of sale, such as legal costs, agent's commission and surveyor's fees for Lot 1. The rates, insurances, land tax, repairs and maintenance in respect of the property were incurred jointly in respect of both Lots. It is your understanding that there was one rate notice, one insurance policy and one invoice in respect of these expenses, but which related to the two Lots. Expenditure has been incurred by the legal personal representative of the estate including the following: · Grant of probate. The grant was required to transfer the property to person A to enable the sale pursuant to the Deed of Settlement to proceed, · Contested litigation legal expenses concerning and defending the validity of the deceased's Will incurred by the executor, · Administration costs in the management of the estate, sale of the properties and ongoing management of the sale proceeds, · Costs of investigation advising and requesting this ruling. Person B has incurred the following expenditure: · Probate litigation plus counsel fees, · Valuation fees for valuation of Lot 1 as at the deceased's date of death and · Wreckers account- clearing metal and rubbish for sale. The estate had no other taxable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 128-15, | Income Tax Assessment Act 1997 Subsection 128-15(1), | Income Tax Assessment Act 1997 Subsection 128-15(2), | Income Tax Assessment Act 1997 Subsection 128-15(3), | Income Tax Assessment Act 1997 Subsection 128-15(4) and | Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision: Summary: Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded. In accordance with section 128-20 of the ITAA 1997 a capital gains tax (CGT) asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: (a) under your will, or that will as varied by a court order; or (b) by operation of an intestacy law, or such a law as varied by a court order; or (c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction or a pecuniary legacy or some other interest or share in your estate; or (d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and (ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate. (It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your legal personal representative.) In your situation, the estate passed the property to the beneficiary when the beneficiary entered into the deed of settlement. Therefore any capital gain or capital loss that the legal personal representative made is disregarded.

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