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Edited version of your written advice
Authorisation Number: 1013119477123
Date of advice: 3 November 2016
Ruling
Subject: Capital gains of a deceased estate
Question
Does an adjacent property held for domestic purposes and treated as part of the deceased's main residence qualify for the CGT main residence exemption where it was sold separately by the deceased estate?
Answer
No
This ruling applies for the following period
Year ended 30 June 20XX
Year ending 30 June 20YY
Year ending 30 June 20ZZ
The scheme commences on
October 20WW
Relevant facts and circumstances
The deceased owned two adjacent properties that were post-CGT assets. The taxpayer used one property for domestic occupation and the other property mainly for storage.
The taxpayer passed away in 20WW. Each property was ultimately sold to a different purchaser. The properties were both sold within two years of the taxpayer's death.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 118-120
Income Tax Assessment Act 1997 section 118-165
Income Tax Assessment Act 1997 subsection 118-195(1)
Detailed Reasoning
Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) allows the trustee of a deceased estate to disregard any capital gain or loss made from a CGT event that happens in relation to a dwelling that a deceased person acquired on or after 20 September 1985 if:
a) 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; and
b) the trustee's ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner.
While the main residence exemption contained in subsection 118-195(1) of the ITAA 1997 applies to the actual dwelling, section 118-120 of the ITAA 1997 extends the exemption to adjacent land that was used primarily for private or domestic purposes in association with the dwelling up to 2 hectares of land.
Taxation Determination 'TD 1999/68 Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling?' states that the main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not also happen in relation to the dwelling or your ownership interest in it (section 118-165 of the ITAA 1997). For example, if both properties were sold to the same person at the same time, the exemption would be extended to include both the main dwelling and the adjacent property up to 2 hectares.
In your case, you have disposed of the main dwelling and the adjacent property to different purchasers. Therefore the exemption cannot apply to the capital gain made on the disposal of the adjacent property.
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