TR 2006/14 covers the capital gains tax consequences of creating life and remainder interests in property. It’s important to note that there are various scenarios that can arise when working to TR 2006/14. These include beneficiaries disclaiming their interests, as well as deeds of arrangements to vary the terms of a deceased’s will. However, for the purpose of this exercise and guidance, the review of the ruling will be limited to extracting the relevant clauses that deal with the scenario at hand.
First off, the ruling distinguishes between life and remainder interests in the property held on trust (referred to in the ruling as equitable interests) and life and remainder interests in land that is not held on trust (referred to in the ruling as legal interests). The CGT consequences for equitable life and remainder interests can differ from those for legal life and remainder interests in real property.
As equitable life and remainder interests relate to interests in trusts, these interests are subject to the specific CGT provisions dealing with trusts. If you jump to para 183 of the ruling, it Q&A: Life tenancy arrangements under a will At a recent Tax & Super Australia discussion group meeting, a query was raised relating to the CGT implications regarding a dwelling that was the subject of a life tenancy under a will. Our Tax Team provides some guidance. 24 The Taxpayer: November 2018 indicates that: “A life interest in an asset entitles the owner of that interest to any income from that asset. If the asset is land, the life interest owner may also be entitled to possession of the property”. The ruling cautions that care should be taken to determine the precise nature of the life or remainder interest being considered before applying the tax consequences from the ruling. In our case, we are satisfied that under the terms of the will, the interest is an equitable interest. As a result there is a creation of a trust over the property. This then results in consequences for the deceased, the trustee, the life interest tenant and the remainder beneficiaries.
Consequences for the deceased
In accordance with paragraph 15 of the ruling, as a trust over the asset is created under the will of the deceased, CGT event E1 happens when the administration of the deceased’s estate in respect of the original asset is completed. Any capital gain or loss made by the deceased from the event happening is disregarded under section 128-10 of ITAA 1997.
Consequences for trustee
As per paragraph 18 of the ruling, because the trust is created as a result of the death of an individual, the trustee acquires the original asset at the date of the deceased’s death under subsection 128-15(2). The trustee’s acquisition cost is determined under subsection 128-15(4). In our situation, the dwelling was the deceased’s main residence just before death, therefore it is taken to be acquired for market value at the date of death. A trustee can make a capital gain or loss from a CGT event happening to the asset after it starts to be held on trust for life interest and remainder owners, however, can 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 (refer to sections 118-195 and 118-210).
Consequences for life interest and remainder owners
In paragraph 24 of the ruling under subsection 109-5(1), equitable life or remainder interests are acquired when they commence to be owned. Paragraph 26 of the ruling indicates that where, as is generally the case, no money or property is given to acquire an equitable life or remainder interest under a will, section 112-20 provides that the first element of the cost base and reduced cost base of the interest is its market value at the time it was acquired. Paragraph 28 indicates that for the purpose of paragraph 112-20(1)(a), equitable life and remainder interests are considered to have been acquired as the result of CGT event E1 happening. Therefore, a market value acquisition cost is not denied on the basis that the interests resulted from CGT event D1 happening or no CGT event at all happening.
Death of the life interest owner
Paragraph 38 of the ruling indicates that the death of the life interest owner will cause the life interest to end. There will be consequences for the life interest owner and there may also be consequences for the trustee and remainder owner.
Consequences for life interest owner
Under paragraph 40 of the ruling, CGT event C2 happens when the asset ends: subsection 104-25(2). In the case of an equitable life interest, CGT event C2 happens when the measuring life for the life interest dies because the interest expires at that time. Paragraph 44 of the ruling indicates that any capital gain or capital loss made by the life interest owner from the CGT event is disregarded under section 128-10.
Consequences for trustee/remainder beneficiaries
Per paragraph 45 of the ruling, if, on the ending of the life interest, the remainder owners become absolutely entitled as against the trustee, to a trust asset, CGT event E5 in section 104-75 may happen. The event does not happen if the trust is a unit trust or a trust to which Division 128 applies. Paragraph 77 of the ruling also indicates that 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, the Commissioner takes the view that it is not necessary to consider whether any other CGT event has happened. Whilst Division 128 does not appear to apply to trusts, a look at paragraph 202 of the ruling indicates that “Division 128 applies to the passing of an asset from a deceased’s individual’s legal personal representative to a beneficiary in their estate (provided the asset was owned by the deceased individual at the time of their death)”.
Paragraph 205 of the ruling goes on to indicate that Law Administration Practice Statement PS LA 2003/12 contains content that, in certain circumstances, the Commissioner treats the trustee of a testamentary trust in the same way as he treats a legal personal representative in relation to the passing of an asset of the deceased to a beneficiary. If so, there are no CGT consequences for the trustee and remainder beneficiaries because the trust asset (the dwelling) was owned by the deceased at the date of death and is passing to the remainder beneficiaries under section 128-20.
The remainder beneficiaries will acquire their share in the dwelling at the trustee’s cost base and reduced cost base (market value in our scenario) on the date of the deceased’s death (subsection 128-15(2)). The remainder owners make a capital gain if the market value of their entitlement to the asset at the time they become absolutely entitled to it is more than the cost base of their interest in the trust capital to the extent it relates to the asset. They make a capital loss if the market value is less than the reduced cost base of the interest in the trust capital to the extent it relates to the asset: subsection 104-75(5). However, paragraph 50 of the ruling indicates that if the remainder owners did not pay anything to acquire their interest in the trust capital and did not acquire it by assignment, then any capital gain or loss will be disregarded: paragraph 104-75(6)(a). In the context of this provision, expenditure means actual expenditure not an amount which the remainder owner may be taken to have paid because of the operation of sections 112-15 and 112-20.
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