Edited version of private advice

Authorisation Number: 1052304462419

Date of advice: 12 September 2024

Ruling

Subject: Main residence exemption

Question 1

Is the trust entitled to value the cost base of its share of the property using 'home first used to produce income rule' under Section 118-192 of the Income Tax Assessment Act 1997?

Answer 1

Yes.

This ruling applies for the following period:

The income year ended 30 June 20XX

The scheme commenced on:

January 20XX

Relevant facts and circumstances

Person A and Person B are both resident individuals.

In 19XX, they purchased a property (Property) in equal shares as tenants-in-common for $XXX,000.

In 20XX, Person B passed away. Person B's ownership interest in the Property passed to their estate: the Trust. The Supreme Court granted probate in 20XX. Person A and Person B's sibling, Person C, became the executors of the Trust in accordance with Person B's will (the will).

The will relevantly provide for Person B's share in the Property to be dealt with as follows:

•                     The executors would hold Person B's residuary estate and any other income or assets on trust for the benefit of Person A under the Person B Fund;

•                     Person B intended that their half-share of the Property should become an asset of the Person B Fund after the Trust was administered, and be dealt with in accordance with Person B's will;

•                     Person A has the right to occupy the Property as their main residence;

•                     The executors should enter into arrangements for the payment of rates, insurance and repairs relating to Person B's half-share in the Property: clause 7.2; and

•                     If Person A notifies the trustee that they intends to sell the Property, the trustee should join Person A in selling its share in the Property: clause 7.3.

Person A lived in the Property until 20XX, at which point they began renting and living at another property.

However, they did not purchase another property and continued to claim the Property as their main residence for tax purposes.

The Property was first rented out in 20XX. At this time, the Property was valued at approximately $XXX,000.

In 20XX, Person A and the Trust both sold the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-30

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-190

Income Tax Assessment Act 1997 section 118-192

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Subsection 118-192(3) applies to the Trustee: the Trustee's ownership interest in the Property was owned by it as the trustee of a deceased estate and the relevant CGT event did not happen within 2 years of the deceased's death.

This provision has the effect that the Subdivision applies as if it had acquired the interest in the Property as an individual; and, in applying the formula in 118-185, its non-main residence days were the days in its ownership period when the dwelling was not the main residence of Person A (being the relevant 'individual' referred to in paragraph 118-192(3)(b) and item 2, column 3 of the table in section 118-195).

In the present case, the terms in paragraph 118-192(1)(a), as applied together with subsection 118-192(3), are satisfied for the following reasons:

•                     The Property is a dwelling, as it is a unit of accommodation that is a building or part of a building: subparagraph 118-115(1)(a)(i).

•                     Person A and Person B each held a 50% ownership interest in the Property, as they both had a legal right over it after purchasing it together as tenants-in-common: subparagraph 118-130(1)(a). The Trustee held a 50% ownership interest in the Property after Person B's ownership interest passed to it when Person B passed away.

•                     The 'ownership period' of the Trustee under paragraph 118-192(1)(a) is the period from 20XX (when Person B passed away) and 20XX (when the Property was finally sold).

•                     Paragraph 118-192(1)(a) will be satisfied if the Trustee is eligible to claim a partial main residence exemption under Subdivision 118-B 'because the dwelling was used for the *purpose of producing assessable income during your *ownership period'.

This condition is satisfied because the Trustee used the Property to produce assessable income by renting it out in 20XX.

The condition in paragraph 118-192(1)(aa) is also met in this case as the time at which it was rented out (the use of the dwelling to produce assessable income for the first time) occurred after 1996.

Further, the condition in paragraph 118-192(1)(b) is satisfied in this case, as the Trustee would have got a full exemption if the CGT event had happened before the time the Property was rented out. Section 118-195 applies in this regard.

Subsection 118-195(1) states:

(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 are satisfied; and

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

The table in section 118-195 sets out a number of situations covered by this provision, which provides:

Table 1 Beneficiary or trustee of deceased estate acquiring interest

The Trustee would have got a full exemption under section 118-195 if the CGT event had happened before the time the Property was rented out because:

•                     Person A and Person C are individuals in the capacity of trustee of the Trust in relation to the Property: paragraph 118-195(a).

•                     Person B purchased the Property after 20 September 1985, lived in the Property as their main residence and the Property was not used to produce income during this period. (Item 1 in column 2).

In addition, Person A claimed the Property as their main residence and the will gave them the right to occupy the Property (Item 2(a) and (b) of column 3): paragraph 118-195(b). Note that paragraph 118-192(1)(b) requires the assumption of a scenario in which the disposal of the Property took place just before it was rented out. Therefore, for the purposes of Item 2 in column 3, the Trustee's ownership interest would be taken in this context to have ended at this point in time.

Person B was not an excluded foreign resident just before their death: paragraph 118-195(c).

As such, the Trust's ownership interest satisfies the conditions in section 118-192(1).

Accordingly, the special rules in subsection 118-192(2) applies to the Trust: it will be taken to have acquired the ownership interest in the Property for its market value at the first time it was used to produce assessable income.

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