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Authorisation Number: 1011956365911

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Subject: Capital gains tax - inherited dwelling - absence choice - chain of deceased estates - disposal

Question 1: Is the capital gain made on the disposal of Parent B's original interest in the dwelling disregarded?

Answer: No.

Question 2: Will the first element of the cost base for the original interest be the market value of the interest on the date Parent B passed away?

Answer: Yes.

Question 3: Will the absence choice apply after the date Parent B passed away?

Answer: No.

Question 4: Is the capital gain made on the disposal of Parent B's inherited interest in the dwelling disregarded?

Answer: No.

Question 5: Will the first element of the cost base of Parent B's inherited interest be the market value of the interest on the date Parent A passed away?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2012

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

Your parents jointly purchased a dwelling after 20 September 1985 and it was their main residence until they moved into a nursing home after a number of years.

The dwelling was left vacant for a number of months until it was rented out and it has continued to be rented out until the present time.

Parent A passed away a number of months after moving into the nursing home and Parent B was named as the sole trustee of their estate, and the beneficiary of their real and personal estate.

Parent B passed away a number of months after the passing of Parent B and you were named as the sole trustee of their estate, and the beneficiary of their real and personal estate.

For the purposes of this ruling, you as trustee of Parent B's estate have made the absence choice in relation to treating the dwelling as Parent A and Parent B's main residence from the date it was rented out until the date of their death.

The title of the dwelling was transferred into your name a number of months after Parent B passed away.

You will dispose of the dwelling over 2 years after the date Parent B passed away and will make a capital gain on the disposal of the dwelling.

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 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 118-205

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Capital gains tax

You may make a capital gain or a capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity.

You make a capital gain when the capital proceeds received on the disposal of the CGT asset are more than the cost base of the CGT asset. In the case of the disposal of an inherited dwelling, if the conditions for an exemption are not met, the capital gain will be calculated on the difference between the proceeds on sale and the cost base of the CGT asset.

Application to your case

For CGT purposes, you are considered to have acquired two separate CGT assets when you inherited the dwelling from Parent B.

The first CGT asset will be the original 50% interest in the dwelling that Parent B purchased when the dwelling was jointly purchased with Parent A.

The second CGT asset will be the 50% interest in the dwelling that was formerly owned by Parent A, which Parent B inherited when Parent A passed away.

Each of these interests is considered a separate CGT asset and must be dealt with separately.

CGT event A1 will occur when you dispose of the dwelling and you will make a capital gain if the capital proceeds are more than the cost base of the interests. You will not be able to disregard the capital gain made on the disposal of the dwelling unless you are eligible for any exemptions in relation to your ownership in the dwelling.

Main residence exemption - original interest acquired by your Parent

If you inherit a deceased person's main residence, you may be exempt or partially exempt when a CGT event happens to it.

To be eligible for a full exemption on the capital gain made on the disposal of an inherited main residence, the following conditions must be met:

1. You disposed of your interest within two years of the deceased's death; or

2. From the date of the deceased's death until you disposed of your ownership interest, the property was not used to produce income and was the main residence of one or more of:

· a person who was the spouse of the deceased immediately before the deceased's death;

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

· you as a beneficiary, if you disposed of the property as a beneficiary.

You can elect that a dwelling that was your main residence continues to be treated as your main residence after you cease living in it. If the dwelling is used to produce income, then there is a six year time limit on the continuing main residence status. A second condition is that no other dwelling can be treated as your main residence in the period of absence from the first dwelling. This election is made at the time that the CGT event happens to the dwelling.

Where the election to treat the dwelling as a continuing main residence is made it applies up to the date of death, the dwelling will be exempt from CGT if it is sold within two years from the date of the deceased's death. That election deems the dwelling to be the main residence at the date of death and overrides the condition about deriving income.

When the full exemption for beneficiaries and trustees of deceased estates does not apply because the conditions listed above have not been satisfied, the beneficiary or trustee may be entitled to a partial exemption.

The partial exemption is available if the taxpayer is an individual and the ownership interest in the dwelling has passed to the taxpayer as a beneficiary of a deceased estate, or the taxpayer must have owned it as a trustee of such estate. Generally, the partial exemption is calculated by working out the number of non-main residence days as compared to the total ownership days that are relevant for main residence exemption purposes.

