Private ruling: CGT - Deceased estate - Double death
Date of advice: 29 July 2025
Published: 29 September 2025
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gains made upon the transfer of the Property by the executor of the deceased estate to the grandsons as tenants in common in equal shares? | A1: No | Q2: Will the grandsons' cost base for the Property be the same as their great grandmother's which is market value of the property in 19XX (plus any later capital expenditure less an adjustment on account of the use of the house on the land as her main residence)? | A2: No

Relevant facts and circumstances: The applicant is acting in the capacity as administrator of the estate of First Deceased and executor of the estate of Second Deceased. The husband of the First Deceased acquired a farming property located in Australia comprising XXX acres (Property) in 19XX. From 19XX the First Deceased and her husband used part of the property as their main residence and they farmed the surrounding land. The First Deceased's husband died on DDMMYYYY. The estate of the First Deceased's husband was fully administered and under the will his property went to the First Deceased who became registered on the title as owner of the Property on DDMMYYYY. The First Deceased continued to use the house and 5 acres as her main residence until her death. The First Deceased is the mother of her only child the Second Deceased. The First Deceased died on DDMMYYYY. A copy of the grant of probate documents including the will and inventory of assets was provided. Relevant clauses of the First Deceased's will provide: • Clause X appoints her son the Second Deceased as the executor of her will and trustee of her estate • Clause X: I give devise and bequeath the rest and residue of my estate both real and personal whatsoever and wheresoever situate unto my trustee UPON TRUST to pay thereout all my just debts funeral and testamentary expenses and any duties payable in connection with my estate and to stand possessed of the balance thereof UPON TRUST for my said son the Second Deceased. • Clause 7: Should my said son predecease me leaving child or children living at my death then I DIRECT that such child or children shall take and if more than one equally between them the share of my estate my said son would have taken had he survived and attained a vested interest therein. The Property was listed under real property in the estate inventory of assets and liabilities filed in the Supreme Court of Victoria and therefore formed part of the residue to be devised within clause X of the First Deceased's will. It was listed at a value of $XX. Following the death of the First Deceased, for the purposes of clause 6 of her will, the Second Deceased paid out of her estate all of the First Deceased's just debts funeral and testamentary expenses and any duties payable in connection with her estate and held the balance of the estate which included the Property upon trust for himself as the sole beneficiary. From the First Deceased's death the Second Deceased treated the Property as his own, paid all expenses associated with holding the property and used the land for stock grazing purposes until his death. The Second Deceased did not obtain probate of the will and so the Property remains registered in the name of First Deceased. The Second Deceased has 2 children, Child 1 and Child 2. Child 1 has 2 children, Grandchild 1 and Grandchild 2. Child 2 has no children. The Second Deceased died on DDMMYYYY. A copy of the grant of probate documents, including the will and inventory of assets, has been provided. Relevant clauses of the Second Deceased's will provide: • Clause X: I give devise and bequeath the property known as Property comprising an area of approximately XXX acres to any grandchildren of mine living at my death upon their attaining the age of XX years PROVIDED THAT there is no grandchildren of mine living at my death then to my said sons in equal shares or to the survivor of them absolutely until such time as this property vests in my grandchildren I DIRECT that my son Child 1 shall be entitled to use the property and retain any income earned from the property. For the purposes of clause X, Grandchild 1 is now XX years of age and Grandchild 2 is now XX years of age. The inventory of assets and liabilities of the Second Deceased's estate filed in the Supreme Court listed the Property under real estate at a value of $XX. A dispute arose between Child 1 and Child2 which resolved by execution of a deed of family arrangement dated DDMMYYYY. A copy of the deed of family arrangement was provided.