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Edited version of your written advice
Authorisation Number: 1012803123671
Ruling
Subject: CGT - deceased estate - partial exemption
Question 1
Does section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain or loss made on disposal of the property?
Answer
No
Question 2
Does section 118-200 of the ITAA 1997 apply allowing a partial exemption for any capital gain or loss made on disposal of the property?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The deceased died in March 20XX.
The deceased acquired a property, for use as a weekend/ holiday home prior to 20 September 1985.
After 20 September 1985, the deceased constructed a brick house on the property and allowed his/her relative to live at the property.
The property consisted of the original holiday house and the brick house. The rear of the brick house and the front of the holiday house were covered by the same veranda and enclosed pergola roofing with encompassing the 10 metres separating the two buildings. The roofing was erected to allow the occupants to move between the two buildings at any time and in any whether.
The two buildings, connected by the pergola and veranda were utilised by the occupants as one residence. The two buildings on the land were not capable of being sold separately or subdivided as they currently stood.
In 19XX the deceased retired and moved to the property as his/her principle place of residence.
Probate was granted on mid-July 20XX.
Clause 4 of the Will permitted the relative to reside at the property subject to conditions with respect to payment of rates and insurances.
The market value of the property at the date of the deceased's death was $XXX,XXX.
In December 20XX, two of the deceased's family members commenced Supreme Court Action pursuant to the Inheritance (Family Provision) Act 1919. This 'froze' the ability of the executor to deal with the assets of the estate, except under court order, until the claims were finalised.
In September 20XX, the relative vacated the property.
In March 20XX the Supreme Court ordered that a settlement had been reached in principle and that as the property had been vacated by the relative, it should be sold.
In June 20XX the property was put up for auction. The property was passed in and it continued to be marketed for sale.
In November 20XX a Consent Order by the Supreme Court authorised and directed the executor to take steps to advertise the property for sale at a price not less than $450,000.
In December 20XX a final offer of $ is accepted, subject to Court approval.
In January 20XX the Supreme Court approved the sale of the property for $ to settle in February 20XX.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 118-195
Income Tax Assessment Act 1997 subsection 118-195(1)
Income Tax Assessment Act 1997 section 118-200
Income Tax Assessment Act 1997 subsection 108-55(2)
Income Tax Assessment Act 1997 subsection 128-15(4)
Reasons for decision
Summary
You do not satisfy the criteria to allow you a full exemption from the capital gain or loss made from the disposal of the property under section 118-195 of the ITAA 1997; however a partial exemption can be applied under section 118-200 of the ITAA 1997.
Detailed reasoning
As per subsection 118-195(1) ITAA 1997, a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling, or your ownership interest in it, is disregarded if:
(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
Beneficiary or trustee of deceased estate acquiring interest | |||
Item |
One of these items is satisfied |
And also one of these items | |
1 |
the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income |
your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner | |
........... | |||
2 |
the deceased *acquired the *ownership interest before 20 September 1985 |
the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: | |
|
|
(a) |
the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or |
|
|
(b) |
an individual who had a right to occupy the dwelling under the deceased's will; or |
|
|
(c) |
if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual |
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) (ATO Interpretive Decision ATO ID 2003/109).
Acquisition date
Subsection 108-55(2) of the ITAA 1997 states that a building or structure on land that you acquired before 20 September 1985 is a separate asset if:
• you entered into a contract for the construction of the building or structure on or after that date, or
• there is no contract for its construction - construction began on or after that date
Example:
You bought a block of land with a building on it on 10 August 1984. On 1 December 1999 you construct another building on the land. The other building is taken to be a separate CGT asset from the land.
Application to your circumstances
In this case the deceased purchased the property prior to 1985 and in 19XX built a structure on the land. As per subsection 108-55(2) of the ITAA 1997, the structure is a separate asset for capital gains tax purposes.
Following the deceased's death, the property passed to the trustee of the deceased's estate. The property was the deceased's main residence just before the deceased's death and was not being used for the purpose of producing assessable income satisfying item 1 of column 2 of the above table. Item 2 of column 2 of the above table is also satisfied because as discussed above, part of the property is a pre CGT asset.
After the deceased's death, his/her relative, had a right to occupy the property under the deceased's will. However, Z moved out of the property in 20XX and the property was not sold until 20XX. Therefore the property was not the main residence of from the deceased's death until the ownership interest ended.
As none of the items in column 3 of the table have been satisfied, the trustee of the deceased estate cannot disregard the capital gain or loss from the disposal of the property under section 118-195 of the ITAA 1997.
Partial exemption for deceased estate dwellings
Where section 118-195 of the ITAA 1997 does not apply, section 118-200 of the ITAA 1997 may provide a partial exemption for deceased estate dwellings. You get only a partial exemption (or no exemption) if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate. You calculate your capital gain or capital loss using the following formula:
Capital gain or capital loss amount x Non-main residence days
Total days
where:
non-main residence days is the sum of:
(a) if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and
(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
total days is:
(a) 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
(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends
As discussed, the brick dwelling will be considered a separate asset from the land for CGT purposes. The property therefore has both pre and post CGT elements and you will be required to complete two separate calculations to determine the partial exemption.
As the property is considered the main residence of the deceased just before death and was not used for the purpose of producing assessable income, subsection 128-15(4) of the ITAA 1997 states that the first element of cost base of both the pre and post CGT assets will be the market value of the dwelling on the day the deceased died.
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