Private ruling: Capital gains tax - deceased estate - life interest - replacement asset - disposal
Published: April 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is any capital gain or capital loss that the estate may make on the sale or transfer of the replacement property disregarded under section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is any capital gain or capital loss that the estate may make on the sale or transfer of the replacement property disregarded under subdivision 118-B of the ITAA 1997 because it was the life tenant's main residence? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200 | Income Tax Assessment Act 1997 Section 118-210.

Reasons for decision: Summary: On the death of the testator, a testamentary trust was established over the dwelling for the lifetime of several life tenants'. As trustee of a testamentary trust, you would generally be liable for any capital gain or capital loss resulting from the sale of the dwelling. In the 1990 income year you disposed of the dwelling and acquired a replacement dwelling for the life tenants'. Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules for situations when capital gains and losses are ignored for main residence dwellings. There are special rules for dwellings that pass from or are owned by a trustee of a deceased estate. Section 118-195 of the ITAA 1997 contains a full main residence exemption if certain conditions are met, from a capital gain or capital loss you make from the disposal of a dwelling that you owned as trustee of a deceased estate. As the replacement dwelling was purchased by you as trustee of a testamentary trust which arose after the death of the deceased, and was not owned by the deceased when they died, section 118-195 of the ITAA 1997 cannot apply. Section 118-200 of the ITAA 1997 contains a partial main residence exemption that may apply in situations where the full exemption is not available under section 118-195 of the ITAA 1997. However, its application is also limited to situations where the dwelling was owned by the deceased when they died, so section 118-200 of the ITAA 1997 also cannot apply. Section 118-210 of the ITAA 1997 applies if you are the trustee of a testamentary trust and under the deceased's will you acquire an ownership interest in a dwelling for occupation by an individual. The will of the deceased provided for you to deal with certain assets of the estate at your absolute discretion for certain purposes, but did not confer upon you any right of sale in relation to the dwelling owned by the deceased when they died or to acquire a replacement dwelling for the life interest to reside in. This is because the original dwelling was specifically bequeathed to you on trust for the life tenants, and after their death to be sold with the proceeds to be divided between the beneficiaries. As such, the dwelling does not form part of the residuary estate. Consequently, it is considered that section 118-210 of the ITAA 1997 also does not apply to the sale of the dwelling as it wasn't acquired under the authority of the deceased's will for occupation by a named individual. Therefore you are unable to disregard any capital gain made on disposal or transfer of the replacement property.

Relevant facts: The deceased died prior to 20 September 1985. | Probate was granted to the Public Trustee. | You have provided a number of documents which forms part of and should be read in conjunction with this private ruling; | • A copy of the will of the deceased | The deceased owned a property located (property A). | The deceased will provided, that property A be held in trust by the trustee for the use and enjoyment of numerous life tenant's. | In a Deed of Assignment, a life tenant renounced their contingent interest in property A. | By a Deed of Agreement, it was agreed between the parties that property A be sold and a substitute property be purchased by the estate and one of the life tenant's (Life tenant Z) as tenants in common. | Property was sold for $X. | A substitute property (property B) was purchased for $Y in accordance with the Deed of Agreement o. | A Clause of the Deed of Agreement provides that the trustee shall apply all or part of the money deposited by the child, and held on trust to make up the shortfall in the cost of purchasing property B including the adjustments after the application of the proceeds of the sale of property B. | This resulted in the estate holding a percentage of the property and a percentage being held by a life tenant. | One of the life tenants's died in the 1995 income year. | The spouse and life tenant, by Deed of Renunciation, renounced and surrendered their life interest in the property B for the benefit of the life tenant Z and now sole remaining life tenant. | Property B was subsequently sold in the 1996 income year. | The proceeds from the sale were apportioned and a percentage returned to the life tenant and a percentage returned to the estate. | The estate purchased another property in the 2000 income year for use by life tenant Z (property C) | The life tenant Z has continued to reside in this property. | The life tenant will instruct the trustee to sell the property or renounce their life interest and transfer the property to the remainder man prior to 30 June 2015.