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 160X | Income Tax Assessment Act 1936 section 160Y | Income Tax Assessment Act 1997 subsection 95(1) | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 subsection 104-85(2) | Income Tax Assessment Act 1997 subsection 104-85(3) | Income Tax Assessment Act 1997 subsection 104-85(5) | Income Tax Assessment Act 1997 subsection 104-85(6) | Income Tax Assessment Act 1997 paragraph 104-85(6)(a) | Income Tax Assessment Act 1997 section 104-100 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 Subdivision 115-C | Income Tax Assessment Act 1997 section 115-215 | Income Tax Assessment Act 1997 section 115-228 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 subparagraph 116-30(2)(b)(i) | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-15(4) | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: Any capital gain or capital loss from the CGT event upon the transfer of the Property in accordance with the Second Deceased's will cannot be disregarded under Division 128 as the Property was not owned by the deceased just before he died. | Detailed Reasoning - Detailed reasoning: Application of Division 128 Division 128 (and its predecessors, former sections 160X and 160Y of the Income Tax Assessment Act 1936 (ITAA 1936) that were operational prior to 1997) sets out what happens when a person dies and a CGT asset they own just before dying devolves to their legal personal representative or beneficiary in their estate. Generally, you can disregard a capital gain or capital loss made on the transfer of an asset from a deceased taxpayer's trustee/executor to a beneficiary when the asset passes to the beneficiary. Under subsection 128-15(3), any capital gain or capital loss the legal personal representative makes is disregarded where: • the CGT asset was owned by a deceased person just before their death, and • the asset devolved to the deceased person's LPR or passes to a beneficiary in the deceased persons estate. A CGT asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset if the legal ownership in the asset is transferred to them, or if the beneficiary becomes absolutely entitled to the asset as against the trustee/executor. On the death of a taxpayer, the property of the deceased passes to their estate, legal control of which is exercised by an executor or legal personal representative (LPR). A fiduciary obligation is assumed by the executor/administrator on the death of the taxpayer in favour of the beneficiaries of the estate. At that time, the beneficiaries of the estate have no interest in the assets of the estate, although they do have a beneficial interest to see that the estate is properly administered. When an asset passes to a beneficiary An asset passes to a beneficiary in the circumstances set out in section 128-20. A CGT asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset under the deceased will, or in one of the other ways set out in subsection 128-20(1) which states: 1) A CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: a) under your will, or that will as varied by a court order; or b) by operation of an intestacy law, or such a law as varied by a court order; or c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or d) under a deed of arrangement if: ii) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and iii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate. (It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your legal personal representative.) The phrase 'under your will' means in accordance with the terms of the will. This would also include if it was in pursuance of the will or under the authority of the will (Paragraph 3 of Taxation Determination TD 1999/74 Income tax: capital gains: in what circumstances does a trustee of a deceased estate acquire an ownership interest in a dwelling 'under the deceased's will' for the purposes of subsection 118-210(1) of the Income Tax Assessment Act 1997? ). Before a beneficiary of a deceased estate owns the relevant asset of the estate, certain steps are required to be undertaken as part of the administration of the deceased estate. During this time the executor' duties consist of paying debts and expenses, and distributing the property of the deceased amongst the persons entitled under the will. Taxation Ruling No IT 2622 Income tax: present entitlement during the stages of administration of deceased estates (IT 2622) outlines the stages of administration of an estate of a deceased person as follows: 1. Burial of deceased. 2. Executor appointed by will or administrator appointed by Court. 3. Probate applied for and granted by Court. 4. Assets vest in executor who pays debts and testamentary expenses: • Initial stage - net income of estate is applied to reduce debts, etc. • Intermediate stage - part of the net income of estate that is not required to pay debts, etc., may be paid to beneficiaries. • Final stage - debts, etc., are paid or provided for in full and net income of estate is available for distribution. ADMINISTRATION OF ESTATE IS COMPLETE In relation to real property, where there is a valid will, a beneficiary of a deceased estate is not considered to own the relevant asset of the estate until probate is obtained and the residue of the estate is ascertained. IT 2622 provides that an executor of a deceased person's estate who leaves a will must obtain probate of the will, which is the official proving of the will and provides the executor with authority to deal with the estate (IT 2622 at paragraph 2). 