Edited version of private advice

Authorisation Number: 1051769214272

Date of advice: 26 October 2020

Ruling

Subject: Capital gains tax

Question

Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and extend the 2 year period?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your relative passed away.

You are a beneficiary of your relative's estate.

Additional taxpayers are also beneficiaries of the estate.

A property formed part of the estate (the property).

The property was not your relative's main residence.

Your relative owned % of the property.

Your relative inherited their % share of the property from their spouse when they passed away.

The remaining % share of the property was owned by another relative.

The property is the additional relative's main residence.

The additional relative was moved into a supported care facility.

The property sale was finalised on XX/month/20XX.

Your relative's main residence another property.

The additional property was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 118-195

Reasons for Decision

Subsection 118-195(1) of the Income Tax Assessment Act (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) or the dwelling was from the deceased's death until your ownership interest ends the main residence of one or more 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.

You have an ownership interest in a property if you have a legal interest in the property. This means that if you sell a property, your ownership interest continues until the date of settlement (rather than the date the contract of sale is signed).

In this case, the property was not the deceased main residence during in the time that they owned a share of the property.

Therefore, you will not be able to disregard the capital gain from the sale of the property in accordance with subsection 118-195(1) of the ITAA 1997.

Calculation of capital gain

Section 118-185 of the ITAA 1997 advises that if you inherit a dwelling there are special rules for calculating your cost base.

The first element of the cost base or reduced cost base of a dwelling - its acquisition cost - is its market value at the date of death if any of the following apply:

·         the dwelling was acquired by the deceased before 20 September 1985

·         the dwelling passed to you after XX/month/19XX (but not as a joint tenant), and just before the deceased died it was their main residence and was not being used to produce income, or

·         the dwelling passed to you as the trustee of a special disability trust.

In any other case, the acquisition cost is the deceased's cost base or reduced cost base on the day they died. You may need to contact the trustee or the deceased's tax adviser to obtain the details. If that cost base includes indexation, you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property.

If you're a beneficiary, the cost base or reduced cost base also includes amounts that the trustee of the deceased's estate would have been able to include in the cost base or reduced cost base.

In this case the property was not the deceased main residence, the deceased obtained their share of the property after 20 September 1985 and the property was not passed to you as the trustee of a special disability trust.

Therefore, you will not be able to make sure of the special rules for calculating your cost base. Accordingly, the provisions with section 110-25 of the ITAA 1997 will apply when calculating your capital gain on the disposal of the property.

As the deceased % share of the property has been passed onto multiple beneficiaries, you will divide the amount of the capital gain between the beneficiaries and declare your subsequent share of the capital gain on your individual income tax returns for the financial year that the event occurred.