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Edited version of private ruling

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Subject: Capital Gains Tax

Question and answer:

Can you disregard a capital gain made on the sale of a dwelling that you acquired as the executor of a deceased estate?

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts:

You are the sole executor of a deceased estate (the estate).

The deceased passed away recently.

The estate includes land on which a dwelling is situated (the property).

The deceased was the sole owner of the property which had a land area of less than 2 hectares.

The deceased was placed in care, where they remained for a number of years prior to their death.

The dwelling was the deceased's main residence immediately before they were placed in care.

After being placed in care, the deceased chose the dwelling to continue to be treated as their main residence.

During the period of time between the deceased making this choice and passing away:

The income producing period was less than six years and incorporated a period before and after the deceased's death.

You sold the property as part of the winding up of the deceased's estate within two years of the deceased's death.

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 118-110.

Income tax Assessment Act 1997 Section 118-145.

Income tax Assessment Act 1997 Section 118-190.

Income tax Assessment Act 1997 Section 118-195.

Income tax Assessment Act 1997 Section 118-200.

Income tax Assessment Act 1997 Section 128-15.

Reasons for decision

Capital gains tax (CGT), main residences and deceased estates - general

In certain circumstances, a CGT exemption applies to allow individuals to disregard and not include in their assessable income any capital gain or loss made from the disposal of a dwelling that was their main residence. This is known as the main residence exemption.

For dwellings that were acquired on or after 20 September 1985, the full main residence exemption is generally available to individuals where the dwelling was the individual's home for the whole period they owned it, was not used to produce assessable income during their ownership period, and is situated on 2 hectares or less of land. A partial exemption may be available where any of these conditions are not met.

When a person dies, ownership of a dwelling that was the main residence of the deceased may pass directly to the executor of the deceased's estate. If this happens:

the executor is taken to have acquired their ownership interest in the dwelling on the day the deceased died, and

special rules apply which mean the executor may also be fully or partially exempt from any capital gain or loss made when a later CGT event, such as the sale of the dwelling as part of the winding up of the estate, happens.

Disposal of a deceased person's main residence by the executor of the deceased's estate

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if a dwelling passes to you as the executor of a deceased estate and you make a capital gain or loss from the subsequent sale or disposal of the dwelling, you can disregard the gain or loss in full if:

Taxation Determination TD 1999/70 specifies that if the above conditions are met, this exemption applies, whether or not the dwelling was used by the executor of a deceased estate to produce income during the two-year period following the deceased's death.

When you acquire a dwelling as the executor of a deceased estate, section 118-190 of the ITAA 1997 provides that you can ignore (for CGT purposes) any income producing use of the property before the deceased's death if:

the dwelling was the deceased's main residence just before their death, and

any income producing use of the dwelling just before the death is ignored (for CGT purposes) because the deceased elected (under the absence provisions contained in section 118-145 of the ITAA 1997) to continue to treat the dwelling as their main residence after they stopped living in it.

Continuing main residence status after a dwelling ceases to be occupied as a main residence

Section 118-145 of the ITAA 1997 provides that if a dwelling that was a person's main residence ceases to be their main residence, they may choose to continue to treat it as their main residence for CGT purposes. If this choice is made, the dwelling can be treated as the person's main residence:

The owner of a dwelling who makes this choice cannot treat any other dwelling as their main residence during the period the choice is made and any income producing use of the property during the allowable six year period is ignored for CGT purposes.

Where a deceased person was not occupying their home as their main residence when they died, the dwelling would still be considered to have been the main residence of the deceased just before they died if the deceased chose to continue to treat the dwelling as their main residence after they stopped living in it. Where that is the case, any income producing use of the property can be ignored for CGT purposes if that income producing use is for a period of less than six years.

Conclusion and application to your facts

After the deceased was placed into care, the deceased's spouse occupied the property for a time. The property was then vacant for a time until it became income producing. The income producing period was less than six years and incorporated a period before and after the deceased's death.

In your case, the deceased chose to continue to treat the property as their main residence after being placed in care.

The deceased was entitled to make this choice under the provisions of section 118-145 of the ITAA 1997.

As a result of the deceased making this choice:

Accordingly, we consider that you meet the requirements of section 118-190 of the ITAA 1997 and can ignore (for CGT purposes) the income producing use of the property before the deceased's death.

We also consider that you meet the requirements of section 118-195 of the ITAA 1997 and can disregard in full any capital gain or loss made from the sale of the property because:

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