Edited version of private advice

Authorisation Number: 1051700437222

Date of advice: 25 June 2020

Ruling

Subject: Main residence exemption on a dwelling acquired from a deceased estate

Question

Can a trustee of a deceased estate get a full main residence exemption for the disposal of a dwelling acquired from the deceased estate under subsection 118-195(1) of the Income Tax Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the period:

Year ended 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

An individual (Deceased) died in March XXXX.

The Deceased's Will named two relatives and a friend as the Executors and Trustees (Trustee) of the Estate.

Probate of the Will was granted by the Court in October XXXX.

The Will was proved to the two relatives of the Deceased as the Trustee, with leave reserved to the friend of the Deceased.

The two children of the Deceased who are the only beneficiaries of Estate were minors at the time the deceased passed away.

Based on the terms of the Will, the children are considered to have a right to occupy the dwelling and use it as their main residence.

The property

The property is a dwelling which was acquired by the Deceased in October XXXX.

The dwelling was used by the Deceased and her family as their main residence up until the time of death and was never used to produce assessable income.

Under the terms of the Deceased's Will, the dwelling was occupied and used as main residence by the Deceased's children until the younger child moved out from the dwelling. During the period that the dwelling was used as the main residence of the children, it was never used to produce assessable income.

Soon after the younger child moved out, the property was put on the market for sale.

The property was sold and the Trustee made a capital gain from the disposal.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 128-15(4)

Reasons for decision

The Executors and Trustees (Trustee) is taken to have acquired the dwelling for its cost base or reduced cost base at the date of death of the Deceased - see item 1 in the table in subsection 128-15(4) of the ITAA 1997.

Any capital gain or capital loss made by the Trustee on the subsequent disposal of the dwelling may be disregarded if the conditions in subsection 118-195(1) of the ITAA 1997 are satisfied.

Subsection 118-195(1) provides that if a dwelling is transferred to you as trustee of a deceased estate and you make a capital gain or capital loss from a CGT event that later happens to the dwelling, you can disregard the gain or loss if:

·                     the deceased acquired the dwelling on or after 20 September 1985

·                     the dwelling was the deceased's main residence just before their death and was not then being used for income producing purposes, and

·                     your ownership interest in the dwelling ends within 2 years of the deceased's death.

Where a trustee's ownership interest in a dwelling ends more than 2 years after the date of the deceased's death, a full main residence exemption will only be available if the dwelling is the main residence of an eligible person such as the spouse of the deceased immediately before death; and/or an individual who has a right to occupy the dwelling under the deceased's will.

Relevantly, an issue arises as to whether the two children of the Deceased have a right to occupy the dwelling under the Deceased's Will.

An individual would be considered to occupy a dwelling under the Deceased's Will if it was in accordance with the terms of the Will. This would also be the case if it was in pursuance of the Will or under the authority of the Will - ATO ID 2003/109.

The terms of the Deceased's Will indicate that the overall intention of the testatrix was to provide for the two children including a place for them to live.

Under the terms of the Will, the children of the Deceased are considered to have a right to occupy the dwelling for the purposes of subsection 118-195(1) of the ITAA 1997.

Therefore, the Trustee of the Estate can get a full main residence exemption under subsection 118-195(1) for the disposal of the dwelling which the Trustee acquired from the deceased estate.