Edited version of private ruling

Authorisation Number: 1011820421935

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax - inherited property

Questions:

1. For capital gains tax purposes do you have two separate interests in the property, one originally acquired by your parent A on the date of purchase, and the second acquired by your parent A on your parent B's date of death?

Answer: Yes

2. Can you disregard any capital gains or losses made from your interest in the property that your parent A acquired on the original purchase date, if the property is sold within two years of your parent A's death?

Answer: Yes

3. Are you entitled for a 50% discount on capital gains arising from your interest that your parent A acquired on your parent B's date of death?

Answer: Yes

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances:

You have inherited a property from your parent A.

Your parents acquired the property prior to 20 September 1985 and used it as their main residence.

Your parent B died in after 1985.

The property has been rented out from about 2000 when your parent A move out due to ill health.

Your parent A died in late 2010.

You are going to sell the property within two years of their death.

Reasons for decision

You make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset that you own. 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. One such exemption relates to the disposal of a dwelling you acquired because you were a beneficiary of a deceased estate. Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the conditions under which the capital gain or capital loss can be disregarded in this situation.

Where a dwelling was originally acquired by the deceased before 20 September 1985 and you, the beneficiary, dispose of your interest in the property within two years of the date of death, any capital gains or capital losses made as a result of the disposal can be disregarded.

Separate interests in a property

For capital gains tax purposes a person can have more than one interest in a property depending on when it was first purchased and how the ownership of the property was passed on to them.

In your case, there are two interests in the property:

· First interest - acquired by your parent A when the property was first purchased

· Second interest - acquired by your parent A on the date of your parent B's death

Upon the death of parent A these interests have been passed on to you.

First interest

As your parent A acquired the first interest before 20 September 1985, any capital gain that you may make upon disposal can be disregarded, if you dispose of your interest within two years of their date of death, as the conditions set out in section 118-195 of the ITAA 1997 are met.

Second interest

Subsection 109-5(1) of the ITAA 1997 states that you are generally taken to have acquired a CGT asset when you become its owner. In addition, subsection 128-15(2) of the ITAA 1997 states that you are taken to have acquired an asset when it is passed to you through a deceased estate on the date of death of the deceased.

For an interest in a dwelling acquired by the deceased after 20 September 1985 the test in section 118-195 of the ITAA 1997 is slightly different. In order to have a full exemption for any capital gain or loss the dwelling must have also been the deceased main residence just before their death.

The basic rule is that you must reside in the property in order for it to be considered as your main residence.

In some circumstances the main residence exemption can be extended to cover a period of time that you did not actually occupy the dwelling. This is discussed in section 118-145 of the ITAA 1997. If the dwelling is used to produce income (for example, renting) you are able to continue treating it as your main residence for a maximum period of six years. If it is rented for more than six years, you will be subject to capital gains tax on the period exceeding six years. To use this rule, the property must have been occupied as your main residence before the period of absence.

In your case, your parent A inherited your parent B's share of the property (second interest) when your parent B died in late 1987. Your parent A lived in the property until they moved into a nursing home in early 1999.

As the property was rented for more than six years, the dwelling cannot be treated as the main residence for their entire ownership period. This also means that the property was not your parent A's main residence at the time of their death in late 2010.

Therefore any capital gain or loss cannot be ignored even if the property is sold with two years of your parent A's death.

You will be able to take the period of time that the property was considered to be their main residence (including the six years under the absence rule) into account when calculating your assessable capital gain (section 118-200 of the ITAA 1997).

50 per cent discount method

Division 115 of the ITAA 1997 allows you to reduce your taxable capital gain by 50 per cent in certain circumstances. In order to be eligible for the 50 per cent discount, you must be an individual, the disposal of the asset must have happened after 21 September 1999 and you must have acquired the asset at least 12 months before the disposal.

Section 115-30 of the ITAA 1997 contains some special rules about the time of acquisition for certain CGT assets for the purpose of applying the 50 percent discount method. Here it states that if you acquire an asset through a deceased estate, and this asset was originally acquired by the deceased after 1985, you are taken to have acquired the asset at the time they acquired it. This means that if the total period that the deceased and the beneficiary together have owned the asset is greater than 12 months, then the beneficiary will be able to use the 50 per cent discount method.

In your case, the date of acquisition of your second interest in the property is the date your parent B passes away in late 1987.

This means that you are able to claim the 50 per cent discount on half of any capital gain you make when you dispose of the property. This reflects the portion of the property (second interest) that your parent A acquired at the time of your parent B's death.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).