Edited version of private advice

Authorisation Number: 1051979762781

Date of advice: 17 May 2022

Ruling

Subject: CGT - deceased estate

Question 1

Is the first element of the cost base of the 50% ownership interest in the Property which Person B acquired pre-CGT the market value of the asset on the date of death of Person B?

Answer

The first element of the cost base of the 50% ownership interest Person B acquired pre-CGT will be 50% of the market value of the asset on the date of death of Person B.

Question 2

Is the first element of the cost base for the 50% ownership interest Person B inherited on the death of Person A the market value at the date of death of Person B?

Answer

The first element of the cost base for the 50% ownership interest acquired on the death of Person B will be the market value of the asset on the date of death of Person B.

Question 3

Will you be eligible for a partial main residence exemption on the disposal of the 50% pre-CGT ownership interest in the Property?

Answer

No.

Question 4

Will you be eligible for a partial main residence exemption on disposal of the 50% post-CGT ownership interest in the Property?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B purchased a property (the Property). The Property was purchased as joint tenants.

The Property was always the owners' main residence and was never used to produce income.

Person A died several years ago. Their interest in the Property passed to Person B at this time.

Person B died the following year.

In their will, Person B bequeathed the Property to their surviving children and grandchildren of their deceased child. Their children received an equal interest each and the grandchildren also received an equal interest each.

Probate was granted a short time later.

A contract of sale for the Property was signed.

Minor repairs and renovations were undertaken prior to sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-197

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 118-205

Income Tax Assessment Act 1997 section 128-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Question 1

Is the first element of the cost base of the 50% ownership interest in the Property which Person B acquired before 20 September 1985 the market value of the asset on the date of death of Mary?

Summary

Yes.

Detailed reasoning

Section 108-5 CGT assets

Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gains tax (CGT) asset is any kind of property or a legal or equitable right that is not property. Paragraph 108-5(2)(a) of the ITAA 1997 provides that to avoid doubt, part of, or an interest in, an asset referred to in subsection (1) is a CGT asset.

Division 128 - Effect of death

Section 128-10 of the ITAA 1997 provides for a CGT exemption when the assets the deceased owned just before they die are transferred to the Executor or legal personal representative (LPR).

Subsection 128-15(1) of the ITAA 1997 sets out what happens if a CGT asset you owned just before dying:

(a) devolves to your LPR; or

(b) passes to a beneficiary in your estate.

Subsection 128-15(2) of the ITAA 1997 provides that the Legal Personal Representative (LPR), or beneficiary, is taken to have acquired the asset on the day you died. Any capital gain or capital loss the LPR makes if the asset passes to a beneficiary in your estate is disregarded under subsection 128-15(3) of the ITAA 1997.

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the LPR or beneficiary.

Main residence cost base

For a dwelling that was the deceased's main residence just before they died, the first element of the cost base and reduced cost base will be the market value of the asset on the date of death of the deceased.

Application to your circumstances

The property was Person B's main residence just before they died. As a result, the first element of the cost base for you as a beneficiary is the market value at the date of Person B's death.

Question 2

Is the first element of the cost base for the 50% ownership interest Person B inherited after 20 September 1985 on the death of Person A the market value of the asset on the date of death of Mary?

Summary

Yes.

Detailed reasoning

Special rules for joint tenants

Subsection 128-50(2) of the ITAA 1997 provides that where a CGT asset is owned by joint tenants and one of them dies, the survivor is taken to have acquired the individual's interest in the asset on the day the individual died.

Section 118-197 provides that subdivision 118-B (Main residence) applies to a surviving joint tenant as if the ownership interest in a dwelling had passed to them as the beneficiary of a deceased estate.

Main residence cost base

For a dwelling that was the deceased's main residence just before they died, the first element of the cost base and reduced cost base will be the market value of the asset on the date of death of the deceased.

Application to your circumstances

The property was Person B's main residence just before they died. As a result, the first element of the cost base for you as a beneficiary is the market value at the date of Person B's death.

Question 3

Will you be eligible for a partial main residence exemption on the disposal of the 50% pre-CGT ownership interest in the Property?

Summary

No. As total days equal non main residence days, you will not be eligible for a partial main residence exemption on the disposal of the 50% pre-CGT ownership interest in the Property.

