Private ruling: CGT - deceased estates
Date of advice: 8 June 2018
Published: August 2018
Ruling period: Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will you as executor of the deceased’s estate be able to disregard any capital gain or capital loss on the passing of the estate properties to the beneficiary of the estate? | A1: Yes | Q2: Will legal costs in relation the private ruling application and costs associated with proving the will and obtaining probate form part of the cost base to the beneficiary? | A2: Yes

Relevant facts and circumstances: C and D acquired some properties. Some of the properties were acquired before 20 September 1985 and some were acquired after 20 September 1985. C passed away and D became the sole owner of the above properties. None of the properties owned by D were used as D’s main residence. D passed away, and by D’s will left the properties to D’s child. D’s child was the Executor and sole beneficiary of D’s estate. Probate was granted to the executor within 6 months of D’s passing. You, being the executor and beneficiary of D’s estate transferred the properties forming part of D’s estate into your name as the legal personal representative (LPR). You received correspondence from your solicitor within 6 months of D’s passing, indicating that the properties forming part of D’s estate had been registered into your name as executor and that the properties are now in your name and future rate notices will be issued to you. You held the belief that the properties had been transferred into your name and continued to receive water and rate notices in respect of the properties in your personal name. You applied for two separate loans and the bank registered a mortgage over some of the properties as security for these loans. The bank retained title to these properties as security for the loans advanced. Recently, you approached your solicitor to locate the certificate of title for one of the properties and were informed that the title remained in your name as LPR. A search of title records of the other properties also revealed that these properties were registered in your name as LPR. You contend that you thought you had transferred the properties of D’s estate into your name and there was nothing preventing you from transferring these properties into your personal name as beneficiary within 6 months of the passing of D.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: You had an absolute entitlement to the capital gains tax (CGT) assets of D’s estate following the grant of probate and administration of the estate on xx July 20xx. As an executor of the estate any CGT on the passing of the assets of the deceased estate to the beneficiary is disregarded. | Detailed Reasoning - Detailed reasoning: Any capital gain or loss arising from a CGT event that happens to a CGT asset of a person when they pass away will be disregarded. When a CGT asset that you owned just before you passed away devolves to LPR or passes to a beneficiary of your estate, the LPR or beneficiary is taken to have acquired the asset on the day you passed away. Any capital gain or loss the LPR makes when the asset passes to a beneficiary is disregarded. The transfer of an asset from the LPR of a deceased estate to a beneficiary requires the asset to have ‘passed’ to the beneficiary. An asset is taken to have passed to the beneficiary when the beneficiary becomes the owner of the asset under specific circumstances in section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997), including under the deceased’s will or by the beneficiary becoming absolutely entitled to the asset against the LPR. Section 106-50 of the ITAA 1997 provides that when a beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as an asset of the beneficiary and not as an asset of the trustee. Income Tax IT 2622 Income tax: Present entitlement during the stages of administration of deceased estates (IT 2622) states that a beneficiary is held to be absolutely entitled to the CGT asset of the estate when administration of the estate has been finalised and there is a sole beneficiary entitled to the residue of the estate. This occurs when probate has been granted and the executor is free to call up the deceased’s assets and liabilities and pay the debts, funeral and testamentary expenses and is free to distribute the property of the deceased to the beneficiaries of the estate. Paragraph 16 of IT 2622 confirms that the estate does not have to be wound up or legal title of the asset to have passed to the beneficiary for the beneficiary to be absolutely entitled to the assets of the estate: The administration of the estate does not have to reach the stage where the estate is wound up for beneficiaries to enjoy present entitlement to the income of the estate. Once the executor has provided for all debts incurred by the deceased before his or her death and for debts incurred in administering the estate (ie funeral expenses) and provided for distributions of specific assets or legacies, it will be possible to ascertain the residue with certainty, even though the executor may not have actually made all the transfers necessary to satisfy these demands on the estate. | Detailed Reasoning - The first element of the cost base of assets held by the LPR or beneficiary of the deceased’s estate: Sub section 128-15(4) of the ITAA 1997 sets out the rules for determining the first element of the cost base of assets in the hands of the LPR or beneficiary. This is for the purposes of calculating any CGT liability in relation to subsequent CGT events such as the beneficiary selling the asset. Assets acquired by the deceased after 25 September 1985 (referred to as post CGT assets of the deceased) are taken to have been acquired by the LPR or beneficiary for the cost base of the asset in the hands of the deceased at their date of death. For CGT assets acquired by the deceased before 25 September 1985 (referred to as pre CGT assets of the deceased) are taken to have been acquired by the LPR or beneficiary for its market value at the date of the deceased death. | Detailed Reasoning - Application to your circumstances: As probate of the estate of D occurred within 6 month from the passing of D and the estate was subsequently administered with all property of the deceased being collected and all debts and legacies paid to create a residue of the estate, you as the sole beneficiary had an absolute entitlement to the estate and to direct the trustee to terminate the trust and transfer the asset to you. This absolute entitlement existed before title to these properties had been transferred into your personal name as beneficiary. The passing of the CGT assets of the deceased estate to you as beneficiary is not subject to any CGT liability. As the beneficiary, the first element of the cost base of the property acquired by the deceased prior to 20 September 1985 is the market value at the date of the deceased’s passing. For properties acquired by the deceased after 20 September 1985, the first element of the cost base is the cost base of the asset on the day the deceased died. | Summary: Legal costs incurred by you as the LPR and beneficiary in the administration of the estate of D can be included in the cost base of the asset. | Detailed Reasoning - Detailed reasoning: The LPR or beneficiary’s cost base can include expenditure relating to legal costs in confirming the validity of the will. ATO Interpretative Decision 2001/729 : Income Tax CGT-deceased estate-cost base of CGT asset-legal costs incurred in confirming validity of the will (ATOID 2001/729) confirms that expenditure incurred by a taxpayer to establish, preserve or defend their title to an asset or a right over an asset forms the fifth element of the cost base of the asset under subsection 110-25(6) of the ITAA 1997. Examples of expenditure that would fall within the fifth element of the cost base include: ● Legal fees incurred by a beneficiary in taking action to establish title to the estate’s property ● The costs incurred by the executor to obtain probate. | Detailed Reasoning - Application to your circumstances: Legal costs you have incurred in establishing title such as obtaining probate and administration of the deceased’s estate form part of the cost base in the hands of the LPR or beneficiary. Where the legal costs apply more than one property, it is reasonable to apportion the expenses on a pro rata basis (by value) across the cost base of all the assets of the deceased’s estate.