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Ruling

Subject: Capital gains tax - deceased estate

Question and Answer

Are you entitled to a capital gains tax main residence exemption on the sale of the dwelling you inherited from your parent?

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2009

Relevant facts and circumstances

A dwelling was purchased on date A after 20 September 1985 in the name of your parent. The dwelling was your parent's main residence from the time of purchase until they moved into a nursing home for several months before death.

The area of the dwelling and surrounding land is less than 2 hectares.

You lived in the dwelling with your parent from when it was purchased until date B more than a year later when you moved to live with your extended family members as your parent was no longer able to look after you. You were a young minor when you began living with your extended family members.

Your parent lived alone in the dwelling. From date B, you visited your parent at the property each week for many years, occasionally staying overnight until your parent moved into a nursing home.

Your parent died on date C in the 2009-10 finacial year.

The dwelling was left to you in your parent's will. In a codicil to your parent's will, it was stated that it was their desire that your extended family members be appointed as your joint guardians.

When your parent was in the nursing home, the dwelling remained unoccupied with all their belongings and is still currently in the same state.

Your parent chose the dwelling to remain their main residence when they moved into the nursing home.

You are not a minor. You are still a student.

Your extended family members are not your legal guardians. You have not been adopted by your extended family members.

You will make the choice to treat the dwelling as your main residence for your entire absence period starting from the date you moved out and began living with your extended family members.

The dwelling will not be rented out at any time.

There is no intention to sell the dwelling within two years of your parent's death.

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 118-110.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-175.

Income Tax Assessment Act 1997 Section 118-195.

Reasons for decision

Inheriting a dwelling

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules that are applicable in the case of a persons death.

Subsection 128-15(2) of the ITAA 1997 states that that the beneficiary is taken to have acquired the asset on the day that the deceased died.

In your case the asset in question is the dwelling which your parent lived in as their main residence. You acquired your ownership of the dwelling under your parent's will. You are taken to have acquired the dwelling on their death on date C.

Capital gains tax (CGT) events

A capital gain or capital loss is only made when a CGT event happens to a CGT asset. A dwelling is a CGT asset. The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset. In your case CGT event A1 will occur when you sell the dwelling.

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 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, the deceased refers to your parent. The dwelling passed to you as a beneficiary on your parent's death on date C. Your ownership interested began on that date and will end when you sell the dwelling (on settlement of the contract of sale).

If the dwelling is sold with two years of your parent's death there will be no capital gain or capital loss on sale.

You have no intention of selling the dwelling within two years of your parent's death. If the dwelling is your main residence from the date of your parent's death (date C) until the date of sale, you will be able to ignore any capital gain or loss made on sale.

Main residence

Wether a dwelling is considered a person's main residence is based on fact and is examined on a case by case basis. Taxation Determination (TD) 51 outlines the criteria used to determine if a dwelling is a person's main residence. The factors which are considered are as follows:

-length of time the taxpayer has lived in the dwelling

-the place of residence of the taxpayer's family

-whether the taxpayer has moved his or her personal belongings into the dwelling

-the address to which the taxpayer has his or her mail delivered

-the taxpayer's address on the electoral roll

-the connection of services, such as telephone, gas and electricity; and

-the taxpayer's intention in occupying the dwelling

In your case the dwelling was purchased by your parent on date A and used as their main residence. You lived in the dwelling from the time it was purchased until date B when you moved to live with your extended family members due to your parent's ill health. You visited your parent each week for several years, occasionally staying overnight until your parent moved into a nursing home. The property was never used to produce assessable income.

Based on the above factors we accept that you did establish the dwelling as your main residence from the time it was purchased on date A.

Absence from your main residence

There is no requirement in section 118-195 of the ITAA 1997 that the beneficiary of the deceased actually reside in the property in the period between the date of the deceased's death and the date that the beneficiary's ownership interest ends. The requirement is that the dwelling be the main residence of the beneficiary of the deceased and continues to be so for the relevant period. It is the status of the dwelling as a main residence that is relevant.

Section 118-145 of the ITAA 1997 provides that once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during certain periods of absence. When the dwelling is left vacant you may continue to treat the dwelling as your main residence for an indefinite period. If you choose to treat the dwelling as your main residence you cannot treat any other dwelling as your main residence during the same period.

In your case the dwelling was your parent's main residence since date of purchase on date A. During the period when your parent lived in a nursing home, your parent chose for the dwelling to be their main residence under the absence rule.

From your parent's date of death, date C, the dwelling has not been occupied by anyone or rented out. Under the absence provisions, the dwelling can still be your main residence even though you are not actually living in it. This is because you already established the dwelling as your main residence when you lived there with your parent for over a year on purchase and it has not been rented out.

As you satisfy the conditions in section 118-145 of the ITAA 1997, the dwelling is considered to be your main residence during the period of your absence as long as you do not rent it out and you do not choose any other dwelling to be your main residence. You have indicated that you will choose to treat the dwelling as your main residence for your entire absence period and the dwelling will not be rented out by you at any time.

Dependent child having different main residence

It is also necessary to consider the provisions dealing with dependent children having a different main residence. Under section 118-175 of the ITAA 1997, if the dwelling is the main residence of a person, and another dwelling is the main residence of the person's child who is under 18, and the child is dependent on the person for economic support, the person must choose one of the dwellings as the main residence of both themselves and the child.

In your case, you and your parent have both chosen for the same property to be your main residence as per section 118-175 of the ITAA 1997. As you are not a child of your extended family members, section 118-175 of the ITAA 1997 has no application to them or their main residence.

Conclusion

In applying sections 118-195 and 118-145 of the ITAA 1997 to your situation:

-          you acquired your ownership interest in the dwelling upon the death of your parent. Prior to their death, your parent owned and occupied the dwelling as their main residence and it was not being used to produce income

-          the dwelling will be your main residence from the date your parent died until your ownership ends.

Therefore, the full main residence exemption will apply and any capital gain or loss you may make from the sale of the dwelling that you inherited from your parent will be disregarded.