Edited version of your private ruling

Authorisation Number: 1012136408561

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Subject: CGT - deceased estate

Question and Answer

Are you entitled to the main residence exemption fro a rental property you inherited through a deceased estate?

No.

Are you entitled to a partial main residence deduction for a rental property you inherited through a deceased estate?

Yes.

Can you include in the cost base expenses incurred for bringing a rental property you inherited to a saleable condition?

Yes.

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Post 20 September 1985 your parent passed away.

The deceased left the marital home to you and your sibling with the proviso that the deceased's spouse live in it until death, or alternatively directs you to sell the home and purchase a different property of choice.

The deceased's spouse opted to sell the home and purchased another property.

The estate sold the property as per at the spouse's request.

You have a letter from the deceased's spouse stating she lived in the property for a number of years.

The deceased's spouse rented out the new property until death and the spouse's child held power of attorney.

You are unaware of where the deceased's spouse lived once she rented out the new property.

You are unaware of whether the deceased's spouse continued to nominate the new property as a main residence.

All rental monies went to the deceased as under the terms of the deceased's Will and was required to keep the property in proper repair and pay all rates and taxes.

You and your sibling had nothing to do with the property during the deceased's spouses' life time.

You were not in touch with the deceased's spouse or the spouse's child except through solicitors.

A number of years after the deceased died the deceased's spouse died.

You and your sibling were not informed of the death and did not find out until months later when you received a rates notice in relation to the property.

The rent money paid since the spouse's death has been collected by the spouse's child and you are in the process of trying to re-coup that money.

If you had been notified in a timely fashion that the deceased's spouse had died you would have sold the property at that time.

The property has been vacated by the tenants.

You incurred expenses in repairing the property; repairs of serious cracking throughout, painting and replacement of carpets due to water damage, staining and musty smell, to bring it up to a saleable condition.

The property is currently on the market.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 118-10

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-200

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

Reason for Decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can only make a capital gain or capital loss if a Capital Gains Tax (CGT) event happens.

Deceased estate

Division 128 of the ITAA 1997 sets out what happens when a person dies and a CGT asset they owned just before dying devolves to their trustee or passes to a beneficiary of their estate.

A beneficiary is taken to have acquired an asset from a deceased estate on the day the person passed away (subsection 128-15(2) of the ITAA 1997).

Any capital gain or capital loss you make when a CGT event happens to your ownership interest in a dwelling you inherit can be disregarded if:

· the deceased acquired the dwelling on or after 20 September 1985; and

· the deceased's death until you dispose of your ownership interest, the dwelling was not used to produce income and was the main residence of the spouse of the deceased, a life tenant or you as a beneficiary or;

· just before the date of the deceased died it was their main residence and was not being used to produce income and you dispose of your ownership interest within two years of the person's death.

Main residence exemption

Generally, you can disregard a capital gain or capital loss made on the sale of a dwelling that is your main residence (section 118-110).  To obtain the full exemption from CGT:

· the dwelling must have been your home for the whole period you owned it, and

· the dwelling must not have been used to produce assessable income, and

· any land on which the dwelling is situated must be two hectares or less.

Continuing main residence status after dwelling ceases to be your main residence

In some cases, you can choose to continue to treat a dwelling as your main residence even though you no longer live in it (section 118-145).

If you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.

If the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is 6 years.

You are entitled to another maximum period of 6 years each time the dwelling again becomes, and then ceases to be, your main residence (section 118-145).

As you do not know whether the deceased's spouse continued to nominate the new property as a main residence when ceasing to reside there and renting it out; you are not entitled to a full main residence exemption.

Partial Exemption

A partial main residence exemption will be available under section 118-200 of the ITAA 1997 if you have an ownership interest in a dwelling as an executor of a deceased estate. 

In your situation, a partial main residence exemption under section 118-200 of the ITAA 1997 does apply when you, as executors, disposed of your ownership interest in the dwelling as the deceased's spouse lived in the property for a number of years.

You will calculate the capital gain or capital loss on the dwelling as follows (subsection 118-200(2) of the ITAA 1997): 

   Capital gain or capital loss         x          non-main residence days

                                                                             total days

The capital gain is calculated as the difference between the capital proceeds (the amount you received from the sale of the dwelling) and the cost base of the dwelling. 

A capital loss is made if the reduced cost base of the dwelling is greater than the capital proceeds.

Non-main residence days are the total number of days from the death of the deceased until the executors' ownership interest ends when the dwelling was not the main residence of one of the following: 

· the spouse of the deceased at time of death (Other than a spouse living permanently separately and apart form the deceased; or

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

· A beneficiary who brought about the CGT event.

Cost base

The general rules about the cost base of a CGT asset are set out in section 110-25 of the ITAA 1997. 

The cost base of a CGT asset consists of five elements as follows:

· money or property given for the asset.

· incidental costs of acquiring the CGT asset or of the CGT event.

· non-capital costs associated with owning the asset (only if you acquired the asset on or after 21 August 1991).

· capital costs associated with increasing the value of your asset.

· capital costs of preserving or defending your ownership of or 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.

From the facts you have provided the second and third elements would be relevant to you;

Second element:

There are ten incidental costs you may have incurred in acquiring the asset or in relation to the CGT event that happens to it (including its disposal). They are:

· remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can include the cost of advice on the operation of the tax law as an incidental cost only if the advice was provided by a recognised tax adviser and you incurred the cost after 30 June 1989)

· costs of transfer

· stamp duty or other similar duty

· costs of advertising or marketing (but not entertainment) to find a seller or buyer

· costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

· search fees relating to an asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable for purchase)

· the cost of a conveyancing kit (or a similar cost)

· borrowing expenses (such as loan application fees and mortgage discharge fees)

· expenditure that

· is incurred by the head company of a consolidated group to an entity that is not a member of the group

· reasonably relates to a CGT asset held by the head company

· is incurred because of a transaction that is between members of the group.

· expenditure (also known as termination or exit or similar fees) that is incurred as a direct result of your ownership of a CGT asset ending.

You do not include costs if you:

· have claimed a tax deduction for them in any year, or

· did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

Third element:

The cost of owning an asset include rates, land taxes repairs and insurance premiums.

You do not include such costs if you;

Have claimed a tax deduction for them in any income year, or

Omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

CGT Discount

An individual may choose under certain circumstances to include only 50% of their capital gain in their assessable income.

Use the discount method to calculate your capital gain if:

you are an individual, trust or a complying superannuation entity

a CGT event happens to an asset you own

the CGT event happened after 11.45am (by legal time in the ACT) on

21 September 1999

you acquired the asset at least 12 months before the CGT event.

Using the CGT discount method, you calculate your capital gain as follows:

Capital proceeds cost base = capital gain

You apply any capital losses (current and/or prior year) against the capital gain before applying the 50% discount.

(Capital gain capital losses) x 50% = net capital gain.

The asset has been held for longer than 12 months, therefore you are entitled to use the CGT discount method.

As capital gains are not taxed separately, this gain is then added to your income in the year in which you incurred the gain, and the tax is calculated on your total assessable income using the normal marginal rates.

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