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Ruling

Subject: Capital gains tax - main residence

Question 1

Can property B be treated as the main residence of the deceased person?

Answer

No

Question 2

Are the legal costs incurred regarding disputed ownership of the property included as part of the cost base of the property?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The deceased person acquired property A due to a marriage breakdown prior to 20 September 1985. The deceased resided at this property until moving into a nursing home, where they lived until passing away. The property was sold several years prior to the deceased's passing.

The deceased person acquired property B after 20 September 1985. Property B was immediately rented out to an unrelated third party. Upon their departure, the deceased person's children then resided in property B. No rent was paid by either of the deceased's children during this period.

Property B was subsequently rented to another unrelated third party until being placed on the market for sale in the relevant financial year.

Legal expenses have been incurred in proceedings to confirm ownership of property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118B,

Income Tax Assessment Act 1997 Paragraph 118-110(1)(b),

Income Tax Assessment Act 1997 Section 110-25 and

Income Tax Assessment Act 1997 Subsection 109-5(2).

Reasons for decision

Question 1

Summary

The property cannot be considered the main residence of the deceased

Detailed reasoning

Section 118-110(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) requires that the dwelling must have been a taxpayer's "main residence throughout the ownership period" in order for a capital gain or loss to be disregarded under the main residence exemption.

Accordingly, the concept of a dwelling qualifying as a "main residence" is central to the application of the exemption. For example, it is necessary in determining whether a dwelling is subject to a full or partial exemption or which of 2 or more dwellings owned by a taxpayer will be entitled to the exemption.

Moreover, it means that a taxpayer cannot claim the exemption in respect of a property merely because it is the only property the taxpayer owns. The dwelling must in fact also qualify as the taxpayer's main residence.

The term "main residence" is not defined in Subdivision 118B of the ITAA 1997. In the ATO "Guide To Capital Gains Tax" the Commissioner states that whether a dwelling qualifies as a sole or principal residence is a question of fact and lists the following factors as being relevant to the question:

(i) the length of time the taxpayer has lived in the dwelling;

(ii) the place of residence of the taxpayer's family;

(iii) whether the taxpayer has moved his or her personal belongings into the dwelling;

(iv) the address to which the taxpayer has his or her mail delivered;

(v) the taxpayer's address on the electoral roll;

(vi) the connection of services such as telephone, gas and electricity; and

(vii) the taxpayer's intention in occupying the dwelling.

The mere intention to construct a dwelling or to occupy a dwelling as main residence without actually doing so is insufficient to obtain the exemption. One important implication of this is that a taxpayer may have no main residence, even where they own more than one property. Likewise, a taxpayer cannot claim they are entitled to the exemption in respect of a property merely because it is the only property the taxpayer owns. It must also qualify as a main residence.

On the other hand, in AAT Case Re Erdelyi and FCT (2007) 66 ATR 872; [2007] AATA 1388, the AAT found that a dwelling that the taxpayers had occupied for 3 months for the purpose of attempting to access the building concession did not qualify as the taxpayers' main residence because it was not occupied on a bona fide basis as their main residence. The AAT concluded that it was not the taxpayers' intention to make the dwelling their main residence. In doing so, the AAT relied on the factors listed above (then contained in withdrawn Determination TD 51).

In your case, the deceased did not occupy property B as a main residence. The deceased continued to reside at property A after they purchased property B and rented it out to an unrelated third party immediately after its purchase. The deceased's children then rented the property, and the deceased only occasionally stayed at the property. The deceased then moved to a nursing home where they resided until they passed away.

As no main residence exemption can be applied to the property, capital gains tax will be payable upon its disposal.

Question 2

Section 110-25 of the ITAA 1997 details the five elements which constitute the cost base of a CGT asset. Subsection 110-25(6) details the fifth element of the cost base, being capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset.

Capital expenditure incurred to establish, preserve or defend title to an asset, or a right over the asset that is expenditure incurred within subsection 110-25(6) of the ITAA 1997 forms part of the cost bases of assets of the taxpayer. The expenditure incurred by a taxpayer in their capacity as the executor of an estate to preserve and defend the title to the assets of the estate falls into this category.

Expenditure that would fall within the cost base could include legal fees incurred by a beneficiary in taking action to establish title to the estate's property. The cost base could also include costs incurred by an executor to obtain probate ( IR Commrs v. Executors of Dr Robert Richards (1971) 1 All ER 785).

In your case, the trustee has incurred legal expenses in establishing correct title to the property of the estate. This expenditure will be included in the cost base of property B.