Edited version of your private ruling

Authorisation Number: 1012434532122

Ruling

Subject: Main residence exemption

Question

1. Are you entitled to disregard the capital gain or loss on the disposal of the deceased's principal residence after two years from the date of death?

Answer: No

2. Will the Commissioner exercise the discretion to extend the two year rule in regards to the disposal of a deceased's main residence?

Answer: No

3. Are you entitled to a partial main residence exemption upon the disposal of the property?

Answer: Yes

4. Will the two separate interests acquired by the deceased in the property be treated as separate Capital Gains Tax (CGT) assets with separate acquisition dates?

Answer: Yes

5. Is the cost base of the half interest in the property acquired by the deceased prior to 20 September 1985 half the market value of the property on the day the deceased died?

 Answer: Yes

6. Is the cost base of the half interest in the property acquired by the deceased after 20 September 1985 half the cost base of the property on the day the deceased died?

Answer: Yes 

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The deceased died in 2XXX.

The deceased left a Will.

The Will provided for the estate of the deceased to go to their children.

The deceased acquired the property with their spouse as joint proprietors before 20 September 1985.

The deceased's spouse passed away in the 1990's.

The trustee received written instructions from all beneficiaries to arrange sale of the property.

Numerous attempts were made by the trustee to gain vacant possession of the property.

The property was finally sold over two years after date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Subsection 128-50(2)

Income Tax Assessment Act 1997 Section110-25

Income Tax Assessment Act 1997 Subsection 118-200

Reasons for decision

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an individual to disregard a capital gain or capital loss made from a Capital Gains Tax event (that is, sale of the ,property) that happens in relation to a dwelling where:

- The ownership of the dwelling passed to you as the beneficiary of a deceased person's estate,

- The deceased person died after 20 August 1996,

- The deceased acquired the dwelling before 20 September 1985, and

- The dwelling was the deceased person's main residence just before death.

 If you meet the above requirements you may be eligible to disregard the capital gains tax if:

- you dispose of your interest in the dwelling within two years of the deceased's death, or

- the dwelling is your main residence from the date of death until the time your ownership ends.

A trustee or beneficiary of a deceased estate may apply to the Commissioner to grant an extension of the two year time period, where the CGT event happens in the 2008-09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

- the ownership of a dwelling or a will is challenged;

- the complexity of a deceased estate delays the completion of administration of the estate;

- a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or

- settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

These examples are not exhaustive.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling. 

In this case, the decision to dispose of the property was not made for nearly one year after date of death. A further period of time elapsed before settlement due to the delay in the occupant vacating the premises. The reasons why the property was not sold within the two year period does not fall into any of the examples stated above and was within the control of the beneficiaries. As such the Commissioner will not exercise his discretion to extend the two year main residence exemption in this case.

Where section 118-195 of the ITAA 1997 does not apply, a partial main residence exemption may still be available under section 118-200 of the ITAA 1997.

However clarification of the CGT assets and their acquisition dates is first necessary.

CGT cost base and acquisition date

When calculating a capital gain or loss special rules apply for joint tenants (section 108-7 of the ITAA 1997). Individuals who own an asset as joint tenants are deemed to own a separate asset, being an equal share in the jointly owned asset.

If joint tenants own a CGT asset and one of them passes away, the interest of the deceased joint tenant in the asset is deemed to be acquired by the surviving joint tenant. The date of the deemed acquisition of the interest is the date the deceased joint tenant passed away (subsection 128-50(2) of the ITAA 1997).

As such, the deceased acquired two separate interests in the property, the first being a half interest when the deceased purchased the property prior to 20 September 1985 (pre-CGT). The second interest was acquired in 1990s (post-CGT) upon the death of the deceased's spouse. Each of these interests is considered to be a separate CGT asset and must be dealt with separately (Taxation Determination TD 2000/31).

Therefore, the trustee will also acquire two interests in the property. The trustee acquires a half interest which the deceased acquired prior to 20 September 1985, and a half interest which the deceased inherited after September 1985. The date of acquisition for both of these interests is the date of death of the deceased.

 As a result of the deceased having two separate interests in the property, the trustee will have different cost bases for each interest acquired on the death of the deceased.

Under section 110-25 of the ITAA 1997 there are five elements that make up the cost base of an asset. These elements are:

1. the money you paid to acquire the asset;

2. the incidental costs you incurred to acquire the asset and to sell it (such as agent's commission, stamp duty and legal costs and fees);

3. the non-capital costs of owning the asset

4. any capital expenditure you incurred to increase the asset's value provided it is reflected in the state or nature of the asset at the time of the CGT event; and

5. the capital expenditure incurred to establish, preserve or defend your title to or rights over the asset.

Cost base of interest in the property acquired prior to 20 September 1985 

If the deceased acquired an asset or interest in an asset before 20 September 1985, the first element of the cost base and reduced cost base of the asset in the hands of the trustee or beneficiary is the market value of the asset on the day the person died (subsection 128-15(4) of the ITAA 1997).

In your case, the first element of the cost base of the trustee's half interest in the property acquired by the deceased prior to 20 September 1985 is half of the market value of the property on the day the deceased died.  

Cost base of interest in the property acquired after 20 September 1985

 If the deceased acquired an asset or an interest in an asset on or after 20 September 1985, the first element of the cost base and reduced cost base of the asset in the hands of the trustee or beneficiary is the cost base and reduced cost base of the asset on the day the person died (subsection 128-15(4) of the ITAA 1997).

In your case, the first element of the cost base of the trustee's half interest in the property acquired by the deceased on the death of their partner is half of the cost base of the property on the day the deceased died.

Partial main residence exemption

A partial main residence exemption under section 118-200 of the ITAA 1997 will apply when you dispose of your ownership interest in a property outside the two year period which was the deceased main residence just before their death. Partial exemption can be calculated for both interests using the following formula:

Capital gain or Capital loss amount multiplied by Non-main residence days divided by Total days.

Capital Gain or Capital Loss is the amount that you made from the sale of the property.

Non-main residence days is the sum of:

- if the deceased acquired the ownership interest on or after 20 September 1985, the number of days in the deceased's period of ownership when the property was not their main residence and

- the number of days in the period from death until you dispose of the property when the property was not the main residence of

- the spouse of the deceased

- an individual who had a right to occupy the property under the deceased's will or

- you as a beneficiary

Total days is:

- if the deceased acquired the ownership interest before 20 September 1985, the number of days in the period from the death until your ownership interest ends; or

- if the deceased acquired the ownership interest on or after 20 September 1985, the number of days in the period from the acquisition of the property by the deceased until your ownership interest ends.

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