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Edited version of private ruling
Authorisation Number: 1011723983909
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Ruling
Subject: Deceased estate
Question 1
Are you entitled to the full main residence exemption on the sale of a dwelling which you inherited from your parent and which you sold within two years of the death of your step parent who had a life tenancy in the dwelling?
Answer
No
Question 2
Does the two year period to allow a full main residence exemption on the disposal of the deceased's main residence start from the date of death of the life tenant?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2010
Relevant facts and circumstances
Your parents purchased a property as their main residence before 20 September 1985.
One parent passed away before 20 September 1985, leaving the property to your other parent (second parent).
The property was your second parent's main residence for their entire ownership period.
Your second parent re-married.
Your second parent died on date A which was after 20 September 1985.
Under your second parent's will, their spouse (your step parent) had a life tenancy in the property.
The property was transferred into your name.
You were unable to sell the property due to your step parent's life interest in it.
You are the executor of your second parent's estate. You are also the beneficiary of their estate.
Your step parent passed away on date B.
The dwelling was empty following the death of your step parent.
From the time of your step parent's death, you prepared the property for sale. The property was sold on date C which was less than two years from the death of your step parent, with settlement date being in the future on date D.
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 118-195.
Income Tax Assessment Act 1997 Section 118-200.
Income Tax Assessment Act 1997 Section 118-205.
Reasons for decision
You acquired your ownership of the dwelling under your second parent's will. For the purposes of this discussion, your second parent is the deceased and your step parent is the spouse of the deceased.
As the dwelling was acquired by your second parent prior to 20 September 1985, you are taken to have acquired the property on their death, on date A, for its market value at that time.
The most common capital gains tax (CGT) event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.
However, there are a number of different exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part.
One such exemption relates to the disposal of a dwelling acquired by a person from a deceased estate.
Main residence exemption
You can disregard any capital gain or capital loss that you make from the disposal of a dwelling that passed to you as a beneficiary in a deceased estate provided certain conditions are satisfied.
Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a beneficiary, to disregard any capital gain or capital loss in relation to the deceased's main residence if:
(1) the beneficiary disposes of their ownership interest within two years of the deceased's death, or
(2) if the beneficiary did not dispose of their ownership interest within two years, the dwelling was, from the deceased's death until their ownership interest ends, the main residence of one or more of:
(a) the deceased's spouse at the time of their death (except a spouse who was living permanently separately and apart from the deceased); or
(b) an individual who had a right to occupy the dwelling under the deceased's will, or
(c) an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary
In your case, as mentioned, the deceased refers to your second parent. They acquired the dwelling prior to 20 September 1985 and the dwelling was their main residence just before they passed away. When your second parent died on date A, you were taken to have acquired the dwelling on that date. However, your step parent (who was not the owner of the dwelling) resided there until his death on date B.
As your ownership interest will end (on settlement of the contract of sale on date D) more than two years after your second parent's death, you cannot disregard in full any capital gain or capital loss made.
However, as your step parent (the spouse of the deceased) lived in the property immediately prior to their death, you will be entitled to a partial exemption because the dwelling was occupied by the spouse of the deceased for part of your ownership period.
We appreciate that you were unable to sell the dwelling as your step parent had a life interest in the dwelling and that you intended to sell the dwelling within two years of their death. However in order to qualify for the full main residence exemption, the dwelling was required to be sold within two years of the death of your second parent.
Partial main residence exemption
You may be entitled to a partial exemption under subsection 118-200(1) of the ITAA 1997.
The life tenant (your step parent) resided in the dwelling as their main residence until they passed away on date B.
Your ownership period of the property commenced when your second parent passed away on date A. Your ownership period will end on settlement date of date D.
Only a partial main residence exemption can be obtained as your step parent did not occupy the property as their main residence for all of your ownership period.
You calculate your capital gain or capital loss as follows:
Total capital gain or loss x |
Non-main residence days |
|
Total days in your ownership period |
Where a dwelling is acquired from a deceased estate the general rules for calculating a capital gain or loss are modified such that:
Non-main residence days will be the number of days in the period from the death of the life tenant (date B) until your ownership interest ends (on settlement of the contract of sale - date D).
Total days will be the number of days from the deceased's death (date A) until your ownership interest end (on settlement of the contract of sale - date D).
Your capital gain is calculated by taking the difference between the capital proceeds (the amount for which you sold the dwelling) and the cost base. The cost base consists of five elements, the first of which will be the market value of the dwelling when your second parent passed away on date A.
As you have owned the dwelling for more than 12 months, and you acquired the dwelling prior to 19 September 1999, you can choose either the indexation or the CGT discount method to calculate your net capital gain. Under the discount method, half of your net capital gain is included in your assessable income.