Edited version of your written advice

Authorisation Number: 1051370312161

Date of advice: 3 August 2018

Ruling

Subject: Capital gains tax

Issue 1 – Main Residence Exemption

Question 1

Does the sale of the Property (the Property), qualify for the main residence capital gains tax exemption in Division 118-B Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the Commissioner exercise his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension of time to the two year period?

Answer

No.

Question 3

If the Commissioner will not exercise his discretion to extend the 2-year period for the disposal of the Property, will the first element of the cost base of the Property be equal to the market value of the Property on the date of death of the deceased in accordance with Item 3 of the table in section 128-15(4) ITAA 1997?

Answer

No.

Issue 2 – Cost Base

Question 1

Does the amount paid to acquire the Property qualify to be included in the first element of the CGT cost base of the Property under section 110-25(2) ITAA 1997?

Answer

Yes.

Question 2

Do the amounts paid to renovate the Property after it was acquired qualify to be included in the cost base of the Property?

Answer

Yes.

Question 3

Do the amounts expended on legal costs (and associated experts and advisers) by the deceased’s beneficiaries to restore the Property to the executor on behalf of the deceased’s estate qualify to be included cost base of the Property?

Answer

Yes.

Question 4

Do the amounts expended on legal costs (and associated experts and advisers) by the executor on behalf of the deceased’s estate to restore the Property to the deceased’s estate qualify to be included in the fifth element of the CGT cost base of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased lost capacity due to dementia.

From a later date, a relative (the relative) of the deceased, commenced acting as their attorney under an enduring power of attorney which did not permit them to benefit while acting as the deceased’s attorney.

The relative purported to exercise the power of attorney and sold shares owned by the deceased, realising significant proceeds.

The relative used the proceeds to purchase a property (the Property) in the names of their child and child’s spouse.

A Court subsequently made a finding of fact that the purpose of the relative selling the shares of the deceased, and using the proceeds to buy the Property, was to: deprive the deceased’s estate of the value of the shares, and provide a corresponding benefit solely the relative’s own family.

At the time of the purchase of the Property, the relative resided in the old house which was jointly owned with the deceased.

Shortly after the purchase, the relative embarked on renovations to the Property which was funded out of the deceased’s money. Subsequently the old house was sold, and the relative moved into the property once renovations were completed.

The relative lived in the property, together with their child and their child’s family for a number of years. It was their main residence.

The deceased subsequently died.

The executor was appointed under the deceased’s last Will.

The deceased’s children learnt that the deceased’s estate had been almost entirely depleted by the relative acting under power of attorney and brought an effective derivative action on behalf of the deceased’s estate in lieu of the executor in the relevant court.

The purpose of the action was to recover the Property into the deceased’s estate.

The Court declared that the legal owners of the Property held the Property as constructive trustees for the deceased’s estate.

The Court held that the funds used to undertake the renovations also comprised assets of the deceased.

The Court made final orders to transfer of the Property back to the estate.

The title to the property was corrected in accordance with the final orders to show the executor as owner as executor on behalf of the deceased estate.

The beneficiaries expended funds on behalf of the executor in relation to the Property. The executor incurred costs in relation to the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Division 118-B

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Main residence exemption

The capital gains provisions allow for concessional treatment to be given to a dwelling that was owned by a deceased person if the executors of the deceased person’s estate sell that dwelling within two years of the date of death.

Any capital gain or capital loss made on the sale of such a dwelling is disregarded if the dwelling was:

● Acquired by the deceased before 20 September 1985, or

● The deceased’s main residence when they died.

The Commissioner has the discretion to extend the two year period. This extension is generally only granted where the executors are merely arranging the ordinary sale of the dwelling and the cause of the delay is beyond their control (for example, if the will is challenged). There must not be any other factors mitigating against exercising it.

Given that the Property was not the deceased’s main residence prior to death, section 118-195 of the ITAA 1997 will not apply and you are not entitled to a full main residence exemption and therefore no application of the Commissioner’s discretion.

In this case, as the dwelling was not the deceased’s main residence, Item 3 of the table in section 128-15(4) ITAA 1997 will not apply to modify the cost base.

Cost base

When considering the disposal of a Property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset.

Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. In the absence of evidence to the contrary, Property is considered to be owned by the person(s) registered on the title. However, in limited circumstances it is possible for legal ownership to differ from beneficial/equitable ownership for taxation purposes.

Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the Property on trust for the beneficial owner.

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss as a result of a CGT event. The sale of a dwelling would constitute CGT event A1 as stated in section 104-10 of the ITAA 1997.

Section 110-25 of the ITAA 1997 sets out the general rules of cost base. The cost base of a CGT asset consists of five elements.

1. The total of any money you have paid to acquire the asset;

2. The incidental costs incurred in acquiring the asset (such as stamp duty and brokerage fees);

3. Non-capital costs of ownership (such as interest and costs of maintaining the asset etc);

4. Capital expenditure incurred to increase or preserve the asset's value; and

5. Any costs incurred to establish, preserve or defend your title to the asset.

Section 128-15(4) provides that the first element of the cost base is the cost base of the asset at the date of the deceased’s death. The first element of the reduced cost base is the reduced cost base of the asset at the date of the deceased’s death.

In this case, the deceased was the beneficial owner of the Property from acquisition; therefore, the first element of the cost base or reduced cost base is the deceased’s cost base at the date of death.

The fifth element of the cost base of a CGT asset includes capital expenditure to preserve or defend the ownership of or rights to the asset. To the extent these costs have been incurred by the estate to preserve or defend the ownership of the Property or rights to the Property, they can be included in the cost base and reduced cost base.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).