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Ruling

Subject: Deceased estate

Question:

1. Is the trustee entitled to fully disregard any capital gain or capital loss made on the disposal of the deceased's share of the dwelling?

Answer:

No

Question:

2. Is the trustee entitled to partially disregard any capital gain or capital loss made on the disposal of the deceased's share of the dwelling?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

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.

You are the trustee for the deceased's estate.

The deceased and their spouse at the time purchased a unit (dwelling) as tenants in common after 20 September 1985 on date A and began using the dwelling as their main residence from that date.

The land on which the dwelling was situated on, and adjacent to, was not more than two hectares.

The deceased moved out of the dwelling on date B after separation from their first spouse and lived with their new partner (second spouse).

The deceased never purchased another dwelling in his/her name after moving out of the dwelling.

The deceased passed away on date C.

The deceased's first spouse continued to live in the dwelling until their death on date D.

The executor for the deceased's estate has chosen for the dwelling to be the deceased's main residence from the time of purchase on date A until death on date C.

The dwelling was never used to produce assessable income.

The deceased's will specify that on their death, their interest in the dwelling was to go to their children as tenants in common in equal shares.

From the date the deceased's first spouse passed away on date D the dwelling was occupied by more than one of the deceased's children.

The dwelling was sold on date F by the executor.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 103-25.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-130.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-195.

Income Tax Assessment Act 1997 Section 128-15.

Reasons for decision

Capital gains tax

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997))

The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

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 of these exemptions is known as the main residence exemption.

Main residence exemption

Generally, a person can disregard a capital gain or capital loss made on the disposal of a dwelling that is their main residence if:

· the dwelling was their main residence for the whole period they owned it

· the dwelling was not used to produce assessable income, and

· any land on which the dwelling is situated on, and is adjacent to, is not more than two hectares.

Continuing main residence status during absence

Once a dwelling has been established as a person's main residence, they may elect to continue to treat that dwelling as their main residence even though they no longer live in it. If the dwelling is not used to produce income it can be treated as their main residence indefinitely (subsection 118-145(3) of the ITAA 1997). If the person makes this choice, they cannot treat any other dwelling as their main residence. This is known as the absence rule.

Spouse having different main residence

Under section 118-170 of the ITAA 1997, if a person and their spouse have different dwellings for a period, the person and their spouse must either:

· choose one of the dwellings as the main residence for both of them for the period, or

· nominate the different dwellings as their main residence for the period.

Where the person and their spouse nominate different dwellings for the period, and the person owns 50% or less of the home he/she has nominated, the person qualifies for an exemption on their share.

CGT and deceased estates

Section 118-195 of the ITAA 1997 provides that where an interest in a dwelling is acquired by the deceased after 20 September 1985, a capital gain or capital loss can be disregarded when it was the main residence of the deceased prior to their death, was not used at that date to produce assessable income and: 

· the trustee's ownership ends within two years of the deceased's death (1^st test); or  

· from the deceased's death until the trustee disposes of their ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:  

· the spouse of the deceased immediately before death (except a spouse who was living permanently separately apart from the deceased); 

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

· an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary (2^nd test).  

The ownership interest of a trustee or beneficiary commences on the date of death of the deceased (subsection 128-15(2) of the ITAA 1997), and ends on the disposal of the dwelling when their legal ownership ends (section 118-130 of the ITAA 1997).

Making a choice

Subsection 103-25(1) of the ITAA 1997 details how the main residence choice is to be made. A choice made under section 103-25 of the ITAA 1997 must be made:

· by the day the person lodges their income tax return for the income year in which the relevant CGT event happened, or

· within a further time allowed by the Commissioner.

Applying the law to your circumstances

Period from time of purchase (date A) until death (date C)

The deceased and their spouse at the time purchased a dwelling as tenants in common on date A and used it as their main residence from date A. The area of the property was less than 2 hectares and the dwelling was not used to produce assessable income.

The executor for the deceased's estate has chosen for the dwelling to be the deceased's main residence from the time of purchase on date A until death on date C, which includes the period from date A until the deceased moved out on date B. Thus the main residence exemption applies for the period the deceased was living in the dwelling (date A to date B).

As the deceased moved out of the dwelling to live with their new partner (second spouse), we need to consider the absence rules and the spouse having different main residence rules. Under the absence rules, the trustee for the deceased's estate chose for the dwelling to be the deceased's main residence until death.

As the deceased owned 50% or less of the dwelling, the deceased qualifies for the main residence exemption for the period from when they moved out on date B until death on date C.

Thus the main residence exemption applies for the period date A to date C.

We shall now consider the time period from the date of death of the deceased until the dwelling was sold.

Period from death of deceased (date C) to sale of dwelling (date F)

Under subsection 128-15(2) of the ITAA 1997, the trustee or beneficiary is taken to have acquired the deceased's ownership interest in an asset on the date of the deceased's death. In this case the deceased died on date C.

You, as trustee, sold the dwelling and your ownership interest ended on sale of the dwelling on date F.

As you did not dispose of your ownership interest in the property within two years of the date of death of the deceased, the first test in section 118-195 of the ITAA 1997 has not been met.

In order to satisfy the second test, from the deceased's death until your ownership interest ended, the dwelling must have been the main residence of a spouse of the deceased, an individual who had a right to occupy the dwelling under the will, or a beneficiary to whom an ownership interest passed and that beneficiary had brought about the CGT event (the sale).

During the period from date C to the date of death of the first spouse on date D, the dwelling was occupied by the first spouse who was not mentioned in the deceased's will. Following the death of the first spouse, the dwelling was occupied by more than one of the deceased's children until sale on date F. As the dwelling was not occupied by a relevant individual as required in the second test in section 118-195 of the ITAA 1997 from the date of the deceased's death, the main residence exemption will not apply for the period from the date of death of the deceased until sale.

Conclusion

Any capital gain or loss made on the sale of the deceased's share of the dwelling will be only partially exempt. A capital gain or loss can be disregarded for the period from the time of purchase on date A until the death of the deceased on date C. A capital gain or loss cannot be disregarded for the period from the deceased's death on date C until sale on date F.