Edited version of private advice

Authorisation Number: 1012643894784

Ruling

Subject: Capital gains tax

Questions and answers

1. Are you entitled to a full main residence exemption when you dispose of the dwelling?

No.

2. Will the Commissioner exercise discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period?

No.

3. Are you entitled to a partial main residence exemption when you dispose of the dwelling?

Yes.

4. Is the CGT discount method available to you?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

Relative X acquired the dwelling prior to 1985 and lived in the dwelling as their main residence until their death a number of years ago

Under Relative X's will, Relative Y and Relative Z were granted a right to occupy the dwelling until their deaths. You would then inherit the dwelling.

Relative Y lived in the dwelling until their death, and Relative Z lived in it until some years after that. Due to ill health, Relative Z moved in with you and formally relinquished their right to reside in the dwelling at this time. The trustee of Relative X's estate was notified in writing of this.

Relative Z died in the income year ended 30 June 20XX.

There was no election made by Relative Z, or the trustee of their estate, to continue to treat the dwelling as their main residence after they moved out of the dwelling.

The dwelling has been vacant since Relative Z moved out.

You became the registered owner of the dwelling in the income year ended 30 June 20XX. You have been paying all the expenses relating to this dwelling since this time.

You intend to sell the dwelling in the near future.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subdivision 115-A.

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-195.

Income Tax Assessment Act 1997 Section 118-200.

Reasons for decision

Capital gains tax (CGT) is the tax that you pay when a CGT event happens to a CGT asset, such as a dwelling. The most common CGT event is when you dispose of the asset to another entity (such as the disposal of a dwelling).

For CGT purposes, assets inherited through a deceased estate are taken to have been acquired on the date of the deceased's death.

In your case, you inherited the dwelling when Relative X passed. They acquired their ownership interest before 1985.

Therefore, your ownership interest in the dwelling is taken to have occurred on the date of death of Relative X. As you acquired the dwelling after 20 September 1985, your interest will be subject to CGT upon disposal of the dwelling.

CGT and inheriting a main residence

Where the deceased acquired the dwelling before 20 September 1985 and you subsequently acquire it as a beneficiary of the deceased estate, section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a capital gain made on disposal to be disregarded in the following circumstances:

• your ownership interest ends within two years of the deceased's death or a longer period allowed by the Commissioner; or

• from the deceased's death until your ownership interest ends the dwelling was the main residence of one or more of the following persons:

• the spouse of the deceased immediately before death; or

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

• the individual as a beneficiary if they are disposing of the dwelling as a beneficiary.

In your situation, your ownership interest in the dwelling will end when you sell the dwelling in the near future, and will be more than two years after Relative X's death.

The dwelling has been vacant since Relative Z moved out, from the time of Relative X's death until your ownership interest ends, the dwelling has not been the main residence of their spouse immediately before their death, or anyone who had a right to occupy the dwelling under the will, or yourself.

Therefore, under section 118-195 of the ITAA 1997, unless the Commissioner allows a longer period than the two years for your ownership period to end, you are not entitled to a full exemption from CGT on the disposal of the ownership interest in the dwelling you inherited from Relative X.

Commissioner's discretion

A trustee or beneficiary of a deceased estate may apply to the Commissioner to grant an extension of the two year time period, where the CGT event happens in the 2008-09 income year or later income years. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

• 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 (for example, 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 circumstances outside the beneficiary or trustee's control.

In exercising the discretion the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.

In your case, the Commissioner will not exercise their discretion to grant an extension of the two year time period, as it was the intention of Relative X that the dwelling be available for Relative Y and Relative Z to live in for the term of their lives, and the fact that you were unable to sell the dwelling within the two years because Relative Y and Relative Z were living in the dwelling is a reflection of Relative X's wishes as set out in their will.

Neither the ownership of the dwelling or the will was challenged, there have been no delays due to any complexity in the administration of the estate, there have been no unforseen serious personal circumstances and settlement has not been delayed or fallen through due to circumstances outside of your control.

Therefore, under section 118-195 of the ITAA 1997 you are not entitled to a full exemption from CGT on the disposal of the ownership interest in the dwelling you inherited from Relative X.

Partial main residence exemption

Where section 118-195 of the ITAA 1997 does not apply, you may be entitled to a partial exemption on any capital gain under section 118-200 of the ITAA 1997 when from the deceased's death until your ownership interest ends, the dwelling was the main residence of one or more of the following persons for part of your ownership period:

• the spouse of the deceased immediately before death; or

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

• the individual as a beneficiary if they are disposing of the dwelling as a beneficiary.

In your case, Relative X died a number of years ago. The dwelling was then occupied by Relative Y and Relative Z, who had a right to occupy the dwelling under Relative X's will, until Relative Z moved out.

Therefore, you are entitled to a partial main residence exemption for the period ending when Relative Z vacated the dwelling and formally relinquished their right to occupy the dwelling.

Calculating the partial main residence exemption

Where the deceased acquired the dwelling before 20 September 1985, you calculate your capital gain or capital loss as follows:

Capital gain/loss amount x (non-main residence days / total days)

Where:

• non-main residence days are the number of days in the period from the deceased's death until settlement of your contract for sale of the dwelling when it was not the main residence of one of the following: (1) a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased) (2) an individual who had a right to occupy the dwelling under the deceased's will, or (3) you, as a beneficiary, if you disposed of the dwelling as a beneficiary

• total days is the number of days from the deceased's death until you disposed of your ownership interest

In your case:

• the non-main residence days will be the number of days from the date when the dwelling was no longer Relative Z's main residence, until the date of settlement when you sell the dwelling

• the total days will be the number of days from the date of Relative X's death until the date of settlement when you sell the dwelling

It is important to note that the non-main residence days start when Relative Z moved out of the dwelling, rather than when Relative Z died, as no election made by Relative Z, or the trustee of their estate, to continue to treat the dwelling as their main residence after they moved out of the dwelling and therefore the absence provisions in section 118-145 of the ITAA 1997 do not apply.

Discount method

A discount capital gain is a capital gain that satisfies the requirements of subdivision 115-A of the ITAA 1997. In the case of an individual, the capital gain must result from a CGT event happening after 21 September 1999, be worked out without the cost base being indexed, and result from a CGT event happening to a CGT asset owned by the taxpayer for at least 12 months. The discount percentage is 50% if the gain is made by a resident individual.

In your case, you acquired the dwelling a number of years ago upon the death of Relative X. As you are an individual that has held the dwelling for more than 12 months, you therefore the requirements of subdivision 115-A of the ITAA 1997 and can apply the discount method when calculating your capital gain.