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Edited version of your written advice
Authorisation Number: 1012806421316
Ruling
Subject: CGT - deceased estate - partial exemption
Question 1
Does section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any part of the capital gain or loss made on disposal of the property?
Answer
Yes, but only to the extent that the property was a pre-CGT asset of the deceased.
Question 2
Does section 118-200 of the ITAA 1997 apply allowing a partial exemption for any part of the capital gain or loss made on disposal of the property?
Answer
Yes, but only to the extent that the property was a post-CGT asset of the deceased.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The deceased and E purchased a dwelling (the property), as an investment property, prior to 20 September 1985. The deceased and E never resided in the property.
E died after 20 September 1985, at which time the deceased became the sole owner of the property by way of surviving joint tenant.
The deceased died on XX September 20XX.
Probate was granted in December 20XX, appointing D, L and R as the executors of the Estate.
R had lived in the property as his/her main residence for many years prior to the deceased's death.
Under Clause 5 of the deceased's Will, R was provided with the right to occupy the property for the rest of his/her life or such earlier date that he elected to vacate or was unable to continue residing at the property due to physical or mental incapacity.
The right to occupancy was conditional upon R paying all outgoings, which he/she met.
Upon R ceasing to reside in the property, it would be held on trust for D and L absolutely.
R decided to relinquish his/her right of residency to occupy the property and agreed with D and L that the property should be sold.
The contract for sale of the property was signed in June 20XX and the property settled in August 20XX.
Following the sale of the property, R moved into another property held by the Estate.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 128
Income Tax Assessment Act 1997 subsection 128-15(1)
Income Tax Assessment Act 1997 subsection 128-15(2)
Income Tax Assessment Act 1997 subsection 128-15(3)
Income Tax Assessment Act 1997 subsection 128-15(4)
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
The capital gains tax (CGT) provisions that deal with the effect of death are located in Division 128 of the ITAA 1997.
When a person dies, the assets that make up their estate can:
• pass directly to a beneficiary (or beneficiaries), or
• pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
A legal personal representative can be either the executor of a deceased estate or an administrator appointed to wind up the estate if the person does not leave a will.
Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explains that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.
Subsection 128-15(3) of the ITAA 1997 provides that any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.
Cost base
Subsection 128-15(4) of the ITAA 1997 sets out modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary. Where an asset was acquired by the deceased before 1985, the first element of the assets cost base (or reduced cost base) for the legal personal representative of beneficiary is the market value on the date of death.
Application to your circumstances
In this case, the deceased and E purchased the property as joint tenants prior to 20 September 1985. The deceased and E each held a 50% ownership interest in the property.
The deceased inherited E's 50% share of the property in 20XX, upon E's death. As per subsection 128-15(4) of the ITAA 1997, the first element of cost base for the deceased's inherited share of the property will be the market value of the asset on the day E died.
Therefore, the deceased held both a pre and post CGT interest in the property just prior to their death.
Full exemption for deceased estate dwellings
As per subsection 118-195(1) ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling, or your ownership interest in it, is disregarded if:
(a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and
(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
Beneficiary or trustee of deceased estate acquiring interest | |||
Item |
One of these items is satisfied |
And also one of these items | |
1 |
the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income |
your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner | |
........... | |||
2 |
the deceased *acquired the *ownership interest before 20 September 1985 |
the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: | |
|
|
(a) |
the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or |
|
|
(b) |
an individual who had a right to occupy the dwelling under the deceased's will; or |
|
|
(c) |
if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual |
An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238) (ATO Interpretive Decision ATO ID 2003/109).
Application to your circumstances
The original 50% share of the property held by the deceased was acquired before 20 September 1985 (pre-CGT interest) and the dwelling was the main residence of an individual who had the right to occupy the dwelling under the deceased's will (R) from the deceased's death until the sale of the property.
As item 2 of column 2 and item 2(b) of column 3 have been satisfied, any capital gain made on the disposal of the pre-CGT interest in the property can be disregarded under section 118-195 if the ITAA 1995.
However, the inherited 50% share of the property was acquired after 20 September 1985 (post-CGT interest) and was not the main residence of the deceased just before they passed away. Neither item 1 nor item 2 in column 2 will be satisfied and therefore section 118-195 of the ITAA 1997 will not apply to disregard any capital gain or loss made on the post-CGT interest in the property.
Partial exemption for deceased estate dwellings
Where section 118-195 of the ITAA 1997 does not apply, section 118-200 of the ITAA 1997 may provide a partial exemption for deceased estate dwellings. You get only a partial exemption (or no exemption) if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate.
You calculate your capital gain or capital loss using the following formula:
Capital gain or capital loss amount x Non-main residence days
Total days
where:
non-main residence days is the sum of:
(a) 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
(b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.
total days is:
(a) 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
(b) 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
The executors are entitled to a partial main residence exemption in relation to the post-CGT interest in the property. The capital gain or loss should be calculated using the above formula.