Edited version of private advice

Authorisation Number: 1052153738128

Date of advice: 8 August 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Is a full main residence exemption available under subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the property?

Answer

No.

Question 2

Is a partial main residence exemption available under subsection 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the property?

Answer

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 passed away several years ago.

The property was the deceased's main residence just before they died.

The property was purchased by the deceased a few decades ago.

The property was less than 2 hectares.

The property was never used to produce assessable income.

Probate was granted several months after the date of death.

The deceased's child had a right to reside in the property for a period of time after the deceased's death.

The deceased's child moved out of the property in the following year.

The deceased's child contested the will.

The Estate claim was resolved pursuant to Terms of a Settlement which were endorsed by Court Orders.

The property was listed for sale a number of weeks later.

A contract for the sale of the property was entered into several months later and settlement occurred in the following month.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 118-195

Reasons for decision

The main residence exemption in section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a taxpayer inherits an ownership interest, subsection 118-195(1) of the ITAA 1997 applies so that any capital gain or capital loss they make from a CGT event that happens in relation to a dwelling or their ownership interest in a dwelling is disregarded if:

•                     They are an individual and the interest passed to them as a beneficiary in a deceased estate, or they owned it as the trustee of a deceased estate; and

•                     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

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

Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

•                     The ownership of a dwelling or a will is challenged.

•                     The complexity of a deceased estate delays the completion of administration of the estate.

•                     A trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury).

•                     Settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control.

Factors that would weigh against the granting of the discretion include:

•                     Waiting for the property market to pick up before selling the dwelling.

•                     Property used to earn assessable income.

•                     Unexplained periods of inactivity by the executor in attending to the administration of the estate.

The above examples are not exhaustive.

In addition, once any circumstances preventing the sale of the Property have been resolved, the Property needs to be placed on the market as soon as possible to enable its disposal.

Application to your circumstances

The deceased's child had a right to occupy the property for a period of time after the deceased passed away.

The deceased's child did not vacate the property for a period of time that exceeded the time allowed under the will.

For the purposes of determining whether a full exemption is available to a trustee under section 118-195 of the ITAA 1997, an individual only has a right to occupy a dwelling under the deceased's will for the period specified in the will. An exemption is not available for any part of the trustee's ownership period that a person who had a right of occupancy continues to occupy the dwelling in some other manner (for example, as a licensee or tenant).

In this case, the deceased's will conferred on their child a right to occupy the dwelling for a limited period. The trustees are therefore unable to claim a full main residence exemption under subsection 118-195(1) of the ITAA 1997 on the sale of the dwelling.

However, a partial exemption is available under section 118-200 of the ITAA 1997.

The partial exemption will be calculated in accordance with the formula in subsection 118-200(2) of the ITAA 1997. In this case the non-main residence days used in the formula are considered to be the number of days in the period commencing when the right to occupy expired and ending when the trustee ceased to own the dwelling.

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