Edited version of private advice

Authorisation Number: 1052383996941

Date of advice: 11 April 2025

Ruling

Subject: CGT - inherited property

Question 1

Where CGT event A1 happens in relation to Property A (being an investment residential home unit) and settlement of the contract for the sale takes place within two years of your partner's death, will any capital gain you make be disregarded in accordance with section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Where CGT event A1 happens in relation to Property B (being an investment residential home unit) and settlement of the contract for the sale takes place within two years of your partner's death, will any capital gain you make be disregarded in accordance with section 118-195 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20YY

The scheme commenced on:

In the year ending 30 June 20XX

Relevant facts and circumstances

1.      You are an individual taxpayer and a resident of Australia for tax purposes.

2.      Your partner died on DDMMYY.

3.      Your partner was an Australian resident for tax purposes at the date of the death and had been an Australian resident for their whole life. They lived their entire life in Australia and was never a resident of another country.

4.      Your partner acquired two residential units prior to the year 1985, both located in Australia (addresses supplied), referred to in this ruling as Property A and Property B.

5.      Your partner was the sole owner of the Property A and Property B.

6.      Both Property A and Property B comprise of residential accommodation and were held by your partner as investment properties. Neither Property A or Property B were your partner's residence.

7.      You have provided with your application a copy of your partner's final will, dated DDMMYY (the Will).

8.      The Will appointed you as the Executor and Trustee of your partner's Will.

9.      The Will specified specific gifts of jewellery and the rest and residue of your partner's estate was bequeathed to you. As such, your partner's interest in Property A and Property B was passed to you as their beneficiary.

10.   You will sell Property A and Property B and the settlement of the contracts for the sale of Property A and Property B will take place within 2 years of the date of their death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section102-5

Income Tax Assessment Act 1997 section102-20

Income Tax Assessment Act 1997 section104-10

Income Tax Assessment Act 1997 section118-195

Income Tax Assessment Act 1997 section118-115

Reasons for decision

Issue 1

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

Question 1

Summary

Where CGT event A1 happens in relation to Property A (being an investment residential home unit) and settlement of the contract for the sale takes place within two years of your partner's death, the requirements of section 118-195 will be met, and any capital gain you make will be disregarded.

Detailed reasoning

Capital Gains Tax (CGT) Event A1

Under section 102-5 capital gains are included in a taxpayer's assessable income.

A capital gain or capital loss is made if a CGT event happens to a CGT asset (section 102-20). Property, including real property, is a CGT asset (section 108-5). A capital gain or loss is therefore made if a CGT event happens in relation to a taxpayer's real property.

CGT event A1 occurs when a taxpayer disposes of their CGT asset (subsection 104-10(1)). A taxpayer is considered to have disposed of a CGT asset if a change of ownership to their CGT asset occurs (subsection 104-10(2)). Therefore, CGT event A1 will occur in relation to real property when a taxpayer sells (or otherwise disposes of) real property.

The capital gain or capital loss is made at the time of the event and the time of the event is when the taxpayer enters into the contract for the disposal or, if there is no contract, when the change in ownership occurs (subsection 104-10(3)).

The capital gain or capital loss may be fully or partially exempt from CGT.

Inherited property and CGT exemptions

There are no inheritance taxes in Australia, however, CGT may apply where a taxpayer disposes of an asset they have inherited from a deceased estate.

As discussed above, CGT event A1 occurs when a taxpayer disposes (e.g. sells) a CGT asset, such as property.

However, where certain conditions are satisfied, section 118-195 provides a full CGT exemption for capital gains and capital losses that are made by a beneficiary or trustee of a deceased estate where they sell certain real property that they inherited from a deceased estate.

The exemption in section 118-195 applies to property that is a 'dwelling' in accordance with the definition set out in section 118-115.

That definition provides:

Meaning of dwelling

(1)          A dwellingincludes:

(a)         A unit of accommodation that:

(i)        is a building or is contained in a building; and

(ii)        consists wholly or mainly of residential accommodation; and

(b)         a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c)         any land immediately under the unit of accommodation.

(2)          However, except as provided in section 118-120, a dwelling does not include any land adjacent to a building.

Property A is a unit of accommodation that is contained in a building and consists of residential accommodation and is therefore a 'dwelling' in accordance with the definition contained in paragraph 118-115(1)(a).

