Edited version of private advice

Authorisation Number: 1012637720915

Ruling

Subject: CGT - deceased estate - disposal

Questions and answers:

1. Are you entitled to disregard in full or in part any capital gain or loss that results from the disposal of the interest in the dwelling that your relative purchased pre-CGT?

No.

2. Are you entitled to disregard in full any capital gain that results from the disposal of the interest in the dwelling that your relative inherited from their spouse post-CGT?

No.

3. Are you entitled to disregard in part any capital gain that results from the disposal of the interest in the dwelling that your relative inherited from their spouse post-CGT?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

Your relatives purchased an apartment pre-CGT as joint tenants and proceeded to occupy the property as their main residence.

Post CGT, due to one of your relatives passing, the title of the property automatically passed to the other relative.

The remaining relative continued to occupy the apartment as their main residence.

After a number of years, your remaining relative suffered an injury and was taken to hospital where they were assessed as requiring high level care and moved into an aged care facility.

During the period that your relative resided at the age care facility the election was made that the apartment remained their main residence.

After a short period in the age care facility your relative passed away.

After a number of months, ownership title of the property fell to you as being sole beneficiary.

For a period the apartment was left empty while you undertook various repairs and maintenance.

After repairs and maintenance were complete the apartment was used as a rental property beyond 2 years of ownership.

After a number of years the apartment was vacated and disposed of

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-205

Income Tax Assessment Act 1997 Section 118-197

Reasons for decision

Capital gains tax

Capital gains tax (CGT) is the tax that you pay on a capital gain you make during an income year and which you include in your assessable income. It is a component of your income tax; you are taxed on your net capital gain at your marginal tax rate.

You can make a capital gain only if a CGT event takes place and the most common CGT event happens whenever there is a change in ownership for a CGT asset, for example, if you sell a dwelling. This is known as CGT event A1.

Deceased estates

When a person dies, the assets that make up their estate can pass directly to their beneficiaries or pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiaries. They are taken to have acquired these assets on the date of the deceased's death.

If an individual acquires a dwelling as a beneficiary or executor, they may be exempt or partially exempt when a CGT event occurs in relation to the dwelling (section 118-195 of the ITAA 1997). Generally, any capital gain or loss you make is disregarded if:

1. You dispose of the dwelling within two years of the date of the deceased's death, or

2. From the deceased's death until you dispose of the dwelling, the dwelling was not being used to produce assessable income. For this period, the dwelling also must have been the main residence of one or more of:

a. a person who was the spouse of the deceased immediately before the deceased's death (but not a person who was permanently separated from the deceased)

b. an individual who had a right to occupy the dwelling under the deceased's Will; or

c. the beneficiary, if the dwelling was disposed of by the beneficiary

In your situation, you did not dispose of the dwelling within two years of your relative's death, and it was not the main residence of any of the above entities.

Commissioners Discretion

The Commissioner has discretion to extend the two-year time period in relation to CGT events that happened in the 2008/09 income year and later income years. The explanatory memorandum (EM) to the Bill that added the discretion to Section 118-195 of the ITAA 1997, the Tax Laws Amendment (2011 Measures No 9) Bill 2011, includes the following non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:

• the ownership of a dwelling or a will is challenged

• the complexity of a deceased estate delays the completion of administration of the estate

• a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (e.g. the taxpayer or a family member has a severe illness or injury), or

• settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.

In your case the property was not disposed of within 2 years of your relative's passing. You used the property to earn assessable income and you had the capacity to dispose of the property within the requirements outlined under section 118-195 of the ITAA 1997.

Therefore, the Commissioner considers it not appropriate to exercise his discretion to extend the 2 year period for the exemption from CGT.

Calculating your cost base and capital gain

You make a capital gain if the capital proceeds from the disposal (the amount received as a result of the CGT event occurring) are more than the assets cost base.

The cost base is made up of five elements:

1. Money or property given for the asset.

2. Incidental costs of acquiring the CGT asset or that relate to the CGT event.

3. Costs of owing the asset. (This element is modified when calculating the reduced cost base.)

4. Capital costs to increase or preserve the value of your asset or to install or move it.

5. Capital costs of preserving or defending your ownership of or rights to your asset.

For CGT purposes, you have acquired two separate assets in relation to the property that you inherited from your relative.

The first CGT asset will be the share of the property that your relative originally acquired pre-CGT. The second CGT asset will be the remaining share of the property that was formerly owned by the one relative and that was passed to the remaining relative when they died post-CGT.

Interest acquired prior to 20 September 1985

If the deceased person acquired an asset or interest in an asset before 20 September 1985, the first element of the cost base and reduced cost base is the market value of the asset on the day the person died under section 128-15 of the ITAA 1997.

In your case, your relative acquired a 50% interest in the property post-CGT when the property was originally purchased. Therefore, the first element of the cost base is the market value of this interest on the day that your relative passed away.

Capital gain 

For the purpose of calculating your capital gain for this half interest in the property, once you have calculated your cost base (including any other elements of your cost base), you will be required to subtract this cost base from half of your total proceeds to calculate your capital gain.

Main residence exemption

As previously discussed, the main residence conditions are outline under section 118-195 of the ITAA 1997.

As you do not meet any of conditions outlined under section 118-195 of the ITAA 1997, you are not eligible for the full main residence exemption in relation to this share in the property. As the property was not occupied by any of the entities contained within category 2 of section 118-195 of the ITAA 1997 after your relative passed away, a partial main residence exemption will not apply either.

Interest acquired after 20 September 1985

If the deceased acquired an asset or an interest in an asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the cost base and reduced cost base of the asset on the day the person died under section 128-15 of the ITAA 1997.

In your case, your relative acquired the second 50% interest in the property on the date that the other relative passed away post-CGT. As this interest was originally acquired by the other relative prior to 20 September 1985, the first element of your relative's cost base will be the market value of the other relative's interest at the time of their passing.

Therefore, the first element of your cost base is your relative's cost base for the 50% interest on the date that they passed away.

Capital gain

For the purpose of calculating your capital gain for this half interest in the property, once you have calculated your cost base (including any other elements of your cost base) you will be required to subtract this cost base from half of your total proceeds to calculate you capital gain.

Main residence exemption

As previously discussed, the main residence conditions are outline under section 118-195 of the ITAA 1997.

As the property was used to produce assessable income and was not disposed of within two years of your relatives passing, you will not be eligible for a full main residence exemption.

However, you will be entitled to a partial exemption so that you can adjust your capital gain to take into account that the property was the main residence of your relative for part of their ownership period.

Partial Main Residence Calculation

Total capital gain

To determine your combined capital gain for both interests you will be required to combine the capital gain from each interest in the dwelling.

CGT discount

Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied:

a)      you are an individual, a trust or a complying superannuation entity

b)      a CGT event happens to an asset you own

c)      the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

d)      you acquired the asset at least 12 months before the CGT event, and

e)      you did not choose to use the indexation method.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.