Edited version of your private ruling

Authorisation Number: 1012512182511

Subject: Capital gains tax

Question 1

Can you fully disregard any capital gain or loss made on the sale of the deceased's dwelling as the executor?

Answer

No.

Question 2

Can you partially disregard any capital gain or loss made on the sale of the deceased's dwelling as the executor?

Answer

Yes

Question 3

Are you entitled to apply the 50% discount method?

Answer

Yes.

Question 4

Are you entitled to apply the absence rule in relation to the sale of the deceased's dwelling?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The property was purchased by the deceased after 1985.

The deceased lived in the property for a number of years at which point they moved overseas to live with their family due to ill health.

The deceased became a non-resident of Australia for taxation purposes when they moved overseas.

The property was rented out from when the deceased moved overseas.

The deceased died more than two years ago.

The property was transferred from the deceased's name to the Executrix.

The property was sold recently.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Capital Gain or Loss

You make a capital gain or capital loss if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset) that you own. Real estate acquired after 20 September 1985 is a CGT asset. The most common CGT event is CGT event A1, the disposal of an asset. However, there are a number of 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.

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are an individual who owns a dwelling in a capacity as trustee of a deceased estate, you are exempt from tax on any capital gain made on the disposal of the property acquired by the deceased after 20 September 1985 if certain conditions are met. One of these conditions is that the property was not used to produce income just prior to the deceased's death.

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In your case, as the property of the deceased was used to produce income just prior to her death, a full exemption will not apply under section 118-195 of the ITAA 1997.

Partial exemption

Where section 118-195 of the ITAA 1997 does not apply, a partial main residence exemption may still be available under section 118-200 of the ITAA 1997 if an ownership interest in a dwelling passed to you as a beneficiary in a deceased estate or you owned it as the trustee of a deceased estate.

A partial main residence exemption under section 118-200 of the ITAA 1997 will apply when you dispose of your ownership interest in the property.

Partial exemption can be calculated using the following formula:

Capital gain or capital loss x non-main residence days

Total days

Non-main residence days is the sum of:

· if the deceased acquired the ownership interest on or after 20 September 1985 - the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

· the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of the deceased's spouse, an individual who had the right to occupy the dwelling under the will, or if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary, that individual.

Total days is:

· if the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or

· if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

Consequently, as any capital gain made on disposal of the dwelling does not qualify for a full exemption under subsection 118-195(1) of the ITAA 1997, a partial exemption will be available under section 118-200 of the ITAA 1997.

The partial exemption can be calculated using the formula in subsection 118-200(2) of the ITAA 1997 which is set out above.

Discount method

Section 115-100 of the ITAA 1997 sets out who is eligible to apply the 50% discount to a capital gain.

If you are an individual or a trust other than a trust that is a complying superannuation entity you may use the 50% discount method.

The discount capital gain can be used if the asset was disposed of after 21 September 1999 at 11.45am (AEST) and held for at least 12 months.

In order to calculate the discount capital gain, you would first calculate your capital gain and then reduce the gain by 50%. This in effect halves the capital gain that needs to be included in your income tax return as assessable income.

In your case, the property of the deceased was held by the estate for more than 12 months and was disposed of after 21 September 1999. Accordingly, the 50% discount will apply to any capital gain made on disposal of the property.

The estate disposed of the property in accordance with the will and is therefore required to pay any tax arising from the disposal.

The Absence Rule

The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. This rule can be applied in the calculation of a capital gain or loss made when the taxpayer disposes of their main residence.

The absence rules are not applicable in your case as they apply to an owner who has lived in their property and then disposes of it, rather than to the trustee of a deceased estate who is disposing of the main residence of the deceased.