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1 If Property X is sold or transferred to the remainderman beneficiary, will the main residence exemption apply to disregard any Capital Gains Tax?

No. Question 2 If Property X is transferred to the remainderman beneficiary, will any Capital Gains Tax be required to be declared on the Estate's return? Answer Yes. Question 3 Is the first element of the cost base for the property what the Estate purchased the property for? Answer Yes. This ruling applies for the following period : Year ending 30 June 20XX The scheme commenced on: 1 July 20XX

The deceased passed away a number of years ago. The deceased main residence prior to their death was Property Z. In their will, the deceased left the Property Z to be held on trust for Individual Z to use throughout their lifetime if they maintained the property in a reasonable state of repair, pays all rates, taxes etc associated with the property and pays a peppercorn rent per month to the remainderman beneficiary. Individual Z used Property Z as their main residence until it was sold and a replacement property (Property Y) was purchased by the estate. You have not supplied information to the Commissioner as to why Property Z was sold. Individual Z used Property Y as their main residence for several years until it was sold, and a further replacement property (Property X) was purchased by the estate. Property Y was sold because Individual Z needed to move due to their work moving. Individual Z has used Property X as their main residence since the purchase of Property X. Property X contains a dwelling.

Individual Z has not fulfilled all their responsibilities under the will, failing to pay rates and not allowing the executor of the estate access to the property to ensure it kept in reasonable repair The remainderman beneficiary is considering paying Individual Z an amount to terminate their Life Tenancy in Property X. The remainderman beneficiary is a registered charity and Deductible Gift Recipient.

Income Tax Assessment Act 1997 section 118-210

Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules for situations when capital gains and losses are ignored for main residence dwellings. There are special rules for dwellings that pass from, or are owned by, a trustee of a deceased estate. Where a dwelling is acquired by a trustee in accordance with the will of the deceased for occupation by an individual, provided that the dwelling was the individual's main residence for the entire period, any capital gain or loss resulting from the disposal of the dwelling is disregarded in accordance with section 118-210 of the ITAA 1997. The prerequisite for section 118-210 of the ITAA 1997 applying is stated under subsection 118-210(1) of the ITAA 1997: "This section applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual [emphasis added]". The issue of when a trustee of a deceased estate acquires an ownership interest under the will of a deceased person is considered in 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 . For a dwelling to be acquired under a will, there needs to be 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. TD 1999/74 also states that a trustee acquires an ownership interest in a dwelling under the will of a deceased person for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the will, or in accordance with the terms of the will as modified by any court order. The trustee also acquires an interest under the deceased's will if they acquire it in pursuance of the will or under the authority of the will. A trustee may also have general rights created under State trustee legislation, such as the Trustee Act 1925 (NSW) , to purchase a dwelling for the occupation by an individual beneficiary. For example, section 14DA of the Trustee Act 1925

gives the trustee the power to acquire dwelling houses for beneficiaries. These rights and powers are created under the relevant state or territory trustees' legislation and not under the deceased's will. This issue is considered in the West Australian Court of Appeal case of Caratti v Commissioner of State Revenue [2017] WASCA 128 (Caratti). In Caratti, the appellant was the trustee of a testamentary trust established by his wife who had passed away in May 2012. The will gave the appellant various powers, including the power to sell or to postpone the sale of the family home. The will contained no grant of a right by which a beneficiary could use the property as a residence. The home had been owned by the appellant's wife since 1988 and had been exempt from land tax as her primary residence up until her death. The appellant and one of the deceased's sons (M) continued to live in the property as their primary residence after the death. The property had been treated as exempt by the Commissioner in the 2013/14 land tax year.

In February 2015, the Commissioner reassessed the land for land tax for the 2013/14 land tax year and issued an original assessment for tax for the 2014/15 year. Following a disallowed objection, the appellant sought review of the objection decision from the Tribunal on the grounds that the land was exempt from land tax under, relevantly, section 22 of the Land Tax Assessment Act 2002 (the Act). Section 22(b)(ii) provides for exemption where a person identified in a will exercises a right granted under the will to use a property as a primary residence. The appellant argued that M had a right to use the property as a primary residence by virtue of an earlier arrangement ("the arrangement") between the appellant and his wife under which it was intended that M would reside in the property for as long as he wished. The Tribunal found that neither the appellant nor M had a "right under" the will to use the property as a place of residence and, accordingly, the basis for exemption had not been made out. The appellant appealed to the Court of Appeal.

Before the court the appellant contended that, as trustee, he had given effect to the arrangement by exercising power under the will to postpone the sale of the property and power under s 24 of the Trustees Act 1962 to retain the property as a residence for a beneficiary. This amounted to a right granted to M under the will to use the property as his residence for as long as he wished, in accordance with s 22(b)(ii)(I) of the Act. The Court of Appeal dismissed the appeal and held that section 22(b)(ii) of the Act required that an individual identified in the will have a right under the terms of the will to use the property as a place of residence. In this case the will gave no such right to M. Neither pre-testamentary arrangements of the kind referred to by the appellant, nor post-testamentary decisions by the trustee to allow M to reside at the property were relevant to the application of s 22(b)(ii). At paragraph [25]-[26] of its judgment, the Court of Appeal stated:

[25] ... Accordingly, attention is directed to the terms of the Will. The Will gives no right of residence to Mr Michael Caratti. He plainly has no such right under the terms of that instrument. Pre-testamentary arrangements of the kind referred to by the appellant are irrelevant to the application of s 22(b)(ii) of the Land Tax Act on its proper construction. [26] Equally irrelevant is any post-testamentary decision by the appellant as trustee appointed under the Will to allow Mr Michael Caratti to reside at the Property. Insofar as it is alleged that Mr Michael Caratti has a right to reside at the Property pursuant to some agreement entered into with the appellant as trustee in the exercise of the appellant's powers under s 24 of the Trustees Act, the right (if it be a right) derives from the post-testamentary agreement, or, perhaps, from the appellant's exercise of a power under s 24 of the Trustees Act. It is not a right given by the terms of the Will, ie, a 'right under the will' given to 'an individual identified in the will' within the meaning of s 22(b)(ii) of the Land Tax Act . [emphasis added] As discussed in ATO Interpretative Decision ATO ID 2003/109

Capital gains tax: Deceased estate - main residence exemption , the general rule of construction is that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. In your case, the deceased's will create a right of use and occupancy in the original property for the deceased's friend and gave them full use and enjoyment thereof during their lifetime during the continuance of their interest therein keeping the said property in a reasonable state of repair to the satisfaction of the trustee. The purchase of Property X the replacement property by the trustees was not done pursuant to the will of the deceased. There is no ability under the terms of the will to purchase replacement properties. No reason has been supplied as to why Property Z was sold and Property Y purchased. You have told us that the reason for the sale of Property Y was due to Individual Z's work moving and this is why Property X was purchased for them.

Consequently, it is considered that section 118-210 of the ITAA 1997 does not apply to the sale of Property X the replacement dwelling as it wasn't acquired under the deceased's will for occupation by a named individual, as required by subsection 118-210(1) of the ITAA 1997. You are unable to disregard any capital gain made on the sale of Property X or the transfer of Property X to the remainderman beneficiary. The Estate is required to declare the capital gain in the Estate tax return and the first element of the cost base for Property X is what the Estate purchased Property X for.