Edited version of private ruling

Authorisation Number: 1011687584022

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Ruling

Subject: Capital gains tax - deceased estate

Question and Answer

Can the Commissioner extend the two year period to allow a full main residence exemption on the disposal of the deceased's main residence?

No

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your parents built a dwelling in joint name before 20 September 1985 which they used as their main residence.

Your mother passed away on date A, after 20 September 1985.

Your father continued to live in the dwelling as his main residence.

Your father passed away on date B.

The dwelling was never used to earn assessable income.

You inherited an interest in the dwelling.

The dwelling was vacant from the date of death of your father until it was sold.

Following the death of your father, the dwelling was cleaned up and made ready for sale.

The dwelling was placed on the market on date C. As there were no offers, the price was reduced a few times. There were still no offers.

The dwelling was sold on date D, which was in the third year following the death of your father.

It was your intention to sell the dwelling within two years from the death of your father. You state that you did everything you could to sell the dwelling within the prescribed two year period but you were up against a poor real estate market and the global financial crisis.

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 128-15

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Subsection 118-200(2)

Income Tax Assessment Act 1997 Section 118-205

Reasons for Decision

Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) includes rules about an exemption from CGT which applies to main residences as well as specific rules applying to dwellings which a person acquires as the beneficiary of a deceased estate.

Subsection 118-195(1) of the ITAA 1997 allows a capital gain or loss to be completely disregarded when a person sells a deceased person's dwelling that they acquired as a beneficiary of that person's deceased estate provided that:

their ownership interest ends within 2 years of the person's death;

and either

 

(a)   the deceased acquired the dwelling before 20 September 1985, or

if the deceased acquired the dwelling after 19 September 1985 the deceased was using the dwelling as their main residence at the time of their death.

You have requested the Commissioner to extend the exemption period for capital gains on an inherited dwelling from 2 years to 3 years. Following the death of your father, you spent time in cleaning the dwelling and preparing it for sale. You state that you did everything you could to sell the dwelling within the prescribed two year period but you were up against a poor real estate market and the global financial crisis. The asking price was reduced a few times. The dwelling was on the market for a significant period before eventually being sold.

Whilst the Commissioner recognises your personal circumstances, section 118-195 of the ITAA 1997 does not provide the Commissioner with any discretion to extend the 2 year exemption period.

In conclusion, any capital gain made on the disposal of your interest in the dwelling cannot be disregarded in full. You may be entitled to a partial exemption under section 118-200 of the ITAA 1997.

Additional information

As one of the beneficiaries of your father's estate, you owned a share in two separate interests in respect of the dwelling (Taxation Determination TD 2000/31). The first interest in the dwelling is the half interest that your father acquired before 20 September 1985 when the dwelling was originally built by him and your mother. The second interest is the one that your father acquired on the death of your mother on date A.

Each interest has its own cost base and date of acquisition in the hands of your father. Therefore, the capital gains tax liability upon the sale of the dwelling will need to be calculated separately for each interest. Firstly, when calculating your capital gain or capital loss you will need to apportion both the cost base or reduced cost base and the capital proceeds between your father's original half interest in the property and the interest he acquired through your mother's estate.

Cost Base and Reduced Cost Base

There are special rules to determine the cost base or reduced cost base of an asset that a person owned as a beneficiary of a deceased estate.

Pre CGT interest

If the deceased person acquired their asset before 20 September 1985, the first element of the beneficiary's cost base or reduced cost base is the market value of the asset to the deceased on the day they died (subsection 128-15(4) of the ITAA 1997). Thus for the first interest which your father acquired before 20 September 1985 when the dwelling was built, the first element of the cost base will be the market value of that interest on the date he died (date B).

Post CGT interest

If the deceased person acquired their asset on or after 20 September 1985, the first element of the beneficiary's cost base or reduced cost base is taken to be the cost base or reduced cost base of the asset to the deceased on the day they died.

However, there is an exception if the asset is a dwelling and the dwelling was the main residence of the deceased just before they died and was not then being used for the purpose of producing assessable income. In this case, the first element of the beneficiary's cost base or reduced cost base is the market value of the asset on the day the deceased died (subsection 128-15(4) of the ITAA 1997). In your case the first element of the cost base of the interest which your father acquired from your mother will also be the market value of the interest on the date of your father's death.

Chain of deceased estates

The formula for calculating the partial main residence exemption is adjusted if the deceased person also acquired the interest in the dwelling on or after 20 September 1985 as a beneficiary of a deceased estate. Your father acquired an interest in the dwelling from your mother. You in turn acquired an interest in the dwelling. This is known as a chain of deceased estates.

As you have acquired an ownership interest in the dwelling after 20 September 1985 through a chain of deceased estates, you need to adjust the formula in section 118-200 of the ITAA 1997 (which gives the formula for calculating a partial exemption) to take into account the times when the dwelling was the main residence of an individual earlier in the inheritance chain (section 118-205 of the ITAA 1997).