The following formula is used to calculate the capital gain:

Capital Gain      X   Non-main residence days

Total days

Non-main residence days is the sum of:

1. The number of days in the deceased's ownership period when the dwelling was not his or her main residence; and

2. The number of days from death until the taxpayer's ownership interest ends when the dwelling was not the main residence of one of the following:

a) The spouse of the deceased at the time of death;

b) Someone entitled to occupy the dwelling under the will; or

c) A beneficiary who brought about the CGT event.

Total days is the number of days from the acquisition of the dwelling by the deceased until the taxpayer's ownership interest ends.

You can reduce any capital gain made on the disposal of a CGT asset by 50% when the following conditions have been met: 

· You are an individual;

· The CGT event will happen to the asset after the 21 September 1999;

· You have owned the asset for more than 12 months; and

· The cost base of the asset was not indexed. 

Application to your case

You inherited Parent B's original interest in the dwelling when they passed away. Parent B had lived in the dwelling until they moved into a nursing home, and the dwelling was rented out a number of months later. You, as trustee of Parent B's estate have made the absence choice for the main residence exemption to apply from the date the dwelling was first rented out.

In this case, the non-main residence days will not include days before Parent B's date of death as you have made the absence choice in your role as trustee of their estate for the main residence exemption to apply. While it is viewed that the dwelling was Parent B's main residence for all of their ownership period of this particular interest, the absence choice only applies to the period of ownership while Parent B was alive. Therefore, the absence choice ceased to have any affect on the date of Parent B's death.

As the dwelling has been rented out until the present time, it has not been occupied by any of the persons listed above for eligibility of the full exemption after Parent B passed away, and you will not dispose of the dwelling within 2 years of the date Parent B passed away, you do not meet the conditions listed above for you to be eligible for a full exemption in relation to Parent B's original interest in the dwelling. Therefore, you will be entitled to a partial exemption on the disposal of the original interest acquired by Parent B when the dwelling was originally acquired.

As the dwelling was Parent B's main residence up to the date of their death due to you making the absence choice, the non-main residence days will commence from the day after Parent B passed away until the date of settlement on the disposal of the dwelling.

The total days will be the number of days from the date Parent B acquired the dwelling until the date your ownership interest in the dwelling ends, the settlement date.

The cost base of Parent B's original interest in the dwelling will consist of five elements. The first element of the cost base of the original interest will be the market value of that 50% interest on the date Parent B passed away.

You will be eligible to reduce the capital gain made on the disposal of Parent B's original interest in the dwelling as you meet the conditions listed above for the 50% discount to apply.

Main residence exemption - Parent's inherited interest in the dwelling

The formula for calculating the partial main residence exemption is adjusted if the deceased individual also acquired the interest in the dwelling on or after 20 September 1985 as a beneficiary, or trustee, of a deceased estate. The main residence exemption is calculated having regard to the number of days the dwelling was the main residence of you and the previous beneficiaries.

The number of non- main residence days is adjusted by adding the number of days that the dwelling was not the main residence of one or more of:

(a) An individual who owned the dwelling at the time of their death; or

(b) Their spouse; or

(c) An individual who had a right to occupy the dwelling under a will; or

(d) An individual to whom an ownership interest in the dwelling passed as a beneficiary in a deceased estate.

The total days will be the fewer of:

(a) The number of days between 20 September 1985 and the day when the interest passed to, or was acquired by the trustee by the most recently deceased; and

(b) The number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary of a deceased estate or as a trustee of a deceased estate and the day when the interest passed to or was acquired as trustee of the most recently deceased.

Note: As it is a requirement that the comparison be made between two positive numbers of days, otherwise the provisions do not operate as intended. If one of the comparison number of days is nil, the positive number of days should be added to the total days.

Application to your case

You inherited the interest in the dwelling inherited by Parent B as a beneficiary through a chain of deceased estates after 20 September 1985.

You do not meet the conditions listed above for a full exemption in relation to the disposal of the interest in the dwelling that Parent B inherited from Parent A. However, you are eligible for a partial exemption on the disposal of this interest. As outlined above, the formula for calculating the partial main residence exemption is adjusted to take into account the time when the dwelling was the main residence of Parent A earlier in the inheritance chain.

In this case, while Parent B acquired this interest on the date Parent A passed away, we take into account Parent A's use of the dwelling from the date the dwelling was acquired. The result is that the non-main residence days and total days are the same for both interests.

The first element of the cost base of the interest in the dwelling inherited by Parent B from Parent A will be the market value of that 50% interest on the date Parent A passed away.