Edited version of your written advice

Authorisation Number: 1012865442771

Date of advice: 27 August 2015

Ruling

Subject: Capital gains tax - deceased estate - main residence

Question 1:

Will you be entitled to fully disregard the capital gain made on the disposal of the property in accordance with section 118-195 of the Income Tax Assessment Act 1997?

Answer:

No.

Question 2:

Will you be entitled to partially disregard the capital gain made on the disposal of the property in accordance with section 118-200 of the Income Tax Assessment Act 1997?

Answer:

Yes.

This ruling applies for the following period:

Income year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

The deceased purchased the property, with settlement occurring after 20 September 1985.

The deceased was unable to look after their own affairs and had been under an Administration Order which you had been initially appointed to manage, and which was later handed to the State Trustees to administer.

The deceased's intention had been for the property to be their main residence, however it had to be rented out for several periods during their ownership period due to the nature of their medical condition which required them to travel interstate on an ongoing basis for medical treatment. When they were ill they had to go interstate for hospitalisation and to enable you to assist them.

The property was rented out during the 20WW-XX income year and was rented out continuously until the 20YY-ZZ income year.

The deceased passed away a number of years later.

For the purposes of this private ruling, the Public Trustees have made the absence choice on behalf of the deceased for the six year period commencing from the date the property was rented out.

The deceased bequeathed the property to you in their will and you entered into a contract to dispose of the property a number of years after the deceased passed away, with the settlement occurring a number of months later.

You have provided copies of a number of documents, which should be read in conjunction with and forms part of the scheme of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-145.

Income Tax Assessment Act 1997 Section 118-192

Income Tax Assessment Act 1997 Subsection 118-195(1)

Income Tax Assessment Act 1997 Section 118-200

Reasons for decision

Full exemption on the disposal of an inherited dwelling

The most common capital gains tax (CGT) event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal, or if there is no contract when the change of ownership occurs.

In certain circumstances, a capital gain or capital loss from a CGT event that happens in relation to a dwelling is ignored if the taxpayer is an individual and the ownership interest in the dwelling passed to them as a beneficiary in a deceased estate.

A full exemption is available if the dwelling was acquired by the deceased after 20 September 1985 and the following conditions are met:

• the dwelling is disposed of, and settlement occurs, within two years of the deceased passing away

• the dwelling was the deceased's main residence just before they passed away; and

• the dwelling was not used for income producing purposes at that time.

However, if the full exemption for beneficiaries of deceased estates does not apply, the beneficiary may be entitled to a partial exemption.

Continuing main residence exemption

A person can choose to continue to treat a dwelling as their main residence even though it has ceased to be so under the absence provisions (the absence choice).

This choice applies for six years if the dwelling is used to produce assessable income. If the dwelling has not been used to produce income it can be treated as the person's main residence indefinitely. 

If the person chooses to treat a dwelling as their main residence they cannot treat any other dwelling they own as their main residence.

Application to your situation

In your case, the deceased had resided in the property for a number of years before moving out, with the property then being used to produce income.

The Public Trustees have elected to continue to treat the property as the deceased's main residence from when the property was rented out. As the property was rented out for more than six years, the absence choice will apply up to six years from the date the property was rented out. The period after the six years has passed is not covered by the absence choice and the property is therefore not viewed as the deceased's main residence after the six year period has expired.

Therefore, property was not the deceased's main residence just before they passed away and was used to produce assessable income. Accordingly you will not be entitled to a full exemption on the disposal of the property and the capital gain made on the disposal of the property cannot be fully disregarded.

However, as you are not entitled to a full exemption on the disposal of the property we have considered your entitlement to partially disregard the capital gain made on the disposal of the property.

Partial exemption on the disposal of an inherited dwelling

Only a partial exemption (or no exemption) is available if the conditions for the full exemption as outlined above are not satisfied.

In such cases, the amount of the capital gain is apportioned by working out the number of non-main residence days as compared to the total ownership days that are relevant for main residence exemption purposes.

You calculate your capital gain using the following formula:

Capital gain X Non-main residence days

Total days

Capital gain is the amount that you made from the disposal of the property. 

Non main residence days are the number of days that the property was not the main residence of either the deceased or the spouse of the deceased.

Total days are the number of days from when the deceased acquired the property until you disposed of it.

Special rules for first use to produce income

If a person acquired their main residence on or after 20 September 1985, and they died and it passes to you as a beneficiary (or as trustee of their estate) after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if: 

• you first used the dwelling to produce income after 20 August 1996

• when a CGT event happens to the dwelling, you would get only a partial exemption because you used the dwelling to produce assessable income during the period you owned it

• you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income, and

• the CGT event did not happen to the dwelling within two years of the deceased's date of death.  

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have choice.

Application to your situation

In this case, the property was not the deceased's main residence when they passed away and it had been used to produce income. You are not entitled to a full main residence exemption because once the rental period for the property exceeded the six year period, you are only eligible for a partial exemption on the disposal of the property.

As the conditions for the first use to produce income applies in this case, the first element of the cost base of the property and the number of days in the non-main residence days and total days will reflect the application of this rule to your situation.

To calculate the capital gain made on the disposal of the property, the formula as outlined above will be used where:

• your capital gain will be the difference between your capital proceeds (the amount you received when you sold the property) and the cost base of the property.

As the relevant conditions listed above for the special rules for first use to produce income have been met, the first element of the cost base of the property will be its market value on the date when it was first used to produce income,

• the non-main residence days will be the number of days from the date when the main residence days covered by the absence choice ceases, until the date that settlement on the disposal of the property occurred; and

• The total days will be the number of days from when the property was first used to produce income until the date that settlement on the disposal of the property occurred.

Note: If you meet the conditions for the 50% CGT discount as outlined in Division 115 of the ITAA 1997, the capital gain made on the disposal of the property can be reduced by 50%.