Edited version of private ruling

Authorisation Number: 1011853764205

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Ruling

Subject: Capital gains tax - deceased estate - main residence not disposed of within two years of the deceased's death

Question: Is the capital gain or capital loss made on the disposal of the deceased's apartment disregarded?

Answer: No.

This ruling applies for the following period

30 June 2012

30 June 2013

The scheme commenced on

1 July 2011

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.

The deceased acquired an apartment in early 1987.

The deceased moved in and established the apartment as their main residence.

The apartment has never been used for income producing purposes.

The deceased resided in the apartment until their death in mid 20XX.

There are a number of beneficiaries under the deceased's Will.

The apartment was left vacant from the deceased's date of death to late 20XX.

The apartment has been used for income producing purposes since early 20XX.

The apartment is currently listed on the property market.

As the executor of the deceased's estate you will dispose of the apartment.

The estate will be fully administered prior to the disposal of the apartment.

The apartment will not be disposed of within two years of the deceased's date of death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 Section 118-200
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Section 102-10
Income Tax Assessment Act 1997 Section 115-5
Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 115-215
Income Tax Assessment Act 1936 Section 98A
Income Tax Assessment Act 1936 Section 97
Income Tax Assessment Act 1936 Section 100

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

You make a capital gain or capital loss if a capital gains tax (CGT) event occurs to a CGT asset that you own. The most common CGT event (CGT event A1) occurs if you dispose of a CGT asset to someone else. The time of the event is when you enter into the contract, or if there is no contract - when the change of ownership occurs.

In your situation, a CGT event A1 will occur when you as executor dispose of the deceased's apartment.

If you acquire a CGT asset as an executor or beneficiary of a deceased estate, you are taken to have acquired the asset on the day that the deceased died.

If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base.

The first element of the cost base and reduced cost base of a dwelling - its acquisition cost - is its market value at the date of death if either:

· the dwelling was acquired by the deceased before 20 September 1985, or

· the dwelling passes to you after 20 August 1996 (but not as a joint tenant), and it was the main residence of the deceased immediately before their death and was not being used to produce income at that time.

Deceased's main residence

A capital gain or capital loss is disregarded when a CGT event happens to a deceased person's main residence that you acquired as an executor or beneficiary of a deceased estate after 20 September 1985, if:

· you are an individual and any of the following apply:

o your ownership interest ends within two years of the person's death - that is, if the dwelling was disposed of under a contract and settlement occurred within two years

o from the deceased's death until your ownership interests ends the dwelling was the main residence of one or more of:

· the spouse of the deceased immediately before death,

· an individual who had a right to occupy the dwelling under the deceased's will, or

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary

You get only a partial exemption (or no exemption) if:

· you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as an executor of the deceased estate, and

· the above conditions do not apply.

The Commissioner does not have the discretion to extend this two year period under any circumstances.

Calculating a partial main residence exemption

You calculate the capital gain or capital loss using the following formula:

Capital gain (CG) or capital loss (CL) amount X Non-main residence days

Total days

CG or CL amount is the capital gain or capital loss you would have made from the CGT event.

Non-main residence days are the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence.

Total days are the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

Capital gains and capital losses made by the estate are aggregated to determine whether the estate has made a net capital gain or net capital loss for the year. A net capital gain is included in the estate's net income that is available for distribution to beneficiaries.

The executor of the estate is assessable on any part of the estate's net income that no beneficiary is presently entitled to.

The beneficiaries are liable to pay tax on the part of the estate's net income that they are presently entitled to.

Present entitlement of the beneficiaries

Generally, beneficiaries cannot enjoy present entitlement to income derived by the estate during the administration of the estate. Income of the estate in income years before administration is complete is the income of the executor's and is not income of the beneficiary/ies.

During the administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts. The executor in this situation might exercise the discretion, to pay some of the income to, or on behalf of the beneficiaries.

Beneficiaries who enjoy present entitlement to income derived by the estate are liable to pay tax on their share of the income received. The trust estates capital gains are treated as the beneficiaries capital gains

The executor of the deceased estate is assessable on the amount of any capital gain attributable to the amounts set aside to cover CGT and not distributed to the beneficiaries.

How the law applies to your circumstances.

You acquired the deceased's apartment on the deceased's date of death for its market value on that date.

As none of the above conditions have been met, you are not entitled to the full exemption on the disposal of the apartment. Although you are not entitled to a full exemption from CGT you are entitled to a partial exemption.

The above formula should be used to calculate the capital gain or capital loss. The non-main residence days are the number of days from the deceased's date of death until settlement date upon the apartment's disposal.

The total days are from the date when the deceased acquired the apartment until settlement date upon its disposal.

As the apartment will be disposed of by you as executor of the estate, any capital gain realised will need to be included in the trust income tax return.

For more information on deceased estates, how to calculate your capital gain or capital loss and the cost base please see the enclosed information sheet. This information has been taken from the Guide to capital gains tax 2010-11 (NAT 411-6.2010). Further information is also available on our website - www.ato.gov.au.