Edited version of private ruling

Authorisation Number: 1011822809026

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Ruling

Subject: Capital gains tax - deceased estate - absence choice

Question 1

Is your share of the distributions that you have received from your parent's estate which are the net proceeds from the sale of the family home (dwelling) taxable income?

Answer: Yes.

Question 2

Is the cost base of the dwelling the market value as at the date of your parent's death?

Answer: Yes.

Question 3

As a beneficiary, are you able to elect for the dwelling to be treated as your main residence?

Answer: No.

Question 4

As a beneficiary, if one of your siblings elected to treat the dwelling as their main residence, would you be able to disregard any capital gain arising from the sale of the dwelling?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

Your parent purchased a family home before 20 September, 1985. From that time onwards this dwelling was your parent's main residence.

Your parent passed away more than two years ago.

Your parent's will did not include a right to occupy your parent's dwelling.

Your parent's dwelling formed the major part of your parent's estate.

At some time close to your parent's death the dwelling became infested with white ants. The dwelling was considered to be uninhabitable. Major repairs were undertaken to repair the damage. The dwelling was at no time used to produce income, and was at no time inhabited by anyone before its sale.

Shortly after the repairs to the white ant damage were completed, the trustees of the estate sold the dwelling. Settlement took place more than two years after your parent's death.

You were presently entitled to the net income of the estate as at 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 101A

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 108-7

Income Tax Assessment Act 1997 Section 108-10

Income Tax Assessment Act 1997 Section 108-20

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 115-215

Income Tax Assessment Act 1997 Section 118-10

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 subsection 118-145(1)

Income Tax Assessment Act 1997 subsection 118-145(3)

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Question 1

If a trustee disposes of a deceased person's dwelling as part of the process of winding up their estate, as a beneficiary of the estate you may be exempt or partially exempt from paying CGT. If the deceased acquired the dwelling before 20 September 1985 you disregard any capital gain or capital loss if either of the following applies:

1 The trustee disposed of the dwelling within two years of the person's death - that is, if the dwelling was sold under a contract, settlement occurred within two years. This exemption applies whether or not the dwelling was used as a main residence or to produce income during the two-year period. The Commissioner has no discretion to extend the two-year period.

or

2 From the deceased's death until the trustee disposed of the dwelling, the home was not used to produce income and was the main residence of one or more of:

· a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased), or

· an individual who had a right to occupy the home under the deceased's will.

In your case, it took more than two years to complete settlement on the dwelling. Accordingly, you cannot disregard a capital gain or loss as per item 1.

Although the dwelling was not at any time used to produce income between the time of your parent's death and the sale of the dwelling, as:

· the dwelling was not the main residence of your parent's spouse, or

· your parent's will did not include a right to occupy the dwelling,

you cannot disregard a capital gain or loss as per item 2.

Therefore, any capital gain or loss made on the sale of the dwelling cannot be disregarded, and you as a beneficiary will be assessable on your share of the capital gain.

Question 2

For your share of any proceeds that you receive from a deceased estate, as a beneficiary, that are:

· your share of the proceeds from the disposal of a CGT asset,

· not exempt or partially exempt from paying CGT,

you will need to calculate a cost base for that CGT asset so as to determine how much capital gain to include in your assessable income.

There are special rules that apply when calculating the cost base of a deceased person's dwelling.

These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling.

The cost base of a CGT asset includes costs associated with acquiring, holding and disposing of the asset.

The cost base of a CGT asset is made up of five elements:

1 Money or property given for the asset.

2 Incidental costs of acquiring the CGT asset or that relate to that event.

3 Costs of owning the asset.

4 Capital costs to increase or preserve the value of your asset or to install or move it.

5 Capital costs of preserving or defending your ownership of rights to your asset.

You need to work out the amount for each element, and then add them together to work out the cost base of your CGT asset.

You can use the discount method to calculate a capital gain provided you have held the dwelling for more than 12 months, and that you are an individual.

The first element of the cost base and reduced cost base of a deceased person's dwelling is its market value at the date of death if either:

· the dwelling was acquired by the deceased before 20 September 1985, or

· the dwelling passes to you after 20 August 1996 (but not as a joint tenant), and it was the main residence of the deceased immediately before their death and was not being used to produce income at that date.

In your case your parent acquired the dwelling prior to 20 September 1985. The first element of your cost base will then be the market value of the dwelling as at the date of your parent's death.

You can use the discount method to calculate your capital gain as you are an individual, and you have held the property for longer than 12 months. This means you can apply the 50% discount when calculating how much CGT you need to pay.

Question 3

In some cases, you can choose to continue to treat a dwelling as your main residence even though you no longer live in it. You cannot make this choice for a period before a dwelling first becomes your main residence.

As the dwelling was uninhabited from the time of your parent's death until the dwelling was sold it was not at any time during this period established as your main residence.

Accordingly, you cannot choose to continue to treat the dwelling as your main residence.

Question 4

In your case:

· The dwelling was uninhabited for the entire period from the date of your parent's death up until the dwelling was sold,

· The dwelling was never established as a main residence of any person who had the right to occupy the dwelling as per your parent's will,

· Any person who would choose to treat the dwelling as their main residence and claim a main residence exemption would be doing so in contravention of the Income Tax Assessment Act 1997, and could be liable to pay the tax shortfall as well as penalties and interest.

As no beneficiary had the right under the will to occupy the dwelling, and the dwelling was sold by the trustee more than two years after your parent's death, any capital gain or capital loss made can not be disregarded.

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