Edited version of private advice

Authorisation Number: 1052160369577

Date of advice: 4 September 2023

Ruling

Subject: CGT - main residence exemption

Issue 1

Question 1

Are you entitled to a full main residence exemption on the sale of the Property?

Answer

No.

Question 2

Are you entitled to a partial main residence exemption on the sale of the Property?

Answer

Yes.

Question 3

Are you eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the Property?

Answer

Yes.

Issue 2

Question

Will the Commissioner accept the appraisal letter as a valid valuation?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

Your parent (Person A) purchased a property (the Property) after 20 September 1985.

The Property has a land area of more than 2 hectares which was used as a lifestyle property with no business being carried out on it.

The Property had a house (the House) and a garage located on it. Other structures on the Property including:

•                     a brick shed that had formerly been used as a dairy

•                     a large iron barn/machinery shed; and

•                     several large dog runs, and kennels with smaller dog runs.

Your parents were divorced.

You commenced living at the Property several years after Person A had purchased it, living there for a significant number of years before moving in with your other parent, Person B, at their property.

Person A was diagnosed with a medical condition, and they moved in with you and Person B where they stayed until they passed after some months on Date 1.

The Property was Person A's main residence during their ownership period until they passed away.

In accordance with Parent A's Will, you were named as the sole beneficiary to inherit the whole estate if still living when Parent A passed away.

The Executor of the Deceased Estate did not want the Property to be occupied until probate was granted.

The Property was transferred into your name after probate was granted.

You and Person B moved to the Property some months after Person A had passed away on Date 2.

Over several years you paid for major roof repairs to the house located on the Property, fixed plumbing issues and undertook fencing works.

The Property has been used by you to run some livestock, using structures on the Property for livestock shelter and to keep a tractor.

After living at the Property for some years you entered into a contract to sell the Property on Date 3, with settlement to occur several years later on Date 4.

You will continue to live at the Property until the settlement date.

You have never owned any other property/properties.

Person C, a representative of a real estate firm, prepared an appraisal letter after you had entered the contract to sell the Property in which they indicated that it was their opinion, but not a sworn valuation, that based on comparable sales and their understanding of the local market place it was their professional opinion that the Property would realise in the vicinity of a specified amount in its current state at the date of sale for the front five acres of the Property

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

ISSUE 1

Question 1: Are you entitled to a full main residence exemption on the sale of the Property?

Question 2: Are you entitled to a partial main residence exemption on the sale of the Property?

Dwellings and land acquired from deceased estates

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or to a beneficiary in a deceased estate.

When a taxpayer dies, assets that pass to a beneficiary of the taxpayer's estate are taken to be acquired by them on the day the taxpayer died under subsection 128-25(2) of the ITAA 1997.

When a beneficiary of the taxpayer's estate acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the beneficiary are modified under subsection 128-15(4) of the ITAA 1997.

The main residence exemption rules may be relevant when a dwelling is disposed of by a beneficiary of a deceased estate.

Full exemption

Under section 118-195 of the ITAA 1997, a capital gain or capital loss you make from a capital gains tax (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 are satisfied.

The relevant CGT events are those that apply for the purposes of the full main residence exemption where there is no deceased estate, such as CGT event A1 when the asset, or interest in the asset is disposed of.

Partial exemption

Where the taxpayer is an individual and the interest passed to the taxpayer as a beneficiary in a deceased estate and the conditions for a full exemption are not satisfied, either a partial exemption or no exemption will be available under subsection 118-200(1) of the ITAA 1997.

If eligible for the partial exemption, the amount of the capital gain or loss is apportioned by working out the number of non-main residence days as compared to the total ownership days that are relevant for main residence exemption purposes under subsection 118-200(2) of the ITAA 1997.

Application to your situation

For CGT purposes you are viewed as having acquired the Property on the date Person A passed away, being Date 1. The Property had been Person A's main residence just prior to their passing and had not been used to earn assessable income after his passing.

The Property was transferred into your name after probate was granted and you and Person B moved to the Property on Date 2, where you have continued to reside until the present time.

You entered a contract to sell the Property on Date 3, with settlement to occur several years later on Date 4. You will move out of the Property when settlement occurs.

Your ownership period in relation to the Property will be from Date 1 to Date 4.

As outlined above, for section 118-195 of the ITAA 1997 to apply, you need to meet one condition in both Column 2 and Column 3. Applying section 118-195 of the ITAA 1997 to your situation:

•                     Column 2

-        Item 1 has been met

•                     Column 3

-        Item 1 has not been met as:

o        Your ownership in the Property will not end within two years after Person A passed away on Date 1, with settlement on the sale of the Property not expected to occur more than ten years after Date 1.

o        You had continued to reside at the Property for many years after Date 1 and nothing has been provided to support that there was any impediment/s for you to sell the Property at an earlier date which would support that there are any grounds for the Commissioner to exercise their discretion to extend the two-year period.

-        Items 2a) and 2b) will not apply as you are not the spouse of the deceased, and you were not provided with a right to occupy the Property under Person A's Will; and

-        Item 2c) will not be met. While you have sold the Property as a beneficiary of the Deceased Estate, you will not have lived at the Property from Date 1 until Date 4, with several months during that period when you did not live at the Property.

