Private ruling: Capital gains tax - deceased estate
Published: December 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the entire capital gain made from the disposal of the property be disregarded? | A1: Yes

Relevant facts and circumstances: The deceased had a last will and testament (the will). The will was amended by two codicils. The effect of the first codicil was to make changes to the office of the executor and trustee. The effect of the second codicil was to appoint a professional advisor to act in respect of any business carried on pursuant to the trust created by the will. Clause X of the will provided that the spouse shall have a personal right to occupy the property during their widowed life. Additionally, clause X of the will provided that where the spouse provided notice that the property be sold or leased the trustees may at the request of the spouse lay out the whole or any part of the residuary estate in the purchase of a freehold property. Any purchased freehold property was to be held upon trust and the spouse was to be given the right to live and occupy that property. The spouse advised the trustees that they could no longer reside at the property as it was too large for them to occupy on their own. They also requested the trustees acquire a modest residential property for them to occupy in accordance with the terms of the will. The spouse, the trustees and the residual beneficiaries of the estate executed a Deed of Family Arrangement with the effect of increasing the annual income payable to the spouse. The trustees sold the property and acquired another property. At all times the property was the main residence of the spouse and was not used to produce assessable income. The spouse did not own any other residential property that could have otherwise been deemed to be their main residence. A Deed of Family Arrangement further increased the annual amount payable to the spouse under the will, authorised the payment of home care fees for the spouse and authorised the payment of a contribution into an aged care facility when required by the spouse. Due to the poor health of the spouse, the property was sold. In accordance with the Deed of Family Arrangement, the spouse had entered a nursing home prior to the sale of the property due to her ill health. The spouse made an election to the trustees to treat the property as their main residence.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-210 | Income Tax Assessment Act 1997 Subsection 118-145(3)

Reasons for decision: Summary: Section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) is applicable where the trustee of a deceased estate acquires an ownership interest in a dwelling for occupation by an individual under the will of the deceased. A trustee acquires an ownership interest in a dwelling "under the will" of the deceased for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the will or under the authority of the will. Paragraph 1 of Taxation Determination TD 1999/74 (TD) states as follows: In its context in subsection 118-210(1) of the Income Tax Assessment Act 1997 , the preposition 'under' requires a connection between the trustee's acquisition of an ownership interest in a dwelling and the deceased's will. The connection required is not a strict one. Subsection 118-210(3) of the ITAA 1997 provides that if the trustee receives money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event. Section 118-210 of the ITAA 1997 applies in this case, as trustee of the deceased's estate acquired an ownership interest in a dwelling for occupation by the spouse, in accordance with clause X of the deceased's will. Pursuant to subsection 118-145(3) of the ITAA 1997, a person can treat the property as their main residence indefinitely even though the dwelling has ceased to be their main residence, provided that it is not used to produce assessable income. Although the spouse did not reside at the property for a period of time when they moved to an aged care facility, it could continue to be treated as the spouse's main residence for the entire period of ownership. Accordingly, section 118-210 of the ITAA 1997 applies and any capital gains made by the trustee in disposing of the property will be disregarded under subsection 118-210(3) of the ITAA 1997.

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