Edited version of private advice

Authorisation Number: 1052117498894

Date of advice: 15 May 2023

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Are you eligible for a full main residence exemption on disposal of the Property in accordance with section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No

Question 2

Are you eligible for a partial main residence exemption on disposal of the Property in accordance with section 118-200 of the ITAA 1997?

Answer 2

Yes

Question 3

Do you need to adjust the formula in subsection 118-200(2) of the Income Tax Assessment Act 1997 using section 118-205 of the ITAA 1997for the ownership interest in the Property that passed to the Deceased on or after 20 September 1985as a beneficiary?

Answer 3

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Deceased and their spouse purchased a house prior to 20 September 1985 (the Property).

They purchased the Property as joint tenants.

The Deceased's spouse died in 19XX. At this time, the Deceased acquired their spouse's interest in the Property.

The Deceased died in 19XX. At the time of the Deceased's death, the Property was not being used to earn assessable income.

Prior to the Deceased's death, their adult child (Person A) moved into the Property to care for the Deceased.

Person A remained living at the Property until it was sold. Settlement occurred 4 weeks later.

There was no provision in the Deceased's Will that allowed Person A to stay living in the Property after the death of the Deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 118-205

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Question 1

Summary

As you do not meet the conditions for a full main residence exemption in section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997), you are not eligible for a full main residence exemption on disposal of the Property.

Detailed reasoning

Where you are an individual and your ownership interest passed to you as a beneficiary, or as trustee of a deceased estate, you will be eligible for a full main residence exemption on disposal, where the following conditions are met:

(a)  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 and;

•         your ownership interest ends within two years of the deceased's death, or a longer period allowed by the Commissioner; or

•         the dwelling was from the deceased's death until your ownership interests ends, the main residence of one or more of the people mentioned in item 2, column 3 of the table in section 118-195 of the ITAA 1997.

(b)  the deceased acquired the ownership interest before 20 September 1985 and;

•         your ownership interest ends within two years, or a longer period allowed by the Commissioner; or

•         the dwelling was from the deceased's death until your ownership interests ends, the main residence of one or more of the people mentioned in item 2, column 3 of the table in section 118-195 of the ITAA 1997.

Application to your circumstances

The Deceased held 2 interests in the Property. The first interest was a 50% interest acquired as a joint tenant (Interest one), prior to the introduction of capital gains tax (CGT) on 20 September 1985.

Interest one was not disposed of within 2 years of the death of the Deceased. Nor was the Property the main residence of an individual mentioned in Item 2, Column 3 of the table in section 118-195 of the ITAA 1997 following the death of the Deceased until disposal of the Property.

Therefore, you will not be eligible for a full main residence exemption on the disposal of this interest.

The Deceased acquired a second 50% interest as a beneficiary on the death of their spouse after 20 September 1985 (Interest two). Subsection 128-50(2) of the ITAA 1997 provides that where a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the individual's interest in the asset on the day the individual died. This interest is therefore a post-CGT interest.

The interest was not disposed of within 2 years of the death of the Deceased. A condition in Item 2 column 3 of the table in section 118-195 of the ITAA 1997 is satisfied for the two years from the death of the Deceased's spouse until the death of the Deceased in 19XX. However, the period from the death of the Deceased in 19XX until settlement of the Property is not covered by an exemption.

Therefore, you will not be eligible for a full main residence exemption on the disposal of this interest.

Question 2

Summary

You meet the conditions for a partial main residence exemption on disposal of the Property.

Detailed reasoning

As the Deceased held two CGT interests in the Property (one pre and one post CGT), it is necessary to calculate any capital gain on the two interests separately.

The cost base of the Property is the market value at the date of death of the Deceased, as the Property was the Deceased's main residence at the time of their death and was not then being used for the purpose of producing assessable income.

You calculate your capital gain or loss using the formula:

(CG or CL amount × non-main residence days) ÷ total days

Interest 1

The Deceased's original interest was acquired pre-CGT. To calculate the partial exemption, the following formula is used:

non-main residence days is the sum of:

•         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 o the ITAA 1997.

total days is:

•         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.

The effect of the application of the formula in subsection 118-200(2) of the ITAA 1997 to your situation is that no exemption is available because the 'non-main residence days' equal the 'total days.'

Interest 2

The Deceased's second interest was acquired post-CGT, as a joint tenant on the death of their spouse. To calculate the partial exemption, the following formula is used:

non-main residence daysis the sum of:

•         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

•         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 of the ITAA 1997.

total days is:

•         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.

Question 3

Summary

As the ownership interest in the Property passed to the Deceased on or after 20 September 1985 as a beneficiary, you must use section 118-205 of the ITAA 1997 to adjust the formula in section 118-200 of the ITAA 1997.

Detailed reasoning

As this ownership interest passed to the Deceased as a beneficiary of a deceased estate, you must add to the total days in the formula in section 118-200 of the ITAA 1997, the fewer of:

(a)  the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

(b)  the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased

In this case, the number of days calculated under paragraph 118-205(2)(a) of the ITAA 1997 is a positive number and the number calculated under paragraph 118-205(2)(b) of the ITAA 1997 is nil. Although nil is less than a positive number, it is considered that the comparison required by subsection 118-200(2) of the ITAA 1997 is between two positive numbers of days, otherwise the provisions do not operate as intended.

Accordingly, the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased should be added to the total days.

You add to the number of non-main residence days as calculated under 118-205(2) of the ITAA 1997, the number of days during that period that the dwelling was not the main residence of one or more of:

(a)  An individual who owned the dwelling at the time of the individual's death; or

(b)  An individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c)   An individual who had a right to occupy the dwelling under a Will; or

(d)  An individual to whom an ownership interest in the dwelling passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

As none of the above apply, there is no adjustment required to the non-main residence days calculation.

You will receive no exemption on the disposal of Interest 1 and a partial exemption on disposal of Interest 2.

As you have owned the Property for at least twelve months, you are eligible for a 50% discount on any capital gain arising from the disposal of the Property.

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