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Edited version of your written advice
Authorisation Number: 1012999714024
Date of advice: 21 April 2016
Ruling
Subject: Capital gains tax
Question
Is a full main residence exemption available under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a dwelling which was occupied by an individual who was granted, under a will, a right to occupy it for the whole period from the deceased's death until it was sold?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The deceased passed away in 20XX.
The deceased held property as a pre-CGT asset.
The will of the deceased states that one of the beneficiaries can continue living in the family home for a set number of years from the date of their death. After this time the property is to be sold.
The beneficiary with a right to occupy is living in the property and treating it as their main residence.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 102-20
Income Tax Assessment Act 1997 - Subsection 118-195(1)
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) 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.
Subsection 118-195(1) of the ITAA 1997 provides that a trustee of a deceased estate disregards a capital gain or loss from a dwelling that a deceased person acquired before 20 September 1985 if:
(1) the trustee's ownership interest ends within 2 years of the deceased's death, or
(2) from the deceased's death until the trustee's ownership interest ends, the dwelling was the main residence of one or more of the following persons:
(a) the spouse of the deceased immediately before death; or
(b) an individual who had the right to occupy the dwelling under the deceased's will; or
(c) an individual who brought about a CGT event where the ownership interest in the dwelling passed to the same individual as a beneficiary.
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).
In this case, you do not intend on selling the property within two years of the deceased's passing. Therefore, a full main residence exemption will only be available after this time if the dwelling is the main residence of one of the specified individuals during the trustee's ownership period.
You advise that the sale of the property should be exempt from CGT under item (2)(b) because one of the beneficiaries has a right to occupy the dwelling for three years under the deceased's will. ATO ID 2004/882 Capital Gains Tax: main residence exemption - deceased estate - right to occupy dwelling for limited period, states that for the purposes of determining whether a full exemption is available to a trustee under section 118-195 of the ITAA 1997, an individual only has a right to occupy a dwelling under the deceased's will for the period specified in the will. An exemption is not available for any part of the trustee's ownership period that a person who had a right to occupancy continues to occupy the dwelling in some other manner (for example, as a licensee or tenant).
In your situation, the deceased provided a right to occupy for one of the beneficiaries for a number of years from the date of their death. Therefore, provided the beneficiary continues to live in the property as their main residence, and it is sold before their right to occupy expires, the full main residence exemption will apply to exempt the estate from paying capital gains tax.