Edited version of private advice

Authorisation Number: 1051726449311

Date of advice: 12 August 2020

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Are you entitled to a full main residence exemption on the disposal of Dwelling A?

Answer 1

Yes

Question 2

Are you entitled to an exemption from capital gains tax on the disposal of Dwelling B?

Answer 2

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A purchased a Property in 19XX. The Property consisted of a house with several rooms (Dwelling A), which was their main residence from the date of acquisition until their death in 20XX.

The Property also had a self-contained flat (Dwelling B).

During Person A's period of ownership, they used Dwelling B to produce rental income.

In 20XX, Dwelling B ceased to be used to produce income

Person A's spouse, Person B, was the sole beneficiary of their Estate under their Will

Following the death of Person A, their spouse, Person B, remained living at The Property in Dwelling A until their death.

Person B died in 20XX.

Probate was granted for Person B in 20XX. Letters of administration were granted for Person A in 20XX.

Settlement of the Property occurred on xx/xxx/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 section 112-30(1)

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120(2)

Income Tax Assessment Act 1997 section 118-195(1)

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Question 1

Summary

The sale of the dwelling (Dwelling A) where the Deceased resided will be fully exempt from CGT as it was the main residence of the deceased at the time of his death and was sold within 2 years of that date.

Detailed reasoning

Where the Trustee of a deceased estate receives an ownership interest in a dwelling, any capital gains or losses made on the sale of the ownership interest can be disregarded provided certain conditions are met. Where the interest in a dwelling was acquired after 20 September 1985, section 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)has the following conditions:

a)    The interest must be disposed of within 2 years of the death of the deceased

b)    The dwelling must have been the main residence of and not being used to produce income just before the deceased's death.

In your situation, the above conditions have been met and there will therefore be no capital gains incurred on the disposal of Dwelling A.

The main residence exemption extends to a maximum of two hectares of land adjacent to the dwelling, including the area of the land on which the dwelling is built (exempt land). Adjacent land is only included in the two-hectare exemption if the land is used primarily for private or domestic use and not to earn assessable income.

Question 2

Summary

You are not eligible for an exemption from capital gains tax on the disposal of Dwelling B.

Detailed reasoning

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset.You will make a capital gain if the capital proceeds from the disposal of a CGT asset are more than the cost base.

The main residence exemption applies to one dwelling only. In certain circumstances, two units of accommodation may be considered one dwelling where they are used together as one place of residence or abode. Whether two units of accommodation are one dwelling is a matter of fact. In your circumstance, the self-contained flat was rented out on a commercial basis. It was not used together with Dwelling A as one place of residence or abode. The deceased never lived in the flat during his ownership period. The self-contained flat is therefore a separate CGT asset and the sale of the flat will not be exempt from capital gains tax.

Apportionment

If you acquire a CGT asset because of a transaction and only part of the expenditure you incurred under the transaction relates to the acquisition of the asset, the first element of your cost base of the asset is that part of the expenditure that is reasonably attributable to the acquisition of the asset.

In this instance, Dwelling B was acquired as part of the same transaction in which Dwelling A was acquired. Therefore, you can allocate expenditure that is reasonably attributable to the acquisition of Dwelling B to its cost base

As outlined in Taxation Determination 1999/67.Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land?to calculate the capital gain on the sale of the Property, where the selected area of land associated with Dwelling B can't be separately valued, your capital gain may be calculated by apportioning capital proceeds and cost base on an area basis.