Edited version of private advice

Authorisation Number: 1051957082417

Date of advice: 29 March 2022

Ruling

Subject: CGT - deceased estate (partial exemption)

Question 1

Is the first element of your cost base, equal to the cost base of the deceased, being the market value on the date the property was first used to produce income?

Answer

Yes.

Question 2

Are you entitled to a partial exemption under section 118-200 of the ITAA 1997?

Answer

Yes

Question 3

Can you exclude the absence choice period from the non-main residence days when calculating the partial exemption under section 118-200 of the ITAA 1997?

Answer

Yes

Question 4

Can you apply the first used to produce income rule to calculate the 'total days' component of the partial exemption?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 2021

Relevant facts and circumstances

At some time after 1985, the deceased and their spouse bought the property as joint tenants.

The property size is less than two hectares.

The property was the deceased's main residence until they moved into aged care. The property remained vacant until it was rented out a short time later. The deceased did not return to the property.

At some time after they purchased the property, the deceased's spouse passed away and legal title of the spouse's share of the property was registered to the deceased.

The deceased made a will. The will appointed you and one other person as co-executors, and it provided you a specific gift of the property.

The deceased passed away.

Shortly after, probate was granted and the property was transmitted to you.

Shortly after, the final distribution was made and the administration of the estate was completed.

You commenced discussions about selling the property with your real estate agent.

You contacted your real estate agent to arrange the following:

•         a marketing contract, with a brief to sell the property and settle by a certain date, and settlement to occur on or before the two-year period expired

•         provide formal notice to the tenants to vacate the property.

Your solicitor lodged a private ruling application. At this time the property was not yet sold.

Assumptions

You and the co-executor chose, on the deceased's behalf to continue to treat the house as their main residence (absence choice) from when they moved into aged care.

You will sell the property before the end of the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 254

Income Tax Assessment Act 1997 subdivision 115-A

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-140

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Question 1

Is the first element of your cost base, equal to the cost base of the deceased, being the market value on the date the property was first used to produce income?

Answer

Yes.

Summary

The first element of your cost base is equal to the cost base of the deceased on the day they died. The cost base of the deceased is the market value at the time it was first rented out.

Detailed reasoning

Section 118-192 of the ITAA 1997 provides the deceased is taken to have acquired the dwelling at the time it was first rented out, for its market value at that time. The property passed to you as beneficiary after 20 August 1996. As you met the following conditions, you are taken to have acquired the dwelling for its market value at the time it was first used to produce income:

•         the dwelling was first used to produce income after 20 August 1996

•         the deceased would get only a partial exemption because they used the dwelling to produce assessable income during the period they had ownership

•         the deceased would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before they first used it to produce income

•         the CGT event did not happen to the dwelling within two years of the deceased's date of death.

The deceased acquired the property after 20 September 1985, and it was being rented out just before they died. Therefore, item 1 of subsection 128-15(4) of the ITAA 1997 provides that you acquire the cost base of the deceased on the day they died.

Question 2

Are you entitled to a partial exemption under section 118-200 of the ITAA 1997?

Answer

Yes.

Summary

You are entitled to a partial exemption to account for the deceased's main residence days. The partial exemption is calculated by multiplying the capital gain amount by the number of non-main residence days, divided by the total days. You will need to do a calculation for each ownership interest as each has a different acquisition date.

The deceased acquired two ownership interests in the property. The first (50%), when they bought the property with their spouse, as joint tenants. The second (50%), when legal title of the spouse's share of the property was registered to the deceased.

The non-main residence days are the same for both ownership interests. That is, the total of:

1.    the number of days during the deceased's ownership period that it was not their main residence. By applying the absence choice, this equals the number of days after the six-year absence choice period expired; and

2.    the number of days, from when the deceased died until settlement of the property; given that the property was never the main residence of any of the following:

a.    you, as a beneficiary,

b.    the spouse of the deceased,

c.     an individual who had a right to occupy the property under the deceased's will.

As the deceased acquired both ownership interests after 20 September 1985, 'total days' is the number of days from when the deceased acquired the property until you dispose of it.

Total days for the first ownership interest equals the number of days from when they bought the property with their spouse until settlement of the property.

Total days for the second ownership interest equals the number of days from when legal title of the spouse's share of the property was registered to the deceased until settlement of the property.

Question 3

Can you exclude the period from absence choice period from the non-main residence days when calculating the partial exemption under section 118-200 of the ITAA 1997?

Answer

Yes.

Summary

As explained in Question 2, non-main residence days includes the number of days during the deceased's ownership period that it was not their main residence. By applying the absence choice, you can exclude the absence choice period from the non-main residence days.

Detailed reasoning

Section 118-145 of the ITAA 1997 provides that the property can still be regarded as the deceased's main residence after they stopped living in it, for a maximum of six years from the time it was first rented out (six-year absence choice period).

Section 254 of the ITAA 1936 enables a legal personal representative to stand in the shoes of the deceased when making choices that the deceased, if living, would have been able to make. In your case, we have included the assumption that you (in your capacity as executor) and the co-executor chose, on the deceased's behalf, to continue to treat the property as their main residence after they moved into aged care until the end of six-year absence choice period.

Therefore, by applying the absence choice, you can exclude the absence choice period from the non-main residence days.

Question 4

Can you apply the first used to produce income rule to calculate the 'total days' component of the partial exemption?

Answer

No.

Summary

The first used to produce income rule is applied to determine the time of your acquisition to calculate your cost base. The 'total days' calculation is based on the deceased's acquisition dates.

Detailed reasoning

As mentioned above, the deceased acquired both ownership interests after 20 September 1985. Paragraph 118-200(2)(b) of the ITAA 1997 provides 'total days' is the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends. There is nothing in the legislation which allows you to apply the first used to produce income rule to determine the deceased's acquisition date for the purpose of calculating the partial exemption.