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Ruling

Subject: Capital gains tax - Multiple deceased estates - disposal of property

Question:

Are you entitled to a partial main residence exemption on the disposal of the property you acquired through a deceased estate under section 118-200 and section 118-205 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2011

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.

Prior to 20 September 1985, deceased A purchased a residential property which they used as their main residence.

After 20 September 1985, deceased A passed away and bequeathed the property to their sibling (deceased B).

Shortly after the death of deceased A deceased B moved into the property and established it as their main residence.

X years later, deceased B passed away and bequeathed the property to their sibling (deceased C).

Under the terms of deceased B's will it stipulated that their sibling (deceased D) had the right to live rent free in the property as long as they live.

Approximately Y years ago, deceased C passed away and bequeathed the property to you. Under deceased C's will the property was subject to the same terms as deceased B's will.

Deceased D continued to reside in the property after deceased C's death.

The property has never been used to produce assessable income.

For the purpose of this ruling deceased D will pass away during the period that the ruling applies. You will dispose of the property on the death of deceased D.

You have supplied a copy of the following documentation to support your application and this document is to be read with and forms part of your application for the purpose of this ruling:

· the last will and testament of deceased C's.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 118-205

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 128-15

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

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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

If you acquire an asset owned by a deceased person as their executor or beneficiary, you are taken to have acquired the asset on the day the person died.

Where an asset was acquired by the deceased prior to 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.

Where the asset is a dwelling that was the deceased's main residence when they died, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died.

In other instances where an asset was acquired by the deceased after 20 September 1985, the first element of your cost base and reduced cost base is generally the deceased's cost base.

CGT event A1 will occur when you dispose of the property.

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 is disregarded (full exemption) or reduced (partial exemption).

Main residence exemption - right to occupy under will

One such exemption relates to the disposal of a dwelling inherited by a beneficiary of a deceased estate. Section 118-195 of the ITAA 1997 outlines the conditions under which the capital gain or capital loss can be disregarded in full.

Where a dwelling was originally acquired by the deceased before 20 September 1985 or it was their main residence when they died and a person who has the right to occupy the dwelling under the deceased's will occupies it as their main residence for all of the beneficiary's ownership period, the capital gain or capital loss arising from its disposal is disregarded.

If the dwelling was acquired by the deceased after 19 September 1985 and it was not their main residence when they died, or the person with the right to occupy a dwelling under a will does not occupy the dwelling for all of the beneficiary's ownership period, only a partial exemption will apply.

Your acquisition date of the property is deceased C's date of death, for their cost base. Deceased C acquired their interest in the property upon the death of deceased B's for its then market value as it was their main residence when they died.

Under both deceased B's and deceased C's will deceased D had the right to occupy the property as their main residence and will do so until they pass away.

The death of a person with the right to occupy a dwelling under a will has no CGT consequences for the beneficiary. The beneficiary does not acquire any asset from the life tenant. Consequently, no additional amount can be included in the first element of the cost base of the beneficiary's asset.

Your ownership period of the property commenced when deceased C died and your ownership period will end when the property is disposed of.

Only a partial main residence exemption can be obtained because deceased C was not occupying the dwelling when they died and also because deceased D will not occupy the property as their main residence for all of your ownership period. Your ownership will end upon the disposal of the property.

You calculate your capital gain or capital loss using the following formula:

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 the dwelling (before applying any main residence exemption).

Non main residence days are the number of days that deceased C owned the dwelling plus the number of days that the dwelling was not deceased D's main residence while you owned it.

Total days are the number of days from the acquisition by deceased C until settlement of the disposal of the property.

However, because you inherited your ownership interest in the dwelling after 19 September 1985, as a beneficiary through a chain of deceased estates, you adjust the above formula to take into account the times when the dwelling was the main residence of a number of individuals earlier in the inheritance chain.

The above formula is adjusted by adding to the 'non-main residence days' - 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 who an ownership interest in the dwelling passed as a beneficiary in a deceased estate.

In this case, the dwelling was also the main residence of deceased B. You need to include deceased B's non-main residence days during their ownership period.

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

· the number of days between 20 September 1985, and the day the ownership interest passed to the most recently deceased (deceased C); and

· 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 or a trustee of a deceased estate, and the day when the interest passed to the most recently deceased (deceased C).

In this case, the number of days calculated under the second dot point above is less than the number of days calculated under the first dot point above.

You can use the discount method to calculate your capital gain as you meet all the relevant criteria.