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 (IT 2622 at paragraph 4). During the time a deceased estate is being administered, a beneficiary of the estate has no right to, or ownership interest in, individual assets of the estate ( Commissioner of Stamp Duties (Queensland) v Livingston (1964) 112 CLR 12 [1965] AC 694; [1964] 3 All ER 692 ( CSD (Qld) v Livingston ); paragraph 3 of IT 2622). Taxation Ruling IT 2622 confirms that the beneficiaries of a deceased estate become beneficial owners of the assets of the deceased after the estate is fully administered (therefore not until probate is granted). At paragraph 2 it provides: On the death of a taxpayer, the property of the deceased taxpayer passes to his or her estate, legal control over which is exercised by an executor or administrator. The executor or administrator, in effect, steps into the shoes of the deceased and winds up the deceased's personal affairs. An executor of a deceased person who leaves a will must obtain probate of the will. This is the official proving of the will and provides the executor with authority to deal with the estate. Where a beneficiary of a deceased estate dies (second deceased) before a CGT asset passes to them, section 128-15 does not apply to disregard any capital gain or capital loss the LPR of the second deceased estate makes when the asset passes to the beneficiary of the second deceased estate. This is because the asset was not one which the second deceased owned just before they died. Application to your circumstances The Second Deceased, as the named executor of the First Deceased's estate and sole residual beneficiary under the will, took steps to administer the estate by paying all of the First Deceased's just debts, funeral and testamentary expenses out of her estate, but did not obtain probate during his lifetime. Without probate, however, the estate remained unadministered, with the Property still registered in the First Deceased's name at the time of Second Deceased's death many years later. As set out in IT 2622, a beneficiary of a deceased estate cannot become the owner of assets of the deceased even though a will may provide beneficiaries with absolute and indefeasible interests, as their rights do not crystallise until probate is granted. During the time a deceased estate is being administered, a beneficiary of the estate has no right to, or ownership interest in, individual assets of the estate ( CSD (Qld) v Livingston ; paragraph 3 of IT 2622). While The First Deceased's estate remained unadministered, the ownership of the Property cannot be said to have 'passed' to the Second Deceased in the way required by section 128-20. As First Deceased's estate was not fully administered at the time of the Second Deceased's death, he had no right to or ownership in the Property prior to his death, so it was not an asset the Second Deceased owned just before his death as required for the operation of Division 128. As a result, Division 128 cannot apply in the circumstances to disregard the capital gain (or loss) that arises when the Property is transferred in accordance with the Second Deceased's will. | Summary: The market value substitution rule in section 112-20 applies so that the cost base of the Property for each grandson will be 50% of the market value calculated at the time the Trust transferred the Property to the beneficiaries. | Detailed Reasoning - Detailed reasoning: Testamentary trust A testamentary trust is established when under the terms of the will an equitable interest and remainder interest is created over the estate. A testamentary trust functions in a similar way to a discretionary family trust with the provisions of the will operating like a trust deed. In specie distribution of the Property - CGT event E7 CGT event E7 in section 104-85 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) distributes a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. The timing of the event is when the disposal occurs (subsection 104-85(2)). CGT events E5 to E8 in sections 104-75 to 104-100 contain an exception for trusts 'to which Division 128 applies'. If the exception applies, it is not necessary to consider whether any other CGT event happened. In the context of CGT event E7, the Division 128 exception will apply if, as part of the administration of a deceased estate, an asset the deceased owned when they died passes to a beneficiary in accordance with section 128-20. This means the exception will not apply unless: a) the event involves an asset that the deceased owned when they died, and b) the asset passes to a beneficiary of the estate in accordance with the rules in section 128-20 for the transmission of an asset through an estate. Division 128 does not apply to a CGT asset acquired after the deceased died (see paragraph 79 TR 2006/14). If CGT event E7 happens there may be CGT consequences for both the trustee and the remainder owners. Trustee The trustee makes a capital gain if the market value of the asset (at the time of the disposal) is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base (subsection 104-85(3)). Any capital gain or loss from CGT event E7 happening to the trustee is taken into account in working out the trustee's net capital gain or loss. A net capital gain is included in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936and taxed in accordance with Subdivision 115-C. Beneficiary The beneficiary makes a capital gain if the market value of the asset (at the time of the disposal) is more than the cost base of the interest, or the part of it being satisfied. