Edited version of private advice

Authorisation Number: 1051860530039

Date of advice: 8 July 2021

Ruling

Subject:CGT - main residence exemption

Question 1

Is the Estate entitled to a full main residence exemption on property A?

Answer

No.

Question 2

Is the Estate entitled to a partial main residence exemption on property A?

Answer

Yes.

Question 3

Is the Estate entitled to the main residence exemption on property B?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased died in the XX income year.

Probate was granted in the XX income year.

The deceased's will appoints their spouse and child as executors.

The deceased's XX children are beneficiaries of the Estate along with their spouse.

The Estate has not been fully administered.

Property A was purchased by the deceased in the late 19XX's.

The deceased's spouse lived in the property as their main residence until XXX at which point they moved into Property B.

The deceased's child who is a beneficiary under the will moved into Property A and lived there rent free.

The deceased's will did not give the child the right to live in Property A.

The deceased's will did not give their spouse a right to occupy Property A.

The deceased's will gave the deceased's spouse the net annual income from the estate.

The property was less than 2 hectares.

The property was never used to produce assessable income.

The property was sold in the 20XX income year.

Property B was purchased by the deceased's estate on in the XXXX income year.

The deceased's spouse lived in the property as their main residence from when it was purchased until they went into a nursing home in XXXX.

Property B was left vacant from when they moved into the nursing home until it was sold.

The deceased's spouse died on XXXX.

The property was less than 2 hectares.

The property was never used to produce assessable income.

The property was sold on in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-110(1)

Income Tax Assessment Act 1997 Subsection 118-130(3)

Income Tax Assessment Act 1997 Subsection 118-210(4)

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling.

The sale of the properties constitutes CGT event A1.

When the relevant criteria is satisfied there is a main residence exemption available under subsection 118-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The main residence exemption provides that a capital gain or capital loss made by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period.

The taxpayer must be an individual to be eligible for the main residence exemption. The ITAA 1997 defines an individual to mean a natural person.

A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity. The trustee of a trust is taken to be an entity consisting of the trustee(s) at any given time.

However, if a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. Therefore, the reference in subsection 118-110(1)(a) of the ITAA 1997 to an individual is a reference to an individual acting in their personal capacity only. It does not include an individual in the capacity of a trustee.

If the dwelling was used as the individual's main residence during only part of that period, a partial exemption will apply. The capital gain should be apportioned by taking into account the total non-main residence days and the total days during the period as per subsection 118-210(4).

A capital gain or capital loss may be disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual and a beneficiary of a deceased estate or you owned it as the trustee of the deceased estate.

For a dwelling acquired by the deceased prior to 20 September 1985, you will be entitled to a full exemption if the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following individuals:

•        the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased);

•        an individual who had a right to occupy the dwelling under the deceased's will, or

•        an individual beneficiary to whom the ownership interest passed and the CGT event was brought about by that person, or

Alternatively, the Commissioner can extend the period to sell your property if it is not sold within 2 years.

The Commissioner can exercise his discretion in situations such as where:

•        the ownership of a dwelling or a will is challenged;

•        the complexity of a deceased estate delays the completion of administration of the estate;

•        a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (for example, the taxpayer or a family member has a severe illness or injury); or

•        settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee's control

Your ownership interest ends within two years of the deceased's death.

For a dwelling acquired by the deceased on or after 20 September 1985, the dwelling must have been used as the deceased's main residence just before their death and not used to produce assessable income at that time.

Subsection 118-130(3) of the ITAA 1997 provides that where the sale or other disposal of the dwelling proceeds under a contract, the ownership interest ends at the time of settlement of the contract of sale and not at the time of entering the contract.

If a beneficiary is absolutely entitled to an asset, then they will have the CGT consequences as opposed to the trust. This means that if the beneficiary is an individual, then they could access the main residence exemption if the other requirements for that exemption are met.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997provides the Commissioner's view on what is meant by absolute entitlement.

Paragraph 10 state the core principle which is:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions.

At paragraph 13 is states that a beneficiary of a deceased estate cannot be absolutely entitled to a CGT asset prior to completion of its administration.

Paragraph 24 highlights the situation where there are multiple beneficiaries:

More than one beneficiary with interests in a trust asset

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

•        the assets are fungible;

•        the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

•        there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them

Property A

Property A was the main residence of the spouse of the deceased from xxxx until they moved out in xxxx. One of the beneficiaries of the trust lived in the property from that point in time.

The deceased acquired the ownership interest before 1985.

The Commissioner would not exercise the discretion under Section 118-195 of the ITAA 1997 as the property was sold some xx years after the deceased died.

There is nothing which indicates that any of the circumstances would fit within the Commissioners parameters to exercise the discretion under this section.

The deceased's spouse lived in the property after their death until xxxx.

One of their children lived in the property after their spouse moved out on xxxx but this child did not have a right under the will to live in the property.

Since the ownership interest had not passed to the beneficiary who lived in it last, that item is satisfied. Therefore section 118-195 cannot apply.

A partial main residence is allowable for this property only.

Property B

For property B no main residence exemption is allowed as the main residence exemption only applies to individuals and this property was owned by the Trust.

A trust is unable to access the main residence exemption as a trust is not an individual and is not a natural person.

The beneficiary who lived in the property is not absolutely entitled to the property as there are multiple beneficiaries and the asset is not fungible.

Section 118-195 of the ITAA 1997 is not applicable, as property B was not an asset that the deceased owned.

Therefore, no main residence exemption is available on this property and Capital gains tax is payable on any capital gain that was made on the sale.