1 Does section 118-210 of the Income Tax Assessment Act of 1997 apply to the sale of the property?
1 No. This ruling applies for the following period: Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
The deceased passed away on XX/XX/19XX. The Trustee was appointed as one of the executors and one of the trustees of the deceased's estate. In relation to the rest and residue of property both real and personal of the estate, the Will directs: ...all the rest and residue of my property both real and personal and wheresoever situate to my Trustees UPON TRUST shall sell all in collect and convert into money the said real and personal property at such time or times and in such manner as they shall think fit... In relation to the investment of the residue of the estate, the Will directs: ... and shall at the discretion of my Trustees invest the residue of the said moneys in the names of my Trustees in or upon any of the investments hereby authorised with power to vary or transpose such investments for or into others of a nature hereby authorised and shall stand possessed of the residue of the said moneys and the investment for the time being representing the same and of such part of my Estate as shall for the time being remain unsold and unconverted (all of which premises are hereinafter referred to as my residuary trust funds) UPON TRUST ...
In relation to the deceased's daughter (the daughter), the Will states: ...half share thereof UPON TRUST as to such part of the income thereof as my Trustees may from time to time think necessary for the maintenance education and advancement of our daughter until she attains the age of twenty five years the remainder (if any) of the said income to be added to the capital of the said half share and from and after the said daughter shall have attained the age of twenty-five years to pay the whole of the income thereof to the said daughter for the duration of her life and from and after the death of the said daughter then the last-mentioned half share shall be held by my Trustees in trust for the children of the said daughter in equal shares... The daughter continues to be entitled to receive this 50% share in the income of the trust, as detailed in the Will. In late 19XX, a property, which was owned by the deceased at the date of death, was sold. The following properties were purchased by the Trustees of the deceased's estate as replacement properties to provide for the daughter's ageing needs as their main residence.
In X 19XX, a property was purchased. The property was sold in 19XX. In 19XX, a property, was purchased. The property was sold in 20XX. In X 20XX, a property (the property), was purchased as a more suitable property for the daughter's declining health. The property was sold on XX/XX/20XX. There is no expressed requirement or condition in the deceased's Will allowing the Trustee to purchase the replacement property. The Trustee has acquired the replacement property in accordance with its powers under section 14DA of the Trustee Act 1925 (NSW) (Trustee Act). Subsection 14DA(1) of the Trustee Act states: Without limiting section 14C and subject to the instrument (if any) creating the trust, a trustee may - (a) Purchase a dwelling-house for a beneficiary to use as a residence, or (b) Enter into any other agreement or arrangement to secure for a beneficiary a right to use a dwelling-house as a residence.
Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 subdivision 118-B Income Tax Assessment Act 1997 section 118-210
Summary Section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply to the sale of the property as it was not acquired under the deceased's Will, as required by subsection 118-210(1) of the ITAA 1997. Detailed reasoning Subdivision 118-B of the ITAA 1997 contains the rules for situations when capital gains and losses are ignored for dwellings that are used as the main residence of relevant individuals. There are special rules for dwellings that pass from or are owned by a trustee of a deceased estate. Section 118-210 of the ITAA 1997 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. Subsection 118-210(3) of the ITAA 1997 provides that if you receive money or property for 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. For the purposes of the exemption only those CGT events listed in section 118-210 of the ITAA 1997 are relevant.
Granting an interest under the Will of a deceased person A Will expresses the wishes of an individual upon their death. A trust comes into operation only after the deceased estate has been administered. As such, a right granted under a testamentary trust deed cannot be said to be created by or under the Will of the deceased. Paragraph 21 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests states, importantly (in the context of this Ruling) , a trustee of a trust may be able to disregard a capital gain or loss from certain CGT events happening to a dwelling occupied by an individual who was given a right to occupy the dwelling under the deceased's Will: sections 118-195 and 118-210. 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 . In its context in subsection 118-210(1) of the ITAA 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. 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 ( Evans v. Friemann (1981) 53 FLR 229 at 238). 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. In Evans v Friemann (1981) 53 FLR 229, the Federal Court had occasion to consider the meaning of the term 'under' in the context of the phrase 'under an enactment' in the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act). It was held that the term may be taken as being, or including, 'in pursuance of' or 'under the authority of'. 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, s 22 of the Land Tax Assessment Act 2002 (the Act). S. 22(b)(ii) provides for exemption where an individual identified in the will has a right under the will to use the property as a place of 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 s. 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 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 1962 , 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 1962 . 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 section 22(b)(ii) of the Act. 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. Conclusion
In order for a dwelling to be acquired under a Will there needs to be a connection between the Will and the acquisition of the ownership interest. The residue of the estate of the deceased put upon trust which provides a half share life interest of the income to the deceased's daughter, is not related to the purchase by the estate of a dwelling for a beneficiary. The property was acquired by the trustees under powers of the Trustee Act 1925 - section 14DA as a subsequent main residence for the deceased's daughter. The acquisition was not under the provisions of the deceased's Will. Therefore, where a Will is silent as to the right to occupy the dwelling of the deceased or any subsequent dwellings purchased by the trustee for the occupation of an individual, the requirements of section 118-210 of the ITAA 1997 will not be met. Consequently, it is considered that section 118-210 of the ITAA 1997 does not apply to the sale of the property as it wasn't acquired under the authority of the deceased's Will for occupation by a named individual. The Trustees are unable to disregard any capital gain made on the disposal of the property.