Private ruling: CGT - deceased estate
Published: October 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the capital gain from the sale of the property be disregarded under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: X was the sole proprietor of the property. The property was purchased by X prior to 20 September 1985. X passed away. X's will appointed Y as executor and sole beneficiary of X's estate. Following X's death, Y continued to reside at the property until they were admitted to a nursing home. The property continued to be treated as Y's main residence under section 118-145 of the ITAA 1997. The property was tenanted through a real estate agent for a period of time. Y passed away. Prior to their death, Y had not applied for probate of X's will. Y's will bequeathed their entire estate to family members in equal shares. The relevant authority granted probate for the estate of Y and letters of administration for the estate of X. The property was sold under a power of sale during the 2011-12 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-130(1) | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-195

Reasons for decision: Summary: As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. | Detailed Reasoning - And also one of these items: 1 the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner ........... 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual * denotes a term defined in section 995-1 of the ITAA 1997 | Detailed Reasoning - Application to your circumstances: In this case when X passed away, their will bequeathed the property to Y. However, Y did not apply for probate in respect of X's will prior to passing away. Taxation Ruling IT 2622 provides that even though a will may provide beneficiaries with absolute and indefeasible interests in the capital or income of an estate, under State laws those interests cannot crystallize until probate has been granted. Accordingly, as probate had not been granted, Y was not absolutely entitled to the property as against the trustee of X's estate. However, for the purposes of section 118-195 of the ITAA 1997, an ownership interest in a dwelling can be a legal or equitable interest in it or a right to occupy it (subsection 118-130(1) of the ITAA 1997). We accept in these circumstances that while Y was not absolutely entitled to the property as against the trustee of X's estate, Y had an equitable interest in the property following X's death. The requirements of subsection 118-195(1) of the ITAA 1997 have been met as: o Y acquired an ownership interest (being an equitable interest in the property) after 20 September 1985 and it was Y's main residence (as a result of the choice under section 118-145 of the ITAA 1997) and not being used to produce assessable income just prior to Y's death; and o the property was sold within two years of Y's death. Accordingly, any capital gain made by the trustee of the estate on the disposal of the property will be disregarded under subsection 118-195(1) of the ITAA 1997.