Edited version of private advice

Authorisation Number: 1052143292799

Date of advice: 17 July 2023

Ruling

Subject: CGT - main residence exemption for an inherited (deceased) property

Question 1

Was the property located at XXX ('the Property') the main residence of Taxpayer A when he passed away?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, will the first element of the cost base of the Property in the hands of the beneficiary of the deceased estate be the market value of the Property at the date of death of Taxpayer A?

Answer

Yes.

Question 3

If the answer to question 1 is yes, would a full main residence exemption be available to Taxpayer C (as the beneficiary of the deceased estate) if he sells his interest in the Property within two years of Taxpayer A's death?

Answer

Yes.

Question 4

Was the Property Taxpayer B's main residence prior to construction occurring?

Answer

Yes.

Question 5

If the answer to Question 4 is yes, can Taxpayer B continue to treat the Property as her main residence if she moves back into the Property as soon as practicable after it has been constructed, and she lives in it for at least three months?

Answer

Yes.

Question 6

If the answer to Question 5 is yes, would a full main residence exemption be available to Taxpayer B if she sells her interest in the Property after at least three months after she moves back into the Property?

Answer

Yes.

This ruling applies for the following periods

DD MM YYYY to DD MM YYYY

The Scheme commences on

DD MM YYYY

RELEVANT FACTS AND CIRCUMSTANCES

Background information

1.      In YYYY, Taxpayer B and her late husband, Taxpayer A purchased land as joint tenants at XXX ('the Property') for $XXX.

2.      The land covers an area of less than XX hectares.

3.      In or around YYYY, a dwelling was constructed on the land.

4.      The dwelling was the primary place of residence for Taxpayer A and Taxpayer B from this date (YYYY) until MM YYYY.

5.      In MM YYYY, Taxpayer A and Taxpayer B moved into another house, located at YYY, leaving the Property vacant for approximately x months.

6.      In or around MM YYYY, Taxpayer A and Taxpayer B applied to the State Revenue Office in XXX ('SRO') to claim the primary place of residence exemption for land tax purposes in respect of the other dwelling in XXX.

7.      From MM YYYY to around MM YYYY, Taxpayer A and Taxpayer B rented the Property to a tenant, for market value rent. The tenants moved out of the Property in or around MM YYYY.

8.      In or around MM YYYY, Taxpayer A and Taxpayer B converted their joint tenancy holding to a tenancy in common.

9.      In MM YYYY, the dwelling was voluntarily demolished, and construction of a new dwelling commenced under a building contract entered into by Taxpayer A and Taxpayer B.

10.   Immediately following the demolition of the original dwelling on the Property, the tenants ceased paying rent to Taxpayer A and Taxpayer B. The property ceased being used to derive assessable income in MM YYYY.

11.   On DD MM YYYY, Taxpayer A passed away. Under the terms of his Will, Taxpayer A's 50% interest in the Property passed to Taxpayer C and Taxpayer D as beneficiaries of his deceased estate. Taxpayer C is the son of Taxpayer A, whilst Taxpayer D is Taxpayer C's wife. Taxpayer C and Taxpayer D jointly own a 50% interest in the property, which was inherited pursuant to the terms of Taxpayer A's will.

12.   As at the current date of this ruling application, the construction of the new dwelling has not been completed.

13.   Taxpayer A, Taxpayer B and Taxpayer C have, at all relevant times, been residents of Australia for tax purposes.

14.   Whilst Taxpayer A and Taxpayer B moved out of the Property in MM YYYY, they continued to treat the Property as their main residence for income tax purposes.

15.   Once the construction of the dwelling is completed, Taxpayer B will move back into the Property, and will live in the dwelling for at least 3 months. Taxpayer B will move back into the Property as soon as it is practicable for her to do so once construction is completed.

16.   The new dwelling on XXX is expected to be completed in MM YYYY.

17.   Taxpayer A and Taxpayer B did not treat any other property, including YYY, as their main residence for income tax purposes, at any time after acquiring the XXX property in YYYY.

Information provided

18.   You have provided a number of documents containing detailed information in relation to the Taxpayers' private ruling application, including:

•           Private Binding Ruling ('PBR') Application, dated DD MM YYYY

•           Response to further questions provided

19.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Question 1

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-100

Income Tax Assessment Act 1997 Subsection 118-120(3)

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-155

Question 2

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-155

Question 3

Income Tax Assessment Act 1997 Subsection 118-195(1)

Question 4

Income Tax Assessment Act 1997 Section 118-145

Question 5

Income Tax Assessment Act 1997 Section 118-150

Question 6

Income Tax Assessment Act 1997 Section 118-150

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY Question 1:

The property located at XXX is considered to be the main residence of Taxpayer A when he passed away on DD MM YYYY.