Detailed reasoning

Dwelling acquired from a deceased estate

Section 118-195 provides that in certain circumstances you can disregard the capital gain or loss from an interest in a dwelling that passed to you as a beneficiary in a deceased estate. However, your ownership interest must end within 2 years of the deceased's death (or within a longer period allowed by the Commissioner), or from the deceased's death until your ownership interest ends the dwelling was the main residence of:

(a)         the spouse of the deceased immediately before the death; or

(b)         an individual who had a right to occupy the dwelling under the deceased's will; or

(c)         an individual to whom the ownership interest passed as a beneficiary

Section 118-200 provides you get only a partial exemption (or no exemption) if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, and section 118-195 of the ITAA 1997 does not apply.

Calculation of capital gain or loss

You calculate your capital gain or capital loss using the formula:

For an ownership interest in a dwelling acquired before 20 September 1985, non-main residence days are the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of:

•         the spouse of the deceased; or

•         an individual who had a right to occupy the dwelling under the will; or

•         an individual who to whom the ownership interest passed as a beneficiary, if that individual brought about the CGT event.

For an ownership interest in a dwelling acquired before 20 September 1985, total days is the number of days in the period from the death until your ownership interest ends

Application to your circumstances

In your case, the number of non-main residence days is the number of days from the death of Person B until your ownership interest ended. This is also the number of total days in the formula. Therefore, you will not receive a partial exemption for the 50% pre-CGT ownership acquired.

Question 4

Will you be eligible for a partial main residence exemption on disposal of the 50% post-CGT ownership interest in the Property?

Summary

Yes. You will be eligible for a partial main residence exemption on disposal of the 50% post-CGT ownership interest in the Property.

Dwelling acquired from a deceased estate

Section 118-195 provides that in certain circumstances you can disregard the capital gain or loss from an interest in a dwelling that passed to you as a beneficiary in a deceased estate. However, your ownership interest must end within 2 years of the deceased's death (or within a longer period allowed by the Commissioner), or from the deceased's death until your ownership interest ends the dwelling was the main residence of:

(a)         the spouse of the deceased immediately before the death; or

(b)         an individual who had a right to occupy the dwelling under the deceased's will; or

(c)         an individual to whom the ownership interest passed as a beneficiary

Section 118-200 provides you get only a partial exemption (or no exemption) if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, and section 118-195 of the ITAA 1997 does not apply.

Calculation of capital gain or loss

You calculate your capital gain or capital loss using the formula:

For an ownership interest acquired on or after 20 September 1985, non-main residence days is the sum of:

•         the days in the deceased's ownership period when the dwelling was not the deceased's main residence

•         the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of:

(a)         the spouse of the deceased immediately before the death; or

(b)         an individual who had a right to occupy the dwelling under the deceased's will; or

(c)         an individual to whom the ownership interest passed as a beneficiary

For an ownership interest acquired on or after 20 September 1985, total days is the number of days in the period from the acquisition of the interest in the dwelling by the deceased until your ownership interest ends.

Adjustment if dwelling inherited from deceased individual

Section 118-205 provides that the formula in section 118-200 must be adjusted if the ownership interest passed to the deceased as a beneficiary of a deceased estate. Under subsection 118-205 (2) you add to the component total daysin the formula the fewer of:

(a) the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

(b) the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

You add to the component non-main residence daysin the formula the number of days in the period applicable under subsection 118-205 (2) that the dwelling was not the main residence of one or more of:

(a) an individual who owned the dwelling at the time of the individual's death; or

(b) an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or

(c) an individual who had a right to occupy the dwelling under a will; or

(d) an individual to whom an *ownership interest in the dwelling *passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate.

Application to your circumstances

Non-main residence days and total days under section 118-200

As person B acquired the interest on or after 20 September 1985, non-main residence days is the period from person B's death until your ownership interest ends.

Total days is the number of days in the period from the acquisition of the interest in the dwelling by the deceased until your ownership interest ends.

Adjustment for dwelling inherited from deceased individual under section 118-205

Section 118-197 provides that subdivision 118-B (Main residence) applies to a surviving joint tenant as if the ownership interest in a dwelling had passed to them as the beneficiary of a deceased estate.

Section 118-205 provides that the formula in section 118-200 must be adjusted if the ownership interest passed to the deceased as a beneficiary of a deceased estate. You must add to the total days component of the formula the number of days between 20 September 1985 and the day when the interest passed to the deceased.

This means that total days is the number of days in the period from 20 September 1985 until you disposed of your post-CGT ownership interest in the dwelling.

As the dwelling was person A's main residence from 20 September 1985 until their death, non-main residence days remains the number of days in the period from person B's death until you disposed of your ownership interest in the dwelling.

You will receive a partial main-residence exemption on disposal of the 50% post- CGT ownership interest in the Property.