Private ruling: Deceased estate
Date of advice: 24 May 2016
Published: July 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Will the beneficiary be entitled to disregard in full any capital gain made on the disposal of the dwelling? | No. | 2. Will the beneficiary be entitled to partially disregard any capital gain made on the disposal of the dwelling? | Yes.

Relevant facts and circumstances: The parent (parent X) of individual X purchased the dwelling prior to 1985. Individual X moved into the dwelling some years later and has lived in the dwelling continuously for over 20 years. Parent X passed away and the dwelling was left to the individual X's other parent (parent Y). The parents of individual X did not occupy the dwelling at any time. The dwelling has not been used to produce assessable income. Parent Y passed away several years ago. The will of parent Y provided for a discretionary trust fund (the Trust Fund) to be established and the property of the fund was to include the dwelling. The will did not include any wording in regard to the right of any individual to occupy the dwelling. No further property has been added to the Trust Fund. The will stated that the primary beneficiary of the Trust Fund was to be individual X and also provided for any spouse or child of individual X be added as a beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subsection 115-30(1) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 subsection 118-200(2) | 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)

Reasons for decision: Detailed Reasoning - Dwellings passing to legal personal representative or beneficiary of estate: Where a CGT asset owned by a deceased person is acquired by an individual as a legal personal representative or beneficiary of the estate, the legal personal representative or beneficiary is taken to have acquired the asset on the day the person died (subsection 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). Where a dwelling was acquired by the deceased before 20 September 1985 or was the main residence of the deceased (and was not being used to produce assessable income), the legal personal representative or beneficiary is taken to have acquired the dwelling for its market value on the day the deceased died (subsection 128-15(4) of the ITAA 1997). Where a dwelling was acquired by the deceased on or after 20 September 1985, the legal personal representative or beneficiary is taken to have acquired the dwelling for the 'cost base' of the dwelling on the day the deceased died (subsection 128-15(4) of the ITAA 1997). In this case, the dwelling passed to parent Y for the market value of the dwelling on the date of death of parent X and the dwelling subsequently passed to the Trustee of the Trust Fund for the cost base of the dwelling on the date of death of parent Y. In determining the cost base as at the date of death of parent Y, the first element of the cost base will be the market value of the dwelling as at the date of death of parent X. Any relevant expenditure on the dwelling incurred by parent Y during their ownership period can be apportioned, as applicable, to the other elements that make up the cost base of the dwelling (section 110-25 of the ITAA 1997). | Detailed Reasoning - Distribution of dwelling by trustee to beneficiary: Should a CGT asset pass to a beneficiary in a deceased estate, any capital gain or loss the legal personal representative makes is disregarded (subsection 128-15(3) of the ITAA 1997). Where the asset is owned by the trustee of a testamentary trust, PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust explains that the trustee will be treated in the same way as a legal personal representative for the purposes of Division 128 of the ITAA 1997, in particular subsection 128-15(3). In this case, the Trust Fund is a testamentary trust as it was created under the terms of the will of the deceased. Therefore, in the event of the Trustee distributing the dwelling to the beneficiary, individual X, any capital gain or loss the Trustee makes will be disregarded. Individual X will be taken to have acquired the dwelling for the cost base of the dwelling on the date of death of parent Y (subsection 128-15(4) of the ITAA 1997). | Detailed Reasoning - Exemption for dwelling acquired from a deceased estate: If a dwelling owned by a deceased person passes to an individual as a beneficiary of a deceased estate or as the trustee of a deceased estate, a capital gain or capital loss made on disposal of the dwelling may be disregarded if certain conditions are met (section 118-195 of the ITAA 1997). For a dwelling acquired by the deceased after 20 September 1985, the basic criteria for the exemption is met if the dwelling was the deceased's main residence just before death and was not then being used to produce assessable income. The availability of the exemption will then depend on: • who occupied the dwelling after the date of the deceased's death, or • whether the dwelling was disposed of within two years of the date of the deceased's death. A full exemption will be available if: • the dwelling was, from the deceased's death until the ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • the ownership interest ends within two years of the deceased's death. In this case, parent Y did not live in the dwelling, so the basic criteria, is not satisfied. Therefore, the CGT exemption under section 118-195 of the ITAA 1997 will not be available should the dwelling be disposed of by the beneficiary of the Trust Fund, individual X. | Detailed Reasoning - Partial exemption for deceased estate dwellings: Where the beneficiary of a deceased estate or the trustee of a deceased estate is not eligible for the exemption under section 118-195 of the ITAA 1997, a partial exemption may be available under section 118-200 of the ITAA 1997. Section 118-200 of the ITAA 1997 specifies that a partial exemption from a capital gain may apply where the dwelling was the main residence of one or more of the following persons for part of the ownership period: • the spouse of the deceased immediately before death, or • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary. In this case, should the Trustee distribute the dwelling to individual X who then disposes of the dwelling, individual X will be entitled to a partial CGT exemption as the dwelling was their main residence and individual X disposed of the dwelling in their capacity as, beneficiary. | Detailed Reasoning - Calculation of partial main residence exemption: Generally, the partial exemption is calculated by working out the number of non-main residence days as compared to the total ownership days that are relevant for main residence exemption purposes (subsection 118-200(2) of the ITAA 1997). The calculation is adjusted in accordance with section 118-205 of the ITAA 1997 where the deceased acquired their interest in the dwelling on or after 20 September 1985 as a beneficiary or as a trustee of a deceased estate. Consequently, an adjustment is required in this case as parent Y acquired their interest in the dwelling on or after 20 September 1985 as a beneficiary of another deceased estate. Individual X will be able to apply the 50% CGT discount to any capital gain as they will be taken to have acquired the dwelling when the deceased, parent Y, acquired the dwelling (subsection 115-30(1) item 4 of the ITAA 1997).