Edited version of private advice

Authorisation Number: 1052232657222

Date of advice: 18 March 2024

Ruling

Subject: Capital gains tax

Question 1

Is the capital gain made on the sale of the property during the relevant year totally disregarded under section 118-210 (3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

The Capital gain is not totally disregarded under Section 118-210 (3) of the ITAA 1997 as part of the property was used to derive assessable income.

Question 2

Will a partial CGT exemption apply to the sale of the dwelling?

Answer

Yes.

A partial main residence exemption is available to disregard part of the capital gain made on the property under Section 118-190 of the ITAA 1997.

Question 3

Is the assessable amount of the gain as calculated in accordance with section 118-190 of the ITAA 1997 and the application of the criteria as outlined in TD 1999/66?

Answer

Yes.

The rule for apportioning the main residence exemption is to adjust based on floor area in the way similar to the calculation of proportionate interest or rent deduction but also taking into account the period of income producing use.

You can use the apportionment in TD 1999/66 income tax: capital gains: what factors should be considered in determining the 'amount that is reasonable' in applying subsection 118-190(2) of the ITAA 1997?

The partial CGT exemption in this case can be calculated in accordance with example 3 in the TD 1999/66.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The Executors are the Trustees for the Estate of the deceased (the deceased) and a second Trust ("The Trust").

The Trust was formed on the death of the Deceased who passed a number of years ago.

The trust is regulated under the law and the Deceased's Will ("the Will").

Probate for the estate of the deceased was granted by the supreme court in the year following the date of death.

A couple of years after Probate was granted, under a deed of appointing a new trustee and retirement of trustee, one executor retired as an executor and trustee and another individual was appointed as an executor and trustee of the estate of the deceased.

From the time that the executor was replaced, the current executors have also been the trustees (collectively, "the trustees") of the estate of the deceased.

The deceased was the parent of each of the trustees and their sibling.

The trustees and their sibling are all Australian Citizens and are Australian income tax residents.

Under clause 3(a) of the will the executors and trustees were require to acquire a residence for the executors sibling for them to reside in during their lifetime.

The trustees acquired a residence for their sibling ("the property").

The sibling resided in the property and the property was their main residence for a number of years.

One bedroom of the property was rented out for several months. During this period, the tenant had access to other areas of the property. A valuation is being obtained to determine the market value of the property just before the room was rented out.

The trustees entered a call option deed with Company Z under which the company had the right to acquire the property ("call option deed").

Under a deed of variation of call option agreement, the trustees and Company Z varied the call option deed. The agreed changed included extending the period under which the call option could be exercised by Company Z and reducing the purchase price of the property. ("Deed of Variation").

Under a deed of agreement, the trustees and Company Z agreed to further vary the call option deed and the contract of sale of the property. The agreed changes included delaying the settlement date on the contract of sale to the property.

Company Z exercised its options to acquire the property from the trustees. As required by the call option deed the trustees and Company Z subsequently executed and exchanged a contract for the sale of the property ("contract for the sale of the property"). Settlement in relation to the sale of the property occurred several months later.

The deposit includes the total option fees and compensation paid by the purchaser under the call option deed (as amended by deed of variation and deed of agreement) and this follows the requirements contained in a clause of the call option deed that options fees will form part of the deposit for the property.

None of the option fees paid to the trust have been returned as assessable income by the trust in the relevant years for reasons consistent with the application of section 118-210 of the ITAA 1997 After considering several potential new residences for their sibling, the trustees entered into a contract for the sale and purchase to acquire anew residence for their sibling "the new residence".

This purchase was completed and their sibling subsequently moved into the new residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-210

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