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Edited version of your written advice

Authorisation Number: 1012706898171

Ruling

Subject: Capital gains on dwelling acquired from a deceased estate

Question and Answer:

Will any capital gain or loss on the disposal of the dwelling be exempt for the trustee of the deceased estate and the three beneficiaries, namely A, B and the Estate of C?

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

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.

The deceased purchased a dwelling before 20 September 1985.

The deceased used the dwelling as their main residence until their death after 20 September 1985.

According to the deceased's will, D has a life interest in the dwelling. The will specifies the dwelling is to be distributed to the children of D, in equal shares as tenants in common, provided they have reached the age of 18.

Since the death of the deceased D has used the dwelling as their main residence.

The dwelling has not been used and will not be used to earn assessable income.

The trustee of the deceased's estate, with permission of the life tenant, and the remaindermen proposes to sell the dwelling at its market value and then distribute the proceeds between the life tenant and the remaindermen (in proportions yet to be agreed).

The dwelling will be sold before 30 June 2015.

The dwelling will remain the life tenant's main residence until sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Paragraph 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Paragraph 118-195.

Reasons for decision

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. 

CGT event A1 happens if you dispose of a CGT asset (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). CGT event A1 will happen when the dwelling in question is sold.

As a result of the death of the deceased, two separate interests in the dwelling in question were created:

For CGT purposes, these separate interests in the property are assets in their own right.

In this case the three remaindermen (beneficiaries) to which this ruling applies acquired their ownership interest in the dwelling on the death of the deceased.

The dwelling will be sold by the trustee. There are various exemptions available under the CGT provisions, one of which is the deceased estate main residence exemption.

Deceased estate main residence exemption

Section 118-195 of the ITAA 1997 disregards a capital gain or loss from a CGT event that happens in relation to a dwelling where a taxpayer is an individual and the ownership interest passed to the taxpayer as a beneficiary in, or the taxpayer owned it as a the trustee of, a deceased estate.

The ownership period of the beneficiaries commences from the deceased's date of death, and ends on the date of settlement of the sale contract.

A full exemption is available to the trustee where a dwelling was a pre-CGT asset in the hands of the deceased and the dwelling was not used to produce assessable income and was the main residence of an individual having a right of occupancy under the will from the time of the deceased's death until disposal.

Your case

In your case, the deceased acquired the dwelling pre CGT and D was given a right to occupy the dwelling (life tenant) under the deceased's will. The dwelling will remain the life tenant's main residence until sale. The dwelling has not been used to earn assessable income, and will not be used to earn income until sale.

Accordingly on sale of the dwelling, the capital gain or loss will be exempt for the trustee as the life tenant will continue to live in the dwelling until sale. As the dwelling will have been the life tenant's main residence for the beneficiaries' entire ownership period, any capital gain or loss made on the disposal of the dwelling can be disregarded by the trustee.

Beneficiaries

As the trustee will make an exempt capital gain or loss, the distribution to the relevant beneficiaries, will also be exempt from CGT.

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