Edited version of private advice

Authorisation Number: 1052034568588

Date of advice: 4 October 2022

Ruling

Subject: CGT - life interest

Question 1

Is a partial main residence exemption available on the disposal of the property, following the death of the life interest?

Answer

Yes

Question 2

Is the first element of the cost base of the property the market value of the property on the death of the original deceased?

Answer

Yes

Question 3

Are the ownership costs paid you while the property was occupied by the life interest eligible to be included in the third element of the properties Cost Base?

Answer

Yes. Excluding expenditure relating to renovations to the bathroom and flooring, which are to be included within the 4^th element of the cost base.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

XX January 20XX

Relevant facts and circumstances

You inherited the Property situated at XXXX upon the deceased death on XXX.

The Property was previously the deceased main residence up until the date of their death and was initially purchased in XXXX.

The property was not ever used to produce income at any time.

The property was occupied by XXXX under a life interest up until their death on XXXX.

You paid all of the ownership costs in relation to the Property while your sibling occupied the property, as well as up until settlement.

These costs were incurred while you were the executor as well as after the life interest ended.

Costs include council rates, water rates, body corporate, insurance, land taxes, repairs and maintenance, renovations (to bathroom and flooring) and costs to stage the property for sale.

The property was vacant from the life interests death until being sold.

The Property was sold on XXXX, with settlement occurring on XXXX

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 112-25(4)

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Subsection 128-15(5)

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Subsection 118-200(2)

Reasons for decision

General rules regarding capital gains (or losses) as a result of death are covered under Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997). According to section 128-10 of the ITAA 1997 any capital gain or capital loss resulting from a capital gains tax (CGT) event in relation to an asset owned by the deceased person immediately prior to the time of death is disregarded.

Partial Main Residence Exemption

As the life interest had chosen to treat the dwelling as their main residence, then if the dwelling was, from the death of the original deceased until your ownership interest ends, the main residence of either:

•         the spouse of the deceased, or

•         an individual who had a right to occupy the dwelling under the deceased's will

any capital gain or capital loss you make from the disposal of the dwelling is disregarded (subsection 118-195(1) of the ITAA 1997).

In your case, the deceased acquired the dwelling after 20 September 1985 and XXXX was provided with a life tenancy under the deceased's will. The estate will not be entitled to apply the full main residence exemption however, as there will be a period of time between the death of the life interest and the disposal of your ownership interest when the dwelling is not the main residence of the life interest. Therefore, the conditions in section 118-195 of the ITAA 1997 cannot be met

In this situation, section 118-200 of the ITAA 1997 provides for a partial exemption.

The relevant formula in subsection 118-200(2) for determining how much of the capital gain or loss is not exempt is:

Capital gain or capital loss amount × Non-main residence Days ÷ Total Days

'Non-main residence days' are defined in subsection 118-200(2) of the ITAA 1997 as the sum of the number of days in the deceased's ownership period if the property was acquired by them on or after 20 September 1985 when the dwelling was not the main residence of the deceased, and the number of days in the period from their death until your ownership period ends when the dwelling was not the main residence of an individual who a right to occupy the dwelling under the will.

'Total days' are defined in subsection 118-200(2) of the ITAA 1997, in the case of a dwelling acquired by the deceased on or after 20 September 1985, as the number of days from the acquisition of the dwelling by the deceased to when your ownership interest ends.

Cost base of asset

Ordinarily, where the asset was a post-CGT asset in the hands of the deceased taxpayer, the first element of the cost base or reduced cost base to the taxpayer's legal personal representative or beneficiary at the time they acquire the post-CGT asset is the deceased taxpayer's cost base (or reduced cost base) on the day of death.

However, the first element of the cost base or reduced cost base of a dwelling is the dwelling's market value when the original deceased passed away because it was the original deceased's main residence just before they passed away and not then being used to produce assessable income.

In this situation, youinherited the dwelling as a beneficiary under the will of the original deceased. You are taken to have acquired the property at the date that the original deceased passed away, rather than the date when the life interest owner passed away.

Expenditure of beneficiary

As per subsection 128-15(5) of the ITAA 1997, a beneficiary can include in the cost base or reduced cost base of the asset any expenditure that the legal personal representative would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

In this instance, the following costs can be included within the third element of the cost base:

•         council rates

•         water rates

•         body corporate

•         insurance premiums

•         repairs and maintenance

•         Cost to stage for sale

•         land taxes

The expenditure relating to renovations to the bathroom and flooring are to be included within the 4th element of the cost base.

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