Edited version of your written advice

Authorisation Number: 1012699711467

Ruling

Subject: Capital gains tax

Question and answer

1. Can the executors of the estate apply the main residence exemption to the gain made on the sale of Property B?

No.

2. Will the Commissioner extend the 2 year period in item 1 of the table in subsection 118-195 of the Income Tax Assessment Act 1997 to allow the whole of the capital gain made on the sale of Property B to be disregarded?

No.

3. If the Commissioner does not exercise his discretion to extend the period for the purposes of item 1 of the table in subsection 118-195(1) of the Income Tax Assessment Act 1997 is the estate entitled to a partial exemption pursuant to section 118-200 of the Income Tax Assessment Act 1997 in respect to the gain made on the sale of Property B?

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

The deceased died a number of years ago.

The deceased had two properties, Property A and Property B.

Property A was inherited by the deceased from their spouse prior to 1985.

Property A was the deceased's main residence for many years.

Property B was purchased after 1985 and the deceased intended to use Property B as their main residence.

The deceased moved into Property B 9 months after it was purchased.

The deceased took her/his time to move in and carried out some improvements prior to moving in.

Property A remained vacant when the deceased was not living in the property.

Property B remained vacant when the deceased was not living in the property.

The deceased moved from property to property at her/his fancy and whim.

The deceased would spend approximately in total 6 months at each property.

Property A had a large garden and required considerable time to maintain them.

Property A received all mail sent to the deceased as Property B's mailbox was not considered to be safe.

All utility bills and other mail associated with Property B were sent to property A.

Property A was listed as the deceased's residential address on both the state and federal electoral rolls.

The deceased would host visits from their family from time to time at Property B.

Property A housed substantial amounts of the deceased's personal files.

Property A remained furnished.

Property B consisted new furniture and some items from property A.

The deceased moved to Property A on a permanent basis 7 years prior to their death to receive medical care at Property A.

The deceased was unable to return to Property B 3 years before they died as they were bed ridden.

In your previous request for a private ruling, you stated that the deceased lived at Property A up until their death. Your specific question in that application was that you were seeking an "extension of the exemption period for the payment of capital gains tax on the sale of a property which was the deceased's main residence at the time of death".

In later correspondence, you requested that the Commissioner rescind the discretion where the Commissioner had allowed an extension of the two year time period as requested by you, as since that discretion was granted, Property A had been sold and a capital loss had been incurred.

In that correspondence, you continued to refer to Property A as the deceased's main residence. You also stated that "the last estate property to sell is a holiday unit that my parent had acquired in XXXX and will definitely be sold with a capital gain as the value has increased substantially since then".

In later correspondence, you again continued to refer to property A as the deceased's main residence.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-20

Income Tax assessment Act 1997 Section 118-10

Income tax Assessment Act 1997 Section 118-195

Income tax Assessment Act 1997 Section 118-200

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

A taxpayer makes a capital gain if a their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.

A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.

Main residence

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

Whether a dwelling is a taxpayer's sole or principal residence is an issue which depends on the facts in each case. Some factors may include, but are not limited to: 

• the length of time the taxpayer has lived in the dwelling

• the place of residence of the taxpayers family

• whether the taxpayer has moved his or her personal belongings into the dwelling

• the address to which the taxpayer has his or her mail delivered

• the taxpayer's address on the electoral roll

• the connection of services such as telephone, gas and electricity, and

• the taxpayer's intention in occupying the dwelling.

A mere intention to occupy a dwelling as your main residence without actually doing so is not sufficient to get the exemption.

To establish a dwelling as a main residence you must move in as soon as practicable. The term as soon as practicable is used in section 118-135 of the ITAA 1997 to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the property became your main residence on the date you acquired it (that is, you would have to physically move in on that day).

Application to your circumstances

In this case the deceased did not move into Property B as soon as practical. The deceased carried out some improvements to the property prior to staying here.

The deceased moved between Property B and Property A at their own fancy and whim, spending approximately a total of 6 months at each property each year.

The deceased had all their mail delivered to Property A including the mail associated with Property B.

The deceased listed Property A as their residential address on both the state and federal electoral rolls.

The deceased did not stay at Property B in the last seven years of their life, as they were house bound in Property A due to health reasons.

In all previous correspondence to the ATO, you referred to Property A as the deceased's main residence and Property B as the holiday unit.

The facts of this case indicate that it was the deceased's intention to treat Property B as a holiday unit rather than their main residence, due to the fact that they came to and from the property as they chose, they did not have their mail delivered to the property, they continued to list Property A property as their address on the electoral role, they retained substantial personal belongings at Property A and when they were unable to leave the house, they remained permanently at Property A. At no time did it appear to be the deceased's intention to give up Property A as being their main residence.

Therefore, Property B was not the main residence of the deceased and therefore no main residence exemption applies.

2 year discretion

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, then 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: 

• the property was the deceased's main residence just prior to their death

• it was not being used to produce assessable income at this time, and

• Your ownership interest ends within 2 years of 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).

Application to your circumstances

As Property B was not the main residence of the deceased prior to their death, the Commissioner cannot exercise the discretion to extend the 2 year time period to exempt the capital gain made on the sale of the property, as the exemption is not available.

The absence rule

The absence rule under section 118-200 of the ITAA 1997 allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence.

This choice needs to be made only for the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it.

If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice for the income year they enter into the contract to sell the first of those two dwellings.

If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period.

Application to your circumstances

The absence rule does not apply in your case, as the deceased did not cease to live in Property A, it remained their main residence at all times.

Partial exemption

There is nothing in the CGT legislation that would apply in your case to allow a partial main residence exemption to be available in regards to Property B.

Conclusion

Property B was not the main residence of the deceased. There is no full or partial main residence exemption available in regards to Property B. The capital gain made when the property was sold is subject to CGT.

Please note that the fact that the deceased inherited Property A from their late spouse and purchased Property B themselves, makes no difference to the application of the CGT main residence rules.