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Ruling

Subject: Capital gains tax - Disposal of dwelling acquired from deceased estate

Question 1

Is the capital gain made on the disposal of the deceased's main residence disregarded?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Prior to September 20 1985 your grandparent C purchased a vacant block of land on which they constructed a dwelling.

Your grandparent A, grandparent B and Relative Y established the property as their main residence.

Prior to 20 September 1985 your grandparent B died.

Your Relative Y returned to the property to live with your grandparent A.

Your grandparent A died on after 20 September 1985.

Your grandparent A's three children, Y, X and Z were the beneficiaries of their Will. Grandparent A's estate was divided equally between their children.

The property was transferred into the three beneficiaries' names.

Under your grandparent A's Will your Relative Y had a right to continue to reside in at the property for a set period.

Z died and their interest in the property passed to their spouse W.

After the set period was up W and X allowed your Relative Y to continue to reside at the property as it had been fitted out to suit their needs.

X and W paid for paid for all repairs to the property.

X then died.

X's interest in the property was passed to their children in equal shares.

X's interest in the property was transferred into their beneficiaries' names.

It was agreed by all beneficiaries that Relative Y should continue to reside at the property.

Relative Y died and under their Will their interest in the property was divided equally between W and X's issue.

This resulted in you and your siblings and W each having an equal interest in the property.

The title to the property was amended to include all the beneficiaries' names.

You had the property valued by a registered valuer as W and Q, W's son wanted to purchase the interest in the property from you and your siblings.

You and your sibling disposed of your 50% interest to W and Q.

You and your siblings received $XXXXX from your share of your X's estate.

You have apportioned the above amount between the two interests that you received in the property from X's estate and your Relative Y's estate.

You have provided copies of the wills of the various people involved with the property to support your application and these documents are to be read with and forms part of your application for the purpose of this ruling:

The most common capital gains tax (CGT) event, CGT event A1, occurs when you dispose of a CGT asset and the time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 118-195,

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

Income Tax Assessment Act 1997 Section 118-200,

Income Tax Assessment Act 1997 Section 118-205 and

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

The most common capital gains tax (CGT) event, CGT event A1, occurs when you dispose of a

Main residence

A capital gain or capital loss made from the disposal of a dwelling acquired by the deceased before 20 September 1985, is disregarded if: 

· the ownership interest in the dwelling ends within two years of the deceased person's death, or

· from the deceased's death until the ownership interest ends, the dwelling was not used to produce income and it was also the main residence of one or more of the following persons: 

o        the spouse of the deceased immediately before death

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

· an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary.  

For a dwelling acquired after 20 September 1985 by the deceased, the following applies:

§ the property was the main residence of the deceased immediately before their death and not being used to produce income,

§ the property is disposed of within two years of the death of the deceased, or

§ from the time of death until its disposal of it, the property was the main residence of the deceased's spouse or an individual who had a right of occupancy under the Will.

You acquired two separate interests in the property, the first being an interest (interest A) when your parent A acquired when grandparent A died. You acquired the second interest when your Relative Y passed away. Each of these interests is considered a separate CGT asset and must be dealt with separately.

The consequences are that on the occurrence of CGT events affecting the separate interests (for example disposal of a CGT asset) there will be

§ a separate date of acquisition for each interest;

§ a separate cost base for each interest; and

§ separate determinations of the capital proceeds from the disposal of each asset.

You have subsequently acquired an proportionate interest (interest A) of X's proportionate interest in the property on their date of death and then another proportional interest (interest B) being a proportion of your Relative Y's interest on their date of death. .

Interest A

You acquired this ownership interest at X's cost base, the market value on your grandfather's date of death.

Under the terms of your grandfather's Will your Relative Y only had a right to reside at the property for a set period after their death. After this period your Relative Y resided at the property because the beneficiaries agreed to allow their to continue to reside in it.

Therefore, as your Relative Y did not have the right to occupy the property after a set date, you cannot disregard the capital gain or capital loss made on the disposal of your interest in the property.

However, you are entitled to a partial main residence exemption. The non-exempt portion of any capital gain or capital loss is calculated as follows:

Capital gain or capital loss    X    Non-main residence days

Total days

Capital Gain or Capital Loss is the amount that you made from the disposal of your interest in the property

Non- main residence days in your case is the sum of

(a) the number of days in X's ownership period the property was not their main residence and

(b) the number of days in the period from your Xs death until your ownership interest ends when the dwelling was not the main residence of:

§ an individual or a spouse of the deceased immediately before death, or

§ an individual who had a right to occupy the dwelling under the deceased's Will

In your case, your non-main residence days are from the date of death of your grandfather to the date of settlement of the sale of the property. 

Total days are the number of days from the acquisition of the property by X until your ownership interest ends.

However, because you have acquired this interest in the property after 20 September 1985, as a beneficiary through a chain of deceased estates, you adjust the formula above to take into account the times when the dwelling was the main residence of your grandfather earlier in the inheritance chain

The 'total days' is adjusted by adding the fewer of:

1. the number of days between 20 September 1985 and the day the ownership passed to the most recently deceased (Relative Y) and

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

Accordingly, the number of days calculated is X,XXX days and the number calculated paragraph 2 above is nil. Although nil is less than X,XXX it is considered that the comparison required under the relevant section of the legislation (subsection 118-200(2) of the Income Tax Assessment Act 1997) is between two positive numbers of days, otherwise the provisions do not operate as intended. Accordingly, X,XXX days should be added to the total days.

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:

§ an individual who owned the dwelling at the time of their death, or

§ their spouse (except a spouse who was living permanently separately and apart from the individual), or

§ an individual who had a right to occupy the dwelling under a will, or

§ an individual to whom an ownership interest in the dwelling passed as a beneficiary in a deceased estate.

In your case, you will need to add the following non-main residence days - the days from the date your Relative Y's right to occupy the property until the date your ownership in the property ceased.

Interest B

The second interest you acquired was when your Relative Y died The acquisition date of this interest is its market value on their date of death.

You acquired this interest in the property on your Relative Y's date of death .The disposal of this interest will trigger CGT event A1 - disposal of a CGT asset.

Section 118 -195 of the ITAA 1997 provides that a full exemption will apply where a CGT event happens to a dwelling (or an interest in it) owned by a trustee or individual beneficiary of a deceased estate if:

Either

(a) the dwelling was a post-CGT asset of the deceased (and it was their main residence just before their death and was not then being used to produce assessable income);

Or

(b) the dwelling was a pre CGT asset of the deceased;

And

Any of the following occurs;

§ the trustee's or beneficiary's ownership interest in the dwelling ends within 2 years of the deceased death

Or

§ the dwelling was the main residence of one or more of the following persons from the deceased's death until the CGT event:

(i) a surviving spouse

(ii) an individual with a right to occupy the dwelling under the deceased's will;

Or

(iii) a beneficiary to whom the ownership interest in the dwelling was passed.

In your case, the property was your Relative Y's main residence just before their death and was not being used to produce assessable income and as you have disposed of your interest in this property within two years of your relative's death, you can disregard the capital gain made on the disposal of interest B in the property.