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Ruling

Subject: capital gains tax implications on disposal of property

Question 1

Will you be assessed on any capital gain made on the disposal of the property?

Answer: Yes

Question 2

Are you entitled to fully disregard the capital gain made on the disposal of the property?

Answer: No

Question 3

Are you entitled to partially disregard the capital gain made on disposal of the property for the period that the property was the main residence of the deceased and the deceased's spouse?

Answer: Yes

Question 4

Is the acquisition date of the property considered to be the date of the deceased's death?

Answer: Yes

Question 5

Is the first element of the cost base of the property considered to be the market value of the property at the date of the deceased's death?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The deceased acquired a property prior to 20 September 1985.

The property was used as the deceased's main residence up until the date of their death.

The property's capital improved value at date of death was $xxx.

Shortly after the date of death probate was granted to appoint an executor.

In accordance with the terms of the deceased's will, the property is to be held by the executor in trust to permit the deceased's spouse, to have use, occupation and enjoyment thereof, or, the rents and profits there from during their lifetime.

The spouse continued to reside in the property which was their main residence up until their date of death.

Later, the executor was issued with court proceedings regarding a part IV claim being made against the estate.

The claimant resided with the deceased's spouse in the property and continued to live in the property until the part IV claim was settled.

Mediation took place and the terms of settlement determined the distribution to beneficiaries.

Immediately after mediation was settled, the executor made the necessary arrangements to place the property on the market.

The property was sold at auction for $xxx.

The claimant remained in the property just prior to the property being settled.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Subsection 128-15(4)

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

Reasons for decision

Summary

As you have disposed of your ownership interest in the property you will be liable for capital gains tax.

You are not entitled to fully disregard the capital gain made on disposal of the property as the property was not the main residence of the deceased or the deceased's spouse for the whole of your ownership period. However, you are entitled to partially disregard the capital gain made on disposal of the property for the period that the property was the main residence of the deceased and the deceased's spouse.

The acquisition date of the property is considered to be the date of death of the deceased and as the deceased had acquired the property prior to 20 September 1985, the first element of the cost base of the property is the market value of the property at the date of the deceased's death.

Detailed reasoning

Deceased estate and the main residence exemption

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if the deceased died on or after 20 September 1985 but, had acquired the dwelling before 20 September 1985 and you have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate, or you have owned it as trustee of a deceased estate, you disregard any capital gain or capital loss you make from a capital gains tax (CGT) event that happens to the dwelling if either of the following applies:

· You disposed of your ownership interest within two years of the person's death, or

· From the deceased's death until you disposed of your ownership interest, the dwelling 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)

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

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Section 118-200 of the ITAA 1997 provides that if you do not qualify for a full exemption from CGT for the home, you may be entitled to a part exemption.

For a partial exemption, you calculate your capital gain or capital loss as follows:

'Non-main residence days' is the number of days that the dwelling was not the main residence.

If the deceased acquired the dwelling before 20 September 1985, non-main residence days are the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not the main residence of one of the following:

· a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

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

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

'Total days' (if the deceased acquired their ownership interest before 20 September 1985) is the number of days from their death until you disposed of your ownership interest.

In your case, on the death of the deceased, the title of the main residence devolved to their estate. Their spouse continued to reside in the main residence, under the terms of the deceased's will, until their death. The property was the main residence of the deceased up until their death, and, the main residence of the deceased's spouse up until their death. From the date of the deceased spouse's death until settlement of the contract for sale of the property, the dwelling was not the main residence of any of the above mentioned people.

Accordingly, you are only able to disregard that part of the capital gain made on disposal of the property for the days in which the property was considered a main residence of the deceased and the deceased's spouse.

In this instance, you will need to use the above mentioned formula to calculate the capital gain made on the disposal of the property with the 'non-main residence days' being the period from the date of the deceased spouse's death until settlement of the contract for sale of the property, and 'total days' being the period from the date of the deceased's death until settlement of the contract for sale of the property.

Deceased estate - acquisition date and cost base of a CGT asset

Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain from the disposal of an asset if the amount of money you received on the disposal was more than the cost base of the asset.

Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base;

1) money paid, or market value of property given, to acquire the asset

2) incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset

3) certain non-capital costs of ownership

4) capital expenditure on improvements

5) capital expenditure in respect of title or right to the asset

Section 110-35 of the ITAA 1997 provides that incidental costs include remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.

Subsection 128-15(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for legal personal representatives (LPR) or beneficiaries of deceased estates. It provides that if the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.

Subsection 128-15(2) of the ITAA 1997 states that the LPR, or beneficiary, is taken to have acquired the asset on the day the deceased died. This means that where a person dies on a certain date, any asset that formed part of the estate that was transmitted to the LPR or to a beneficiary is also taken to have been acquired by the LPR or beneficiary on this date. This is the case even though the asset may have been transmitted to the LPR or beneficiary after this date.

Accordingly, as the deceased acquired the property in question prior to 20 September 1985, the first element of the cost base of the asset is the market value of the asset on the date of the deceased's death. Further, the date of acquisition is considered to be the date of the deceased's death.

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