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Edited version of private ruling
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Ruling
Subject: Capital gains tax (CGT) - Deceased estate - life tenant and disposal of main residence
Can you apply the absence rule when the life tenant moved into the retirement home?
Yes.
This ruling applies for the following period
For the year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
In the early 1990's the deceased acquired a property (the property).
This property was the deceased's main residence for their entire ownership period.
The deceased died the following year.
The property was valued at their date of death.
In the deceased's Will their friend and confidant (life tenant) had a life interest in the property.
The life tenant established the property as their main residence.
Several years later the life tenant moved into a retirement home.
The trustee is choosing to elect the property as the life tenant's main residence.
The property was rented out shortly after the life tenant moved out.
The life tenant died early this year.
The value of the property at the time the life tenant died was higher than the value at the deceased's death.
The tenant vacated the property shortly after the death of the life tenant.
Six months later the property was disposed of.
You have supplied copies of the following documentation to support your application and this document is to be read with and forms part of the scheme for the purpose of this ruling:
· the last Will and Testament of the deceased.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-145
Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 118-200
Income Tax Assessment Act 1997 Section 118-192
Income Tax Assessment Act 1997 Section 118-195
Reasons for decision
The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset, the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.
However, there are a number of different exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part.
For a property acquired by the deceased on or after 20 September 1985, which was the deceased's main residence just before they died and, at that time, was not being used for the purpose of producing assessable income, the trustee will be entitled to a full exemption if:
· the trustee's ownership interest ends within two years of the deceased's death, or
· the dwelling was, from the deceased's death until the trustee's ownership interest ends the main residence of one or more of:
o the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)
o an individual who had a right to occupy the dwelling under the deceased's Will, or
o an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.
If the life tenant does not occupy the property for all of the trustee's ownership period, only a partial exemption will apply.
An individual can choose to treat a property as their main residence even though they no longer reside in it. Where the property is used to produce income, the choice is effective for a period of up to six years. If the property is not used to produce income, this choice can be made for an unlimited period.
In your case, you as trustee have elected to continue to treat the property as the life tenant's main residence after they moved into the nursing home. As the property was rented out for more than six years the six year rule will apply until a specified date.
As the property was not disposed of within two years of the death of the deceased and because it was not the main residence of an individual who had the right of occupancy under the deceased's Will for all of your total ownership period you are not entitled to the full main residence exemption. You are entitled to a partial main residence exemption.
Using a home you inherited to produce income:
If a person acquired their main residence on or after 20 September 1985, and they died and it passes to you as a beneficiary (or as trustee of their estate) after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if:
· you first used the dwelling to produce income after 20 August 1996
· when a CGT event happens to the dwelling, you would get only a partial exemption because you used the dwelling to produce assessable income during the period you owned it
· you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income, and
· the CGT event did not happen to the dwelling within two years of the deceased's date of death.
If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have choice.
Calculation of your capital gain or capital
You calculate your capital gain or capital loss using the following formula:
capital gain or capital loss X non-main residence days
total days
Capital Gain or Capital Loss is the amount that you made from the disposal of the property.
Non main residence days are the number of days that the property was not the main residence of either the deceased or the spouse of the deceased (the individual who had the right to occupy the property under the deceased's Will). In your situation, your non-main residence days are from the date the six year rule does not apply from to settlement date on the disposal of the property.
Total days in your case are the number of days from when the property was first used to produce income until the date of settlement of the contract to dispose of the property.
You can use the discount method to calculate your capital gain as you, as trustee meet all the necessary criteria.
Further information on CGT can also be obtained from our website.
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