Edited version of private ruling

Authorisation Number: 1011752502292

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Ruling

Subject : Capital gains tax and sale of inherited property

Question and Answer

Are you exempt from capital gains tax on the sale of an inherited property if it is sold within two years?

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2011

Relevant facts and circumstances

In xx the taxpayer married.

In xx the taxpayer purchase a property in A.

In xx the taxpayer and spouse separated.

Between xx and to xx, after the marriage break up, the taxpayer took up residence in A and nominated it as the main residence.

After xx the taxpayer rented a property in B area because of the distance from A to work.

The taxpayer leased out the property in A.

The taxpayer continued to elect the property in A as the main residence.

In xx under the terms of the Family Law Court Order, preceding the formal divorce arrangements, the taxpayer was to retain the A property.

In xx the taxpayer passed away.

In xx the tenant at A property vacated.

The beneficiary is not interested in retaining the property.

In xx the A property was put up for auction but as yet has not sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Subsection 128-15(2)

Reason for Decision

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies that a Capital Gains Tax (CGT) event A1 happens if you dispose of a CGT asset. You dispose of a CGT assets if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Further, the capital gain or capital loss is made at the time of the event.

A CGT asset is any kind of property (e.g. land and buildings) or legal or equitable right that is not property (subsection 108-5(1) of the ITAA 1997).

Assets acquired through a deceased estate

Division 128 of the ITAA of the 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or beneficiary in a deceased estate.

Section 128-10 of the ITAA 1997 provides that when a person dies, that person disregards a capital gain or loss from a CGT event happening to a CGT asset the person owned just before their death.

Where the asset devolves to the LPR or passes to a beneficiary of the deceased estate the LPR or beneficiary is taken to have acquired the asset on the day the person died. Regardless of the actual date that the legal title in the property passed (subsection 128-15(2) of the ITAA 1997)

Under section 118-195 of the ITAA 1997 for property acquired by the deceased after 20 September 1985 which was the deceased's main residence just before he died and, at the time was not being used for the purpose of producing assessable income, a full exemption will be available if;

· the ownership interest ends within two years of the deceased's death or

· the property was, from the deceased death until the ownership interest ends the main residence of one or more of:

· the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

· an individual who had a right to occupy the dwelling under the deceased's will; or

· an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.

Absence Rule

Section 118-145 of the ITAA 1997 provides that if the taxpayer's main residence ceases to be their main residence, they can choose to continue to treat it as their main residence.

 If the taxpayer uses the dwelling that was their main residence to produce assessable income the maximum period that they can treat it as their main residence while they use it for that purpose is 6 years. They cannot treat another dwelling as their main residence during this time.

Partial main residence exemption

The capital gain or loss is reduced according to the number of days the property was not used as your main residence as a proportion of the total ownership period.  This is expressed in the formula below:

Capital gain or capital loss x non-main residence days / total days

Where:

the non-main residence days equals the number of days in your ownership period when the dwelling was not your main residence.

the days in your ownership period equals the total number of days in your ownership period.

Application to your circumstances

The taxpayer resided in the A property between xx and xx and nominated the property as the main residence.

The taxpayer moved out, however, continued to nominate the property in A as the main residence even though it was leased.

Therefore; you are entitled to the exemption under 118-195 of the ITAA 1997 if the property is sold within two years of the taxpayer's death.

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