Edited version of your written advice

Authorisation Number: 1012851421324

Date of advice: 3 August 2015

Ruling

Subject: Capital gains tax - deceased estate - main residence - income producing

Question 1:

Are you entitled to a full exemption from any capital gain realised on the disposal of the

deceased's dwelling?

Answer:

No.

Question 2: 

Are you entitled to a partial exemption from any capital gain realised on the disposal of the deceased's dwelling?

Answer

Yes.

Question 3

Is the rent received by the trustee assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts

The deceased and their partner acquired a dwelling prior to 20 September 1985.

The deceased passed away in the 20XX income year.

The deceased and their partner married after a number of years.

The dwelling was the deceased's and spouses main residence.

The dwelling was altered and separate units of accommodation were established.

Unit A was occupied by the deceased and spouse and unit B leased to tenants via a local real estate agent.

The local council issued two separate rates notices.

The title to the dwelling was not altered.

The deceased's spouse passed away in the 20YY income year.

The deceased continued to reside in unit A until they passed away in the 20XX income year.

The rental income was not included in the deceased's income tax returns.

Unit B was leased for a number of years.

The dwelling was sold and settlement occurred in 20ZZ.

You have provided a number of documents which forms part of and should be read in conjunction with this private ruling;

• Certificate of title volume

• Statement from real estate agent - owner ledger

• Valuation report

• Deposit release document

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200.

Reasons for decision

You make a capital gain or loss if a capital gains tax (CGT) event happens to a CGT asset that you own. Land and dwellings are CGT assets. A CGT event A1 is the most common CGT event, which occurs when you dispose of a CGT asset to someone else.  

If you inherit a deceased person's dwelling, you may be exempt or partially exempt from a CGT liability when a CGT event happens to it. The same exemptions may apply if a CGT event happens to a dwelling owned by a deceased estate of which you are the trustee. 

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. 

The capital gain or capital loss you make on the disposal of an asset is disregarded if you acquired the asset before 20 September 1985. 

Acquisition of the property 

When considering the exemptions that apply to a property that will be disposed of by the trustee of a deceased estate, we need to determine the date any ownership interest(s) have been acquired. 

From the information you have provided, the original ownership interests were acquired in the property before 20 September 1985 and they are considered to be pre CGT assets.  

However, when deceased's spouse died in 20YY, the deceased automatically acquired their spouse's ownership interest in the property. When a beneficiary acquires an asset from a deceased estate and that asset is pre-CGT, then the beneficiary is taken to have acquired that asset on the date that the deceased died. This means that where the deceased passes away after 20 September 1985 the pre-CGT asset becomes a post CGT asset in the hands of the beneficiary, and the beneficiary is taken to have acquired the post CGT portion of the asset at the market value of the asset on the date of the deceased's death. 

Therefore it is considered that the deceased had two ownership interests in the property, one part that is pre CGT and the other part that is post CGT. 

Main residence exemption of the dwelling by the Trustee

In considering whether any exemption from a capital gain liability applies we need to look at both ownership interests as different exemption conditions apply to pre CGT and post CGT assets. 

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the treatment of dwellings acquired from a deceased estate. It provides: 

For pre CGT assets where you have an ownership interest in a dwelling as a trustee of a deceased estate, any capital gain or loss made upon disposal of the dwelling is disregarded if the trustee's ownership interest ends within two years of the deceased's death.  

For post CGT assets which were the deceased's main residence just before they died and, at that time, were not being used for the purpose of producing assessable income, the trustee will be entitled to a full exemption if:  

• the trustee's ownership interest ends within two years of the deceased's death, or

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

• the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

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

 Ownership of the property as trustee of a deceased estate

Section 118-200 of the ITAA 1997 provides that you are only entitled to a partial main residence exemption (or no exemption) if you acquired your ownership interest in a dwelling as a beneficiary of a deceased estate, or if you owned the property as the trustee of a deceased estate, and section 118-195 of the ITAA 1997 does not apply.

However, as the trustee disposed of a post-CGT ownership interest in the dwelling and the dwelling was being used to produce assessable income, no exemption is available under the provisions available under section 118-195 of the ITAA 1997. When the post-CGT ownership interest in the dwelling is disposed of you will only be entitled to a partial main residence exemption.

Rent received is assessable income

Where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arm's length or otherwise, the amount received as rent or in respect of the lease or licence is assessable income. Please refer to IT 2167 for further information.