Edited version of private advice

Authorisation Number: 1051987712913

Date of advice: 31 May 2022

Ruling

Subject: CGT - deceased estate

Question 1

Are Dwelling A and Dwelling B considered to be one dwelling for the purposes of the main residence exemption?

Answer

Yes.

Question 2

Can you disregard the capital gain made on the disposal of the Property under section 118-195 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A dual occupancy structure was constructed on the Property several decades before 20 September 1985 which consisted of Dwelling A and Dwelling B, collectively referred to as the Duplex.

Prior to 20 September 1985:

•         The owner of the Property passed away and left the Property to relative who lived overseas, Person A, with a life interest in the Property to the owner's spouse, Person B

•         The Deceased and their spouse, Person C, rented Dwelling B with Person B living in Dwelling A; and

•         Person A passed away intestate with no children, with Person B also passing away after a short period, also intestate without any children.

The Duplex

A Duplex is a connected hipped roofed building and from the street the Duplex has the appearance of a single house.

Dwellings A and B are a mirror image of each other, each consisting of several bedrooms, a lounge, kitchen and bathroom.

The main entrance to the Property is via Dwelling A which has its own driveway on one side of the Property. Dwelling B has a separate entrance with its own driveway on the other side of the Property. Each have their own utilities and rates.

There is a courtyard located at the rear of the Duplex with the backdoors of the Dwellings A and B on opposite sides, facing each other around three metres apart, which were used as the main point of access between them.

There are no dividing fences in either the front or rear yards of the Property.

The Property is listed with Dwelling A as the address on the title and has a Heritage Overlay and the Duplex cannot be demolished, and its façade must be maintained.

Following Person C's passing

After Person B passed away the Deceased and Person C maintained the Property, paying rates and utilities, continuing to live in Dwelling A.

Dwelling B was used for storage purposes by the Deceased and Person C, and it remained vacant, with its condition deteriorating until it and Dwelling A were renovated a significant period after Person B had passed away.

Person C was experiencing health issues there were discussions that Person D, a child of the Deceased and Person C, would move into Dwelling B to provide support with Person C's health issues given Person D had experience in assisting the elderly. It was agreed that Person D would move into and accept responsibility for paying for the rates and utilities for Dwelling B and Person D moved into Dwelling B.

After a period of time Person C passed away and the Deceased continued to reside at Dwelling A, with Person D continuing to reside at Dwelling B.

After Person C passed away, evening meals and weekend lunches were prepared by Person D in Dwelling B for both them and the Deceased, with meals being consumed together in the kitchen and/or lounge.

The Deceased spent most of their time with Person D in Dwelling B when they were home from work and on weekends.

The Deceased had several falls and cognitive issues raising concerns about their safety and they started living permanently in Dwelling B as it was considered too dangerous for them to sleep alone at Dwelling A, or to use the entrance to get into Dwelling A which had steep brick stairs. Additionally, the Deceased developed dementia and could not be left alone.

Dwelling A was left vacant, being maintained with utilities being kept connected and some bedrooms being partly used for storage purposes. On occasions, the Deceased's other children stayed in Dwelling A to provide care and support to the Deceased and to provide respite for Person D.

The Deceased made a legal claim for Adverse Possession of the Property. The limitation period for bringing actions to recover land is 15 years in State A from the date on which the right of action accrued, which was Date 1.

Several months after the claim was made the title of the Property was transferred to the Deceased, Date 2.

The Deceased's health deteriorated, and they moved into an Aged Care facility.

The Deceased made the absence choice to continue to treat the Property as their main residence after they moved out.

Person D continued to reside in Dwelling B after the Deceased moved from the Property.

To fund the Deceased's entrance into aged care and ongoing costs, the Property was put on the market and a contract of sale was entered for the Property several months after the Deceased had moved from the Property, with settlement to occur during the following year on Date 3.

The Deceased passed away after the contract of sale of the Property was entered, but prior to settlement on the sale of the Property occurring.

Person E had acted as the Deceased's Power of Attorney until the date they passed away.

Probate on the Deceased's Estate was granted prior to the date settlement on the sale of the Property was to occur, with you, being Person E, being appointed as the trustee of the Deceased Estate.

The contract for the sale of the Property will continue with you, as the Trustee of the Deceased Estate, being the vendor. Settlement will still occur on Date 3.

A capital gain will be made on the sale of the Property.

Person D will continue to reside at Dwelling B until settlement occurs.

Neither Dwelling A nor Dwelling B were rented from the time Person B passed away until the present time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Question 1: Are Dwelling A and Dