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Edited version of your written advice
Authorisation Number: 1013009031026
Date of advice: 11 May 2016
Ruling
Subject: Capital gains tax - deceased estate - main residence exemption - absence rule
Question
Would the disposal of the deceased's property be exempt from capital gains tax?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The deceased died on in the 20xx-xx financial year.
The deceased purchased a property in the 19xx-xx financial year.
The deceased resided in the house up until the 20xx-xx financial year.
The deceased then moved into a nursing home.
For a short period of time the property remained vacant and did not produce assessable income in this period.
In the 20xx-xx, a decision was made to rent out the property, with tenants moving in the 20xx-xx financial year.
The property continued to be rented out up until the deceased's date of death.
The time from when the deceased moved out of the property until the date of deceased's death was over six years.
During this time the deceased continued to treat this property as their main residence under the absence rule.
The executor continued to rent out the property until the property was sold in the 20xx-xx financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 118-145 and
Income Tax Assessment Act 1997 section 118-195.
Reasons for decision
Deceased Estate - Main Residence Exemption
Subsection 118-195(1) of the ITAA 1997 states that if you own a dwelling in your capacity as trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you are exempt from tax on any capital gain made on the disposal of the property if:
• the property was acquired by the deceased before 20 September 1985, or
• the property was acquired by the deceased 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, and
• your ownership interest ends within 2 years of the deceased's death (the Commissioner has discretion to extend this period in certain circumstances).
However it is also noted in section 118-195, that in some cases the use of a dwelling to produce assessable income can be disregarded if the absence rule is applied under section 118-145 of the ITAA 1997.
Furthermore if you acquire a house as an executor or beneficiary of a deceased estate, rent it out and sell it within 2 years of the deceased's death. You can ignore the rental because the exemption does not require the house to be your main residence during the 2 years after the death.
Absence Rule
As a general rule, a dwelling is no longer your main residence once you stop living in it. However under section 118-145 of the ITAA 1997 you may choose to have a dwelling treated as your main residence for capital gains tax purposes even though you no longer live in it.
Under subsection 118-145(2) of the ITAA 1997, if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence.
The six-year period in relation to income-producing use need not be continuous. If there are intermittent periods of income-producing use during the one period of absence, those intermittent periods are aggregated in calculating whether the six year limitation has been exceeded.
However if you make this choice, you cannot treat any other dwelling as your main residence while you apply this section.
Conclusion
In your case, the property would be considered the main residence of the deceased just prior to their death under the absence rule, as even though the deceased's period of absence from the property was greater than six years, the aggregated intermittent periods of income-producing use were less than six years. Furthermore even though the property was producing assessable income just before the deceased's death, this element of eligibility can be disregarded if the absence rule is applied.
The property was then sold within the two years of the deceased's date of death. Even though the property was used to produce income after the deceased's date of death, this can be ignored as the exemption does not require the house to be your main residence during the 2 years after the death of the deceased.
Therefore on disposal of your ownership interest in the property, you would be entitled to the full main residence exemption.