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Edited version of your written advice
Authorisation Number: 1012776355427
Ruling
Subject: Main residence exemption
Question 1
Is any capital gain made on disposal of the property disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 200X
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 passed away during the 200X financial year
At the time of their death, the deceased lived in the property with their children.
The property was purchased after 19 September 1985.
The will states:
"My Executors shall hold the whole of my estate on trust to divide equally among those of my children who survive me and attain the age of twenty five…."
The will allows the Executors in their discretion to "apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of the beneficiary the whole of any part of the capital and income of that part of my estate to which the beneficiary is entitled or may in the future be entitled".
The property was the main residence of the children until it was sold.
The property was not used to produce assessable income.
The property was sold during the 2014-15 financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 118-195.
Reasons for decision
Summary
As the beneficiaries did have the right to occupy the dwelling, the capital gain made on disposal of the property can be disregarded in full.
Detailed reasoning
A capital gain or capital loss is disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) where a capital gains tax (CGT) event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon:
• who occupied the dwelling after the date of the deceased's death, or
• whether the dwelling was disposed of within two years of the date of the deceased's death.
For a dwelling acquired by the deceased, you will be entitled to a full exemption if:
• the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals:
• the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)
• an individual who had a right to occupy the dwelling under the deceased's will, or
• an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or
• your ownership interest ends within two years of the deceased's death.
In this case, the property was the deceased's main residence prior to death, and at that time, was not being used to produce assessable income. However, there is no spouse or individual beneficiary to whom the ownership interest passed. Therefore, whether or not the property was occupied by a relevant individual needs to be examined.
Subsection 118-195(1) of the ITAA 1997 requires that, to be a "relevant individual", you had to have a right to occupy the dwelling "under the will".
ATO ID 2003/109 further interprets the law, which is well relevant to your case:
An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238).
In this case, the beneficiaries were residents of the property at the date of the deceased's death. The deceased included a clause in the will stating that the estate should be held on trust to be divided equally between the children when they attain the age of 25. Another clause of the will allowed the Executors to apply the estate for the use and benefit of the children.
It was not mentioned in the will that a "right to occupy" of the property was given to either of the beneficiaries, the Trustee, or any third party. That is, it was "ascertained from the words of the Will" that you had the right to occupy the dwelling. Therefore, the beneficiaries are relevant individuals on that basis.
As the beneficiaries did have the right to occupy the dwelling, the capital gain made on disposal of the property can be disregarded in full.
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