Edited version of private advice

Authorisation Number: 1051576146265

Date of advice: 21 October 2019

Ruling

Subject: Capital gains tax - deceased estate - dwelling inherited from deceased estate

Question 1

Did the client acquire their ownership interest in the property on the date their parent died?

Answer

Yes

Question 2

Are you entitled to a full CGT exemption on the sale of the dwelling?

Answer

No

This ruling applies for the following period.

Year ending 30June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The property was purchased pre-CGT by the client's parent.

The client's parent passed away in 199X.

The Will of the client's parent left a life interest for the client's child with a clause that if they ever relinquished their life interest or passed away then the property was to be sold and the money given to the client.

The title for the property was transferred to the client in the middle of 199X.

The client's child relinquished their life interest in the property in 201X.

The sale contract for the property was entered into on the same day as the life interest was relinquished, under instruction from the trustee of the estate of the client.

Settlement was completed on some weeks later.

A deed of family arrangement was entered into by the X beneficiaries of the Will, the deed states how the proceeds from both parent's estates will be handled for the distribution of monies:

• Payment of outstanding debits for both estates.
• A distribution was made to their child as compensation for improvement costs.
• An amount was to be set aside to pay any CGT liability on the sale of the property.
• The remaining amount was split X ways and distributed to the beneficiaries.
• Any amount left over from the CGT dealings with the ATO will be distributed to the X beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 118-205

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Detailed Reasoning

Full CGT main residence exemption

Under section 118-195 of the ITAA 1997, a capital gain or capital loss that you make from CGT event that happens to a dwelling (or your ownership interest in it) is disregarded if you are an individual and the interest passed to you as a beneficiary in a deceased estate or you owned it as the trustee of a deceased estate, and:

• The deceased acquired their ownership interest in the dwelling prior to 20 September 1985, or
• The deceased acquired their ownership interest on or after 20 September 1985 and the dwelling was their main residence just before they passed away and was not then being used to produce income;

And either one of the following conditions also applies:

• Your ownership interest ends within two years of the deceased's death, or within a longer period allowed by the Commissioner; or
• The dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:
  1. The spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or
  2. An individual who had a right to occupy the dwelling under the deceased's Will; or
  3. If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary-that individual.

Application to your circumstances

In your case, the client acquired the ownership interest in the dwelling on May 199X when their parent passed away. This date is after 20 September 1985, however the dwelling was not the client's main residence just before they passed away.

Therefore you will not be eligible for a full main residence exemption under section 118-195 of the ITAA 1997, because you do not satisfy the condition that the deceased either acquired their ownership interest before 20 September 1985, or they acquired it after 20 September 1985 and the dwelling was their main residence.

Partial exemption for deceased estate dwellings

If you are not entitled to a full exemption under section 118-195 of the ITAA 1997, you may be entitled to a partial exemption under section 118-200 of the ITAA 1997 if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary or as the trustee of a deceased estate.

In these circumstances, you calculate your capital gain or capital loss using the formula:

[Capital gain or Capital loss × Non main residence days] ÷ Total days

Non main residence days

Non main residence days for the purposes of this section are the sum of:

• If the deceased acquired their ownership interest in the dwelling on or after 20 September 1985, the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and
• The number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of:
• The spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or
• An individual who had a right to occupy the dwelling under the deceased's Will; or
• If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary -that individual

Total days

If the deceased acquired their ownership interest on or after 20 September 1985, the 'total days' are the number of days from when the deceased acquired the dwelling until your ownership interest ends.

You can adjust the formula by ignoring any non-main residence days and total days in the period from the deceased's death until your ownership interest ended, if:

• The deceased acquired the ownership interest on or after 20 September 1985; and
• Your ownership interest ends within:
• 2 years of the deceased's death; or
• A longer period allowed by the Commissioner; and
• You get a more favourable result by doing so.

Application to your circumstances

Non main residence days

For the purposes of this section you calculate the non-main residence days by calculating the number of days from when the client acquired their ownership interest until they passed away, plus the number of days in the period from when the client passed away until you sold the property, where the dwelling was not the main residence of:

• The spouse of the deceased immediately before the death; or
• An individual who had a right to occupy the dwelling under the deceased's Will; or
• If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual

In your case, the client acquired their ownership interest in the dwelling on the day their parent passed away. The dwelling was occupied by the client's child under the terms of the client's parent's Will from then until the client's child relinquished their life interest.