SUMMARY Question 2:

As the answer to Question 1 is yes, the first element of the cost base of the Property in the hands of the beneficiary of the deceased estate is considered to be the market value of the Property at the date of death of taxpayer A.

SUMMARY Question 3:

As the answer to question 1 is yes, a full main residence exemption is available to Taxpayer C (as the beneficiary of the deceased estate) if he sells his interest in the Property within two years of Taxpayer A's death.

SUMMARY Question 4:

The Property is Taxpayer B's main residence prior to construction occurring.

SUMMARY Question 5:

As the answer to Question 4 is yes, Taxpayer B can continue to treat the Property as her main residence if she moves back into the Property as soon as practicable after it has been constructed, and she lives in it for at least three months.

SUMMARY Question 6:

As the answer to Question 5 is yes, a full main residence exemption is available to Taxpayer B if she sells her interest in the Property after at least three months after she moves back into the Property.

DETAILED REASONING

Question 1 - Main residence

20.   Section 118-100 of the ITAA 1997 describes in detail what Subdivision 118-B is about, as follows:

You can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence.

However, this exemption may not apply if you are a foreign resident, and may not apply in full if:

•         it was your main residence during part only of your ownership period; or

•         it was used for the purpose of producing assessable income.

There are special rules for dwellings passed from, or owned by a trustee of, a deceased estate.

There is a similar exemption for a CGT event that is a compulsory acquisition (or similar arrangement) happening to adjacent land but not also to the dwelling itself.

21.   In determining whether a property is a taxpayer's main residence, consideration is to be given to the facts of the case, as it is a question of fact.

22.   Subsection 118-120(3) of the ITAA 1997 applies to a dwelling's adjacent land as if it were a dwelling. It states that the maximum area of adjacent land covered by the exemption for the CGT event is 2 hectares, less the area of the land immediately under the dwelling.

23.   Section 118-130 of the ITAA 1997 outlines the meaning of ownership interest in land or a dwelling, as follows:

(1)    You have an ownership interest in land or a dwelling if:

(a) for land--you have a legal or equitable interest in it or a right to occupy it; or

(b) for a dwelling that is not a flat or home unit--you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or

(c) for a flat or home unit--you have:

(i) a legal or equitable interest in a stratum unit in it; or

(ii) a licence or right to occupy it; or

(iii) a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

(2) For land or a dwelling that you acquire under a contract, you have an ownership interest in it from:

(a) the time when you obtain legal ownership of it; or

(b) if the contract or a related contract gives you a right to occupy it at an earlier time--the earlier time.

(3) For land or a dwelling where you have a contract for the happening of the CGT event, you have an ownership interest in it until your legal ownership of it ends.

Absences from property

24.   Section 118-145 of the ITAA 1997 outlines provisions concerning absences from the property, as follows:

(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

(2) If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

(3) If you do not use the dwelling for that purpose, you can treat it as your main residence under this section indefinitely.

(4) If you make the choice, you cannot treat any other dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies.

Renovation and repair rules

25.   The CGT main residence attaches to a dwelling, and, under subsection 118-120(3) of the ITAA 1997, it also attaches to any land that is adjacent to the dwelling (capped at two hectares). It is not uncommon for individuals to renovate or repair an existing dwelling which is their main residence, such that the original dwelling may be demolished, with a new dwelling built. Where this is the case, section 118-150 of the ITAA 1997 can apply, such that the new dwelling is deemed to be the individual's main residence from the time that they first acquired an interest in the land.

26.   Specifically, a taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

27.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

Death during renovations and repair rules

28.   Section 118-155 of the ITAA 1997 applies in scenarios where a dwelling is being built, repaired or renovated (ie. where section 118-150 applies), and an owner of the interest dies. There are three potential scenarios where section 118-155 can apply, namely where the individual passes away:

•         After the work began, or the individual entered into a contract for it to be done, but before it was finished; or

•         After the work was finished, but before it was practicable for the dwelling to become the individual's main residence; or

•         During the period of 3 months referred to in paragraph 118-150(3)(b).