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that interest or part (subsection 104-85(5)). A capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired the trust interest (except by way of an assignment from another entity) for no expenditure (paragraph 104-85(6)(a)). Capital proceeds Capital proceeds are defined as the total of the money you have received or are entitled to receive and the market value of any other property you have received or are entitled to receive (section 116-20). Section 116-30 contains the capital proceeds market value substitution rule. Under subparagraph 116-30(2)(b)(i), the capital proceeds from a CGT event are replaced with the market value of the CGT asset if the capital proceeds are more or less than the market value of the asset and you are not acting at arm's length. Cost base The cost base of a CGT asset is generally what it cost you to buy it, plus other costs you incur to hold and dispose of it (section 110-25). In some situations, the cost base is the market value of the property at a specified time, plus other costs. Section 112-20 provides a market value substitution rule applies in specified circumstances. Under this rule, the first element of cost base is its market value where you acquire an asset from another entity, and any of the 3 following conditions apply: • you didn't incur expenditure to acquire it (unless created by CGT event D1 or without a CGT event) • some of the expenditure can't be valued • you didn't deal at arm's length to acquire it. Application to your circumstances Under clause X of the will the Property devolves to the Second Deceased's grandsons as follows: I give devise and bequeath the property known as Property comprising an area of approximately XXX acres to any grandchildren of mine living at my death upon their attaining the age of XX years PROVIDED THAT there is no grandchildren of mine living at my death then to my said sons in equal shares or to the survivor of them absolutely until such time as this property vests in my grandchildren I DIRECT that my son Child 1 shall be entitled to use the property and retain any income earned from the property At the time of the Second Deceased's death he had 2 grandsons, Grandson 1 who was over XX years of age and Grandson 2 who was not yet XX years. Under the terms of the Second Deceased's will a testamentary trust was established where an equitable interest was created allowing Child 1 to use the property and retain any income earned from the property until such time as both of the grandsons attained the age of XX and their right to the property vested. Grandson 1 and Grandson 2 received a remainder interest, with Grandson 2's interest contingent on turning XX years of age at which time his right to the property vested. Since there was more than one beneficiary with an interest in the trust asset, neither beneficiary could be considered absolutely entitled to the Property (TR 2004/D25 at paragraph 23). So, although Grandson 1 had already turned XX and held a non-contingent vested interest, as there was more than one beneficiary with an interest in the trust asset, absolute entitlement to the Property could not be established. Once Grandson 2 reached age XX, Child 1's right to use the property and to retain the income earned ended, and the Property will be transferred to Grandson 1 and Grandson 2 under the terms of the will. This disposal of the Property will trigger CGT event E7 in section 104-85. The time of the event will be when the property is transferred to the grandsons (subsection 104-85(2)). There are CGT consequences for both the trustee and the beneficiaries when CGT event E7 happens. Trustee The trustee makes a capital gain if the market value of the asset at the time of the disposal is more than its cost base. It makes a capital loss if that market value is less than the assets reduced cost base (104-85(3)). The cost base for the Trustee will be the First Deceased's cost base of the Property on the day she died under the modifications to the cost base rules set out in item 1 of the table in subsection 128-15(4). Any capital gain or loss from CGT event E7 happening to the trustee is taken into account in working out the trustee's net capital gain or loss. A net capital gain is included in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936 and taxed in accordance with Subdivision 115-C. Beneficiaries While beneficiaries can make a capital gain if the market value of the assets at the time of the disposal is more than the cost base of the interest or the part of it being satisfied, under the exception for beneficiaries in paragraph 104-85(6)(a) a capital gain or capital loss the beneficiary makes is disregarded where the beneficiary acquired the CGT asset for no expenditure. In this case the grandsons acquired the property under the terms of the will for no consideration, so any capital gain or loss for the grandsons will be disregarded. The cost base for the grandsons Section 112-20 explains that the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value at the time of acquisition if you did no incur expenditure to acquire it. Therefore, Grandson 1 and Grandson 2's cost base for the Property will be equal to the market value at the Property at the time they acquired it.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.