As you acquired your ownership interest from the client (rather than their parent), the calculation under section 118-200 must be based on whether the dwelling was occupied by the client's spouse, or a beneficiary or person who had a right to occupy the dwelling under the terms of the client's Will.

In your case, the dwelling was never the main residence of the client and has been occupied by the client's child as a life interest from the client's parent Will until the life interest was relinquished by the client's child in a deed of family arrangement so the house could be sold.

None of the relevant categories of people have occupied the dwelling under the terms of the client's Will.

Therefore, the non-main residence days will include the entire period from when the client acquired their ownership interest until they passed away plus the number of days between when the client passed away until your ownership interest ended.

The total days will be the number of days from when the client acquired the dwelling until your ownership interest ended.

Because the client acquired their ownership interest after 20 September 1985 and you disposed of your interest within 2 years of passing away, you may adjust the formula by ignoring any non-main residence days and total days in the period from the date when the client passed away until your ownership interest ended, if you get a more favourable result by doing so.

Adjustment if dwelling inherited from deceased individual

The formula in section 118-200 of the ITAA 1997 must be adjusted under section 118-205 of the ITAA 1997 if the (most recently) deceased acquired the dwelling after 20 September 1985 as a beneficiary or trustee of deceased estate.

This modification adjusts the formula to take account of periods where the dwelling was the main residence of individuals earlier in the inheritance chain.

Where the most recently deceased acquired ownership of the dwelling after 20 September 1985 as the beneficiary or trustee of a deceased estate, you add to the number of total days the fewer of:

• The number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and
• The number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

You add to the number of 'non-main residence' days in the period that you have chosen above (ie. the lesser of the two periods), the number of days during that period that the dwelling was not the main residence of one or more of:

1. An individual who owned the dwelling at the time of the individual's death; or
2. An individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or
3. An individual who had a right to occupy the dwelling under a Will; or
4. An individual to whom an ownership interest in the dwelling passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

Application to your circumstances

In your case, because the client acquired their ownership interest in the dwelling from the estate of their parent, in order to modify the formula you must calculate:

• The number of days between 20 September 1985 and the day when the client acquired their ownership interest, and
• The number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary or as trustee of a deceased estate and the day when the client acquired their ownership interest.

In your case, an ownership interest in the dwelling was not acquired on or after 20 September 1985 in circumstances other than as a trustee or beneficiary of a deceased estate.

Because the second option results in a calculation of zero days, you would add the number of days in the period between 20 September 1985 and the date of the client's parent's passing to the number of total days.

Once you have determined the relevant period, you then calculate the number of days during that period where the dwelling was not the main residence of one of the individuals listed.

In your case, the dwelling was the main residence of the client's parent who owned the dwelling at the time they passed away, so you would not add anything to the number of non-main residence days in the section 118-200 formula.

CGT cost base

If you acquire a CGT asset as the beneficiary or trustee of a deceased estate that the deceased person acquired on or after 20 September 1985 and the dwelling was not their main residence at the time they passed away, the first element of the cost base for the asset is the deceased persons cost base for the asset on the day they passed away.

A beneficiary can include in the cost base or reduced cost base of an asset any expenditure that the LPR of the deceased estate would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

For example: if you passed away on 1 May 1995 owning land and on 15 June 1995 your legal personal representative paid $500 council rates for the land and the on 31 July 1995 your representative transferred the land to a beneficiary in your estate, (who is taken to have acquired it on 1 May 1995), the beneficiary can include the $500 in the third element of the cost base of the land. It is included on 15 June 1995.

Application to your circumstances

Because the client acquired their ownership interest in the dwelling after 20 September 1985 and the dwelling was not their main residence before they passed away, you are taken to have acquired the dwelling for the client's cost base on the day their parent passed away, which has as it 1^st element the market value of the property at the date of their parent's death.

You may be able to include expenditure incurred by the LPR of the client's parent's estate in relation to the dwelling in the client's cost base for the dwelling, if the LPR would have been able to include that expenditure in the cost base at the time the asset passed to the client.

Conclusion

The dwelling was acquired by the client after 20 September 1985 and was not their main residence before they passed away; therefore you are not entitled to a full CGT exemption on the disposal of the property.

Because the client acquired ownership of the dwelling from a deceased estate, you will be entitled to a partial exemption to take account of the period between 20 September 1985 and the date of the client's parent's passing where the dwelling was the main residence of the client's parent.

The 1^st element of the cost base for the asset will be the client's costs base as at the date that their parent passed away, plus any other expenditure which the LPR of their parent's estate would have been able to include in the cost base when the asset passed to the client.