As such, a capital gain or loss that happens in relation to Property A will be disregarded where the requirements of section 118-195 are met.

Section 118-195 states:

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 are satisfied; and

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

Table 1: Beneficiary or trustee of deceased estate acquiring interest

Subsection 118-130(3) provides that where there is a contract for the disposal of a dwelling, the taxpayer's ownership interest in the dwelling will end when the taxpayer's 'legal ownership' interest in the dwelling ends (i.e. on settlement of the contract), not when contracts are exchanged.

To summarise, a capital gain or loss that a taxpayer makes from a CGT event that happens in relation to a dwelling (such as CGT event A1 happening when the taxpayer sells a dwelling), will be exempt where:

•                     the taxpayer is an individual, and an interest in a dwelling is passed to the taxpayer as a beneficiary of a deceased estate,

AND

•                     the deceased was not an excluded foreign resident just before their death,

AND

•                     the taxpayer satisfies one of the items in column 2 of the table and one of the items in column 3 of the table contained in section 118-195 of the ITAA 1997.

Subsection 128-20(1) sets out when a CGT asset is considered to pass to a beneficiary of an estate and includes circumstances where the beneficiary becomes the owner of the asset under a will, or a will as varied by a court order (paragraph 128-20(1)(a).

Subsection 118-110(4) provides that a taxpayer is an 'excluded foreign resident' at a particular time if they are a foreign resident at that time and had been a foreign resident for a continuous period for at least the 6 years prior to that time.

There are 4 potential ways to meet the requirement that the taxpayer satisfies one of the items in column 2 of the table and one of the items in column 3 of the table. One of the ways this requirement can be met is if the property is a pre-CGT asset in the hands of the deceased (i.e. it was acquired by the deceased prior to 20 September 1985) and beneficiary disposes of their ownership interest in the property within two years of the deceased's death (or within a longer period allowed by the Commissioner). This combination satisfies item 2 in column 2 of the table, and item 1 in column 3 of the table. There are no main residence requirements using this combination of items from the table.

Therefore, where:

•                     a taxpayer is an individual, and received an interest in a dwelling as a beneficiary of a deceased estate, and

•                     the deceased was not an excluded foreign resident just before their death, and

•                     the deceased acquired the ownership interest in the dwelling before 20 September 1985, and

•                     the taxpayer's ownership interest ends within 2 years of the deceased's death (e.g. the taxpayer who inherits the dwelling as the deceased's beneficiary sells the property and settlement of the contract for the sale takes place within 2 years of the deceased's death),

then, any capital gain or loss that the taxpayer makes from the CGT event (sale of the dwelling) is exempt.

Application of section 118-195 to your circumstances

You are an individual and your ownership interest in Property A was passed to you as a beneficiary of your partner's estate. Your partner acquired their ownership interest in the Property A before 20 September 1985. Your partner was an Australian resident for tax purposes at the date of their death and had been an Australian resident for their whole life. They lived their entire life in Australia and was never a resident of another country and was therefore not an excluded foreign resident just before their death.

Where CGT event A1 happens in relation to Property A (e.g. by you selling Property A) and your ownership interest in the Property A ends (settlement of the contract for the sale of Property A takes place) within two years of your partner's death, any capital gain you make will be disregarded in accordance with section 118-195, as the conditions contained in paragraph 118-195(1)(a) and 118-195(1)(c) are met, and the condition contained in paragraph 118-195(1)(b) will also met as item 2 in column 2 of the table and item 1 in column 3 of the table will be satisfied.

Question 2

Summary

Where CGT event A1 happens in relation to Property B (being an investment residential home unit) and settlement of the contract for the sale takes place within two years of your partner's death, the requirements of section 118-195 will be met, and any capital gain you make will be disregarded.

Detailed reasoning

Refer to the reasoning in Question 1 above. The same reasoning can be applied to conclude that where CGT event A1 happens in relation Property B (e.g. by you selling Property B) and your ownership interest in Property B ends (settlement of contract for the sale of Property B takes place) within two years of your partner's death, any capital gain you make will be disregarded in accordance with section 118-195 as the conditions contained in paragraph 118-195(1)(a) and 118-195(1)(c) are met and the condition contained in paragraph 118-195(1)(b) will also met as item 2 in column 2 of the table and item 1 in column 3 of the table will be satisfied.

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