29.   Subsection 118-155(2) of the ITAA 1997 allows a taxpayer to choose to apply the CGT main residence exemption as if the dwelling were the main residence of the individual at the following times:

•         When the individual died; and

•         For the shorter of:

o   4 years before the individual's death; or

o   The period starting when the individual acquired the interest in the land and ending when the individual died.

30.   Subsection 118-155(2) of the ITAA 1997 has been drafted such that it can apply where the land was either held by a single individual, held by two individuals as joint tenants, or held as tenants in common. This is clear from the wording of subsection 118-155(2), which states:

"If the individual owned the interest in the land as a joint tenant, the surviving joint tenant or, if none, the trustee of the individual's estate, can choose to apply this Subdivision........."

31.   Where the land is held as joint tenants, the surviving joint tenant will automatically acquire the interest in the land held by the deceased joint tenant due to the legal principle of the right of survivorship. In all other situations, the interest in the land would devolve to the trustee of the deceased estate of the individual. In both scenarios, subsection 118-155(2) of the ITAA 1997 permits either the surviving joint tenant, or the trustee of the deceased estate, to choose to treat the interest in the land as the main residence.

Question 2 - Cost base of property

32.   Subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary. Item 3 in the Table of subsection 128-15(4) of the ITAA applies to the cost base of a dwelling that was a deceased's main residence just before they died, if it was not then being used for the purpose of producing assessable income, is the market value of the dwelling on the date of death, as follows:

Table 1: Modifications to cost base and reduced cost base

33.   Where an individual passes away, there are particular rules contained in Division 128 of the ITAA 1997 which determine the cost base of a CGT asset that was owned by the deceased, in the hands of either the trustee of the deceased's estate (referred to as the 'legal personal representative'), or a beneficiary of the estate.

34.   Depending on the specific characteristics of the CGT asset, the legal personal representative or beneficiary of the estate can either inherit the historical cost base of the asset or obtain a cost base equal to the market value of the CGT asset as at the date of death.

35.   Item 3 of the Table in subsection 128-15(4) of the ITAA 1997 can apply to a dwelling that was the main residence of the deceased just before the individual died. Where Item 3 of the Table applies, the first element of the cost base of the asset is the market value of the dwelling on the date of death.

36.   For Item 3 of the Table in subsection 128-15(4) of the ITAA 1997 to apply, the dwelling must have been the main residence of the individual just before the date of death, and the dwelling must not have been used for the purpose of producing assessable income at that time.

Question 3 - Main residence exemption

37.   Subsection 118-195(1) of the ITAA 1997 outlines the following with regard to a dwelling acquired from a deceased estate:

(1)    A capital gain or capital loss you make from a 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 below are satisfied; and

(c)    the deceased was not an excluded foreign resident just before the deceased's death.

Table 2: Beneficiary or trustee of deceased estate acquiring interest

Question 4 - Main residence prior to construction

38.   Section 118-145 of the ITAA 1997 outlines provisions concerning absences from the property, as follows:

(1) If a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence.

(2) If you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

Question 5 - Main residence after construction

39.   As noted for Questions 1 and 4 above, Section 118-145 of the ITAA 1997 outlines provisions concerning absences from the property (see above).

40.   A taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

41.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

42.   The main residence exemption attaches to a particular dwelling, so if the dwelling is demolished, the main residence exemption may not be available. However, a taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

43.   Further to subsection 118-150(4) of the ITAA 1997, a taxpayer can only treat the repaired or reconstructed property as their main residence during the renovation period for a maximum of four years. However, taxpayers can apply to the Commissioner for additional time if required. The purpose of this four-year rule is to provide taxpayers with a limited period in which the old dwelling can be renovated or repaired.

Question 6 - Main residence exemption

44.   As noted for Questions 1, 4 and 5 above, Section 118-145 of the ITAA 1997 outlines provisions concerning absences from the property (see above).

45.   A taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

46.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

APPLICATION TO YOUR CIRCUMSTANCES

Question 1 - Main residence

47.   Taxpayer A and Taxpayer B resided at the Property for just under xx years. This significant length of time, in conjunction with all other circumstances as previously outlined, support that the Property was Taxpayer A's and Taxpayer B's main residence for income tax purposes throughout their ownership period.

48.   There are however two events that need to be considered with regard to whether Taxpayer A and Taxpayer B can treat the Property as their main residence for income tax purposes, being:

•         The x-month period where they rented the Property to tenants (MM YYYY to MM YYYY); and

•         The demolition and construction of a new property on the land upon which the main residence was located (MM YYYY - Present).