CGT looks at what had occurred in relation to the Property during your ownership period. In your situation you lived at the Property for some years until you moved in with Person B at their property, where you continued to live until you and Person B moved to the Property on Date 2.

While you had left some of your personal items at the Property your common law home during the period were staying at Person B's property would be that property. That is because you had a greater relationship and connection with Person B's property during that period given that was where you were living so that you could care for Person B, and nothing had been provided to support that you had not lived with Person B.

While you could not move to the Property until after probate was granted, you had not physically resided at the Property until Date 2, several months after Date 1.

As you have not met a condition in both Column 1 and Column 2 of the table contained in section 118-195 of the ITAA 1997, you are not entitled to a full exemption in relation to the sale of the Property.

However, you will be eligible for a partial exemption for the main residence days you have in relation to the Property during your ownership period, which will be the days from Date 2 to Date 4.

The partial exemption will apply to the area of the Property covered by the main residence exemption and any eligible adjacent land that the main residence exemption may be extended to cover as discussed below.

Question 3: Are you eligible to claim the main residence exemption for the dwelling and adjacent land up to two hectares located at the Property?

A CGT exemption is available for capital gains and losses from CGT events affecting a dwelling or an ownership interest in it if the dwelling was the main residence of the taxpayer during the taxpayer's ownership period under section 118-110 of the ITAA 1997.

The main residence exemption may be extended to adjacent land, a garage, storeroom or other structure associated to a dwelling if the following conditions contained in section 118-120 of the ITAA 1997 are met:

•                     the same CGT event happens to the land (or the taxpayer's ownership interest in it) as happens in relation to the dwelling (or the taxpayer's ownership interest in it) under subsection 118-120(1) of the ITAA 1997

•                     land adjacent to a dwelling is its adjacent land to the extent that the adjacent land was used by the taxpayer primarily for private or domestic purposes in association with the dwelling under subsection 118-120(2) of the ITAA 1997; and

•                     the maximum area of adjacent land covered by the exemption for the CGT event is two hectares, less the area of the land immediately under the dwelling under subsection 118-120(3) of the ITAA 1997.

If a taxpayer's land (including land on which a dwelling is situated) exceeds two hectares, the taxpayer can select which two hectares the main residence exemption applies to as outlined in Taxation Determination TD 1999/67.

Application to your situation

The Property has a land area of more than two hectares and has the House and several other structures located on it. Both you and Person A used the Property for personal and private use, with no business activities being undertaken on the Property.

The contract of sale for the Property is for the whole land area.

As outlined above, you are entitled to a partial exemption in relation to the Property as you will not have lived at the Property for part of your ownership period, which ends on the settlement date.

You have lived at the Property since Date 2 from when it had been used for private and domestic purposes during your ownership period. Therefore, you meet the conditions for the main residence exemption to apply.

As a whole Property was sold in the one sale transaction, the main residence exemption will extend to the land adjacent to the House, and the land under it, up to a total of two hectares.

Therefore, the partial exemption will apply to the House and the land under it, and up to a total of two hectares of the Property that you choose out of the total Property land area.

The remaining land area in excess of the two hectares are not covered under the exemption and the general CGT provisions will apply to it.

Conclusion

In your situation:

•                     You will be entitled to a partial main residence exemption in relation to the House and the land it is located on, and a total of 2 hectares of the remaining land area of the Property of your choice; and

•                     No exemption applies to the remaining land area of the Property in excess of the two hectares and the general CGT provisions will apply on the disposal of your ownership interest in that portion of the Property.

Note: If the conditions contained in Division 115 of the ITAA 1997 have been met, any capital gain made on the disposal of the house and two hectares and/or the excess 14 hectares can be reduced by applying the 50% CGT discount.

Issue 2

Question: Will the Commissioner accept the appraisal letter dated 3 June 2023 as a valid valuation?

Valuation report vs real estate appraisal advice

A valuation must report value in accordance with the definition of market value as defined by the International Valuation Standards Committee (IVSC) and endorsed by the Australian Property Institute, as follows:

The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

Whereas real estate appraisal advice is guidance to a prospective vendor as to the highest achievable sale price if offered to the market after a proper marketing campaign.

Application to your situation

Person C, a representative of a real estate firm prepared the appraisal letter after the contract of sale of the Property had been entered.

The letter clearly and unambiguously states that Person C is providing real estate appraisal advice and not valuation advice as the opening line states that they are thankful:

...for the opportunity to prepare this written appraisal for you.

Further, in concluding the appraisal advice the agent states that:

...I stress that it is an opinion only and not to be taken as a sworn valuation.

The appraisal letter doesn't in any way proport to be a valuation and more importantly doesn't comply with the Australian Property Institute's (API) Valuation Standards and Guidance Notes as to what comprises, and who may undertake, a valuation.

Additionally, neither you nor the purchaser are assumed or required to be 'acting knowledgeably, prudently and without compulsion' in the appraisal letter.

Therefore, the appraisal letter is not viewed as a valid valuation for taxation purposes.

Note: The following is a list of the key criteria we would expect to be included in a valuation report for the subject property, which must also be prepared in accordance with the Australian Property Institute's (API) Valuation Standards and Guidance Notes.

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