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Edited version of your private ruling
Authorisation Number: 1012550232972
Ruling
Subject: Capital gains tax
Question 1
Upon disposal of a dwelling, can the Executor of a deceased estate obtain a full exemption from capital gains tax if the deceased had moved out of the dwelling prior to their death but chose to apply the absence provision?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
The property was purchased prior to 20 September 1985 by three people.
Owners 1 and 2 held their half share, as joint tenants, as tenants in common with owner 3 who held the other half.
All three lived in the property for several years until owners 1 and 2 moved out into a rental property due to health risks.
The third owner also moved out of the property around the same time.
The third owner arranged for their half of the property to be rented out.
The half of the property belonging to owners 1 and 2 was not rented out; they considered their half to still be their main residence. They were intending to move back in and were waiting on an outcome from the Environmental Protection Authority.
Owner 2 died and as a joint tenant, their share went to owner 1.
When owner 1 subsequently died their share went to X beneficiaries.
The Executor has chosen to use their discretion to apply the absence provisions for the period that owners 1 and 2 were not living in the property.
The Executor sold the property within two years of the death of owner 1.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 100
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subdivision 118-B
Income Tax Assessment Act 1997 Subsection 118-145(1)
Income Tax Assessment Act 1997 Subsection 118-195(1)
Income Tax Assessment Act 1997 Section 128-10
Income Tax Assessment Act 1997 Section 128-15
Reasons for decision
Please note, all references are to the Income Tax Assessment Act 1997 (ITAA 1997).
Capital gains tax
Division 100 explains the fundamentals of capital gains tax (CGT). CGT affects your income tax liability because your assessable income includes your net capital gain for the income year. Your net capital gain is the total of your capital gains for the year, reduced by certain capital loses you may have.
You can make a capital gain or loss only if a CGT event happens. There are a wide range of CGT events and the most common is CGT event A1. Section 104-10 explains that this event occurs when there is a change of ownership for an asset, such as on the disposal of a dwelling from one person to another. The time of the event is taken to be when you enter into a contract for the sale, or if there is no contract, when you cease being the owner, or part owner of the property.
Therefore, when you as Executor disposed of the property, there was a change in ownership for that property and CGT event A1 occurred.
General CGT exemptions
Subdivision 118-B explains that there are special rules for dwellings passed from, or owned by an Executor of a deceased estate. One requirement in certain circumstances is that the dwelling must have been the main residence of the deceased just before they died.
Absence from main residence
Where a property ceases to be an individual's main residence, they have an option to continue to treat the property as their main residence even though they no longer live there. If this choice is made, no other property can be treated as their main residence for that period.
If the property is rented out, the maximum length of time it can continue to be treated as their main residence is six (6) years. If it is not used to produce assessable income, there is no time limit for treating the dwelling as their main residence.
As Executor you have made the choice for owners 1 and 2 to continue to treat the property as their main residence for CGT purposes after they moved out because of health reasons. Because owners 1 and 2 jointly-owned half of the property was not made available for rent, there is no time limit applicable to the period they could continue to do so to their share of the dwelling.
Ownership of the property
There are various points of acquisition involved in this property:
1. Owners 1 and 2 acquired their share of the property as joint tenants prior to the introduction of capital gains tax (CGT). At this time their share of the property was a pre-CGT asset.
2. Pursuant to section 128-15 owner 1 is taken to have acquired owner 2's share of the property on their date of death which was after the introduction of CGT and therefore they then had two separate ownership interests:
(a) his original pre-CGT interest; and
(b) owner 2's share which he acquired post-CGT.
3. You, as Executor are taken to have acquired owner 1's share of the property on the date of their death. This means you acquired owner 1's share as a post-CGT asset.
Section 128-10 says that a capital gain or capital loss that occurs as a result of a CGT event happening to an asset you owned just before you die is disregarded. Therefore any capital gain or loss made when the change in ownership occurred when owner 2 died and owner 1 became owner of their share of the property is disregarded. Similarly, when owner 1 died and you as Executor became owner of the property, any capital gain or loss made when that change in ownership occurred at that time is also disregarded.
However, when you, as Executor subsequently disposed of the post-CGT property it did not at that time fall within the exemption of 128-10.
Dwellings acquired from a deceased estate
Section 118-195 contains the rules for dwellings acquired from deceased estates. It explains how a capital gain or capital loss made from a CGT event that happens in relation to the Executor's ownership interest in a dwelling may be disregarded.
The rules apply to you as Executor of owner 1's estate like this:
1. You owned the property as the Executor of owner 1's deceased estate. As pointed out above, owner 1's ownership was made up of two shares: one pre-CGT and one post-CGT.
2. Pre-CGT portion
As Executor your ownership interest ended within two years of owner 1's death and therefore the requirements of section 118-195 are satisfied and any capital gain or capital loss that was made when the CGT event A1 took place on the disposal of the pre-CGT portion of your ownership interest in the property is disregarded.
3. Post-CGT portion
As Executor your ownership interest ended within two years of owner 1's death and owner 1's share of the dwelling was their main residence just before they died (under the absence choice contained in section 118-145) and their share of the dwelling was not then being used to produce assessable income. Therefore the requirements of section 118-195 are satisfied and any capital gain or capital loss that was made when the CGT event A1 took place on the disposal of the post-CGT portion of your ownership interest in the property is disregarded.
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