Edited version of your written advice

Authorisation Number: 1012983982310

Date of advice: 14 March 2016

Ruling

Subject: Capital gains tax

Question 1

Are you entitled to a main residence partial exemption on the transfer of the property you acquired through a deceased estate under section 118-200 and section 118-205 of the Income Tax Assessment Act (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015.

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your parents owned a property as joint tenants which they acquired before 20 September 1985.

The property was their principal place of residence until they passed away.

Your parent passed away after 20 September 1985. Your surviving parent inherited their ownership interest in the property at this time.

You and your sibling inherited the property when your surviving parent passed away sometime later.

You inherited 50% each.

You and your sibling rented out the property for a number of years.

Sometime later, the existing dwelling was demolished and the land was subdivided. Separate units were constructed on each lot.

You transferred part of your ownership interest in one of the units to your sibling's spouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 102-20,

Income Tax Assessment Act 1997 - Section 128-20,

Income Tax Assessment Act 1997 - Section 118-195 and

Income Tax Assessment Act 1997 - Section 118-200.

Reasons for decision

Section 102-20 advises that capital gains tax (CGT) is incurred when a CGT event takes place and either a capital gain or a capital loss results. Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

The most common CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a CGT asset from one party to another.

CGT and deceased estates

Section 128-20 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the legal personal representative or beneficiary, but CGT may apply when the asset is subsequently disposed of. Assets forming part of the deceased estate are deemed to have been acquired by the representative or the beneficiary at the date of death of the deceased.

You therefore acquired your ownership interest in the property on the date your surviving parent passed away. As your parents were joint tenants, your parent is considered to have had an interest in the property until he/she passed away and then your surviving parent is considered to have had two interests in the property; that being her/his original interest and the interest she/he acquired upon your parent's passing. You and your sibling acquired joint ownership of these interests on the date of your surviving parent's passing, and any capital gain or loss needs to be calculated separately for each asset.

You are not eligible for a full main residence exemption, however section 118-200 of the ITAA 1997 allows for a partial exemption if:

(a) you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) section 118-195 of the ITAA 1997 does not apply.

Application to your circumstances

You and your sibling demolished the existing dwelling that was the deceased's main residence, subdivided the existing land into separate lots and constructed separate units on each subdivided lot.

The partial exemption in section 118-200 of the ITAA 1997 only applies to dwellings that have been acquired as a beneficiary from a deceased estate. If that dwelling is demolished the partial exemption cannot apply to any subsequent CGT events involving new dwellings as these dwellings have not been acquired from the deceased estate. Therefore, the units on the land are not deemed to have been acquired from the deceased estate and the partial exemption does not apply.

There are no other exemptions or partial exemptions that will apply to any capital gain or capital loss made from the disposal of the replacement dwelling.