Edited version of private advice

Authorisation Number: 1051655424435

Date of advice: 09 April 2020

Ruling

Subject: Deceased estate - main residence- adjoining block- CGT implications

Question

Is any capital gain or capital loss you make from the sale of the property at XXXX (the vacant land) disregarded?

Answer

No

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The assets of the deceased included the following two properties:

Property One

The deceased was the sole owner of a main residence (the dwelling). This property was originally purchased with XXXX prior to XXXX. The dwelling was used as the main residence at all times during the period of ownership.

Property Two

The deceased purchased an adjoining block of land (vacant land) to Property One.

Both properties retained individual titles.

When XXXX died on or around September 1995, the deceased became the sole owner of her main residence (the dwelling) and the adjoining block of vacant land.

Neither property was ever used by the deceased for income producing purposes.

The deceased died.

Probate was granted.

The deceased's will appointed Executors. The will also appointed the residuary estate upon Trust to beneficiaries.

Executors of the deceased estate entered into contracts to sell both properties one and two. The dwelling was sold earlier in XXXX prior to the sale of the vacant land, which settled in XXXX

The vacant land was sold, following a contract being signed and settlement occurred.

The contracts to sell properties one and two both settled less than two years after the date of death of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Section 128-50.

Income Tax Assessment Act 1997Section 128-15.

Reasons for decision

Real estate (including vacant land and land on which there is a dwelling) is a CGT asset. As a general rule, an assessable capital gain or loss can only be made on a CGT asset acquired on or after 20 September 1985 (post-CGT assets). In most cases, any capital gain or loss made on a CGT asset acquired before 20 September 1985 (pre-CGT assets) is disregarded.

For CGT purposes, if you acquire real estate as the trustee of a deceased estate, you are taken to have acquired the real estate on the day the deceased person died. A deceased estate is a trust and remains so until administration of the estate is complete. Generally, administration is complete when the net income of the estate has been established and all of the assets and income of the estate have been distributed to the beneficiaries.

The person nominated under the will to wind up the affairs of the deceased person is the executor and trustee of the deceased estate. Once probate of the deceased's will has been granted, the executor is free to call up the deceased's assets and liabilities, and to pay the debts and other expenses of the deceased estate.

The net income of the deceased estate is established by the executor after all the income and expenses of the estate have been accounted for.

The assessable income of a deceased estate may include capital gains if any capital gains tax (CGT) assets are disposed of by the executor as part of the administration of the estate.

Property One: XXXX- the dwelling - main residence

In certain circumstances you're exempted from capital gains tax (CGT) on an inherited dwelling if you dispose of your ownership interest within two years of the person's death.

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if you have an ownership interest in the dwelling as trustee of the deceased estate and you dispose of that dwelling in your capacity as trustee, you can disregard any capital gain or loss made from the disposal if you disposed of your ownership interest within two years of the person's death - that is, if the dwelling was sold under a contract and settlement occurred within two years.

This is the situation that occurred in relation to Property One XXX.

The dwelling was the main residence of the deceased, who technically had two interests in the dwelling, but they were both exempt. The 'purchased' interest was pre-CGT in the deceased's hands. The 'inherited' interest (from XXXX) was post-CGT. As above, the dwelling was the deceased's main residence, was not used to produce assessable income, it was sold within two years of death and therefore any capital gain or loss is disregarded.

Main residence exemption and land adjacent to your dwelling

Generally, you can ignore a capital gain or capital loss you make from a CGT event that happens to a dwelling that is your main residence (section 118-110 of the ITAA 1997).

The main residence exemption can include land adjacent to the dwelling to the extent that it is used primarily for private or domestic purposes in association with the dwelling. The maximum area of land that is covered by the main residence exemption (including the area under the dwelling) must not exceed two hectares (section 118-120 of the ITAA 1997).

If you dispose of adjacent land to the same person at the same time as you dispose of your main residence, the exemption extends to the adjacent land.

If you dispose of adjacent land at a different time than you dispose of your main residence, the exemption does not apply to the adjacent land (section 118-165 of the ITAA 1997).

In your case, you will not be able to apply the main residence exemption to the vacant block of land, as it was sold separately from the dwelling.

Whilst we appreciate your circumstances, unfortunately there are no provisions within the taxation legislation that allows the Commissioner the discretion to disregard the capital gain.

Property Two: XXXX- vacant land

The vacant land was originally purchased prior to 20 September 1985 with the deceased's spouse. The deceased's spouse passed away in the XXXX financial year and the deceased became the sole owner of the vacant land.

Property two was vacant land from the time it was acquired by the deceased until the time you disposed of it in your capacity as executor of the deceased's estate. Therefore, no exemption is available that would allow you to disregard any capital gain made from the disposal of property two.

Special rules apply for joint tenants (section 108-7 of the ITAA 1997). Individuals who own an asset as joints tenants are deemed to own a separate asset, being an equal share in the jointly owned asset. If joint tenants own a CGT asset and one of them passes away, the interest of the deceased joint tenant in the asset is deemed to be acquired by the surviving joint tenant. The date of the deemed acquisition of the interest is the date the deceased joint tenant passed away (section 128-50 of the ITAA 1997).

If a taxpayer purchased a CGT asset before 20 September 1985 (pre-CGT) as a joint tenant, the taxpayer has a half interest in the CGT asset which is pre-CGT. The taxpayer will receive the other half interest in the CGT asset on the date of death of the other joint tenant. If the date of death is after 20 September 1985, then the taxpayer will have a half interest in the CGT asset which is post-CGT.

If the deceased acquired their interest in a CGT asset before 20 September 1985, the first element of the cost base or reduced cost base of the surviving joint tenant is the market value of the asset on the day the person died (section 128-15 of the ITAA 1997).

Therefore, there are two different CGT calculations in regards to the vacant adjoining property.

The deceased acquired two separate interests in the property, the first interest being a half interest when the XXXX purchased the property as a joint tenant with the spouse before 20 September 1985 (pre-CGT). The second interest was a half interest acquired after 19 September 1985 on the death of the spouse in XXXX (post-CGT). Each of these interests is considered to be a separate CGT asset and must be dealt with separately (Taxation Determination TD 2000/31).

As you have two separate interests in the vacant block - 50% pre CGT and 50% post CGT, and you cannot apply the main residence exemption, you cannot disregard any capital gain or capital loss made on the sale of the vacant block.

Therefore, the deceased holds an original interest as a pre CGT asset and the inherited interest as a post CGT asset. For the estate, the two assets become one because it acquires both interests as at the date of the deceased's death. But the cost bases are worked out separately before they become one asset.