49.   Considering the facts, Taxpayer A and Taxpayer B occupied the original dwelling as their main residence from YYYY to MM YYYY.

50.   In MM YYYY, Taxpayer A and Taxpayer B moved into another property in YYY, leaving the dwelling vacant for approximately x months until MM YYYY, after which time the Property was rented to tenants.

51.   Under subsections 118-145(1) and 118-145(2) of the ITAA 1997, Taxpayer A and Taxpayer B still chose to continue to treat the Property as their main residence, and the period that the Property was used for the purpose of producing assessable income was less than the allowable x years.

52.   Despite the dwelling being demolished in MM YYYY, the intention of Taxpayer A and Taxpayer B was to move back into the Property as soon as practicable once it was constructed, and to live in the property for at least three months.

53.   However, before the construction was completed, Taxpayer A passed away. As such, it is necessary to consider the rules in section 118-155, which address the situation where an individual passes away during the period in which the dwelling is being repaired or renovated.

54.   Taxpayer A and Taxpayer B entered into a contract for the construction of the new dwelling where the old dwelling was demolished in MM YYYY. Taxpayer A passed away in MM YYYY prior to the work being completed. Therefore, section 118-155 applies.

55.   Based on the application of sections 118-145, 118-150 and 118-155 of the ITAA 1997, the Property will be Taxpayer A's main residence at the date of his death on DD MM YYYY, and for the four years prior to this date.

56.   The Trustee of the deceased estate can choose to apply Subdivision 118-B as if the dwelling were the main residence of the individual for the 4 year period before Taxpayer A's death.

Question 2 - Cost base of property

57.   Subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary. Item 3 in the Table of subsection 128-15(4) of the ITAA applies to the cost base of a dwelling that was a deceased's main residence just before they died, if it was not then being used for the purpose of producing assessable income, is the market value of the dwelling on the date of death.

58.   All the requirements of Item 3 in the Table of subsection 128-15(4) of the ITAA are satisfied, therefore the first element of the cost base of the Property in the hands of Taxpayer C, in his capacity as a beneficiary of the deceased estate, is the market value of the Property as at the date of death of Taxpayer A.

Question 3 - Main residence exemption

59.   As established previously, the Property was Taxpayer A's main residence just before his death and it was not being used to produce assessable income at this time.

60.   Therefore, if Taxpayer C disposes of his interest within two years of Taxpayer A's passing (if Property is sold before DD MM YYYY), any capital gain or loss in relation to the disposal will be disregarded under Item 1 of subsection 118-195(1).

Question 4 - Main residence prior to construction

61.   A taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

62.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

63.   As noted previously, on application of section 118-150 of the ITAA 1997, the Property was Taxpayer A's and Taxpayer B's main residence prior to construction.

Question 5 - Main residence after construction

64.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

65.   As noted previously, Taxpayer A and Taxpayer B relied on the absence rule in section 118-145 of the ITAA 1997 and chose to continue to treat the old dwelling as their main residence.

66.   The Property will continue to be Taxpayer B's main residence if she moves back in as soon as practicable after construction is completed if she relies on the renovation and repair rule in section 118-150 of the ITAA 1997.

Question 6 - Main residence exemption

67.   Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

68.   As noted previously, the Property will continue to be Taxpayer B's main residence if she moves into the Property as soon as practicable after construction is complete for a minimum period of three months. On this basis, if Taxpayer B disposed of the Property after the three month period, she would be entitled to a full main residence exemption.

CONCLUSION

The property located at XXX is considered to be the main residence of Taxpayer A when he passed away on DD MM YYYY.

As the answer to Question 1 is yes, the first element of the cost base of the Property in the hands of the beneficiary of the deceased estate is considered to be the market value of the Property at the date of death of Taxpayer A.

As the answer to question 1 is yes, a full main residence exemption is available to Taxpayer C (as the beneficiary of the deceased estate) if he sells his interest in the Property within two years of Taxpayer A's death.

The Property is Taxpayer B's main residence prior to construction occurring.

As the answer to Question 4 is yes, Taxpayer B can continue to treat the Property as her main residence if she moves back into the Property as soon as practicable after it has been constructed, and she lives in it for at least three months.

As the answer to Question 5 is yes, a full main residence exemption is available to Taxpayer B if she sells her interest in the Property after at least three months after she moves back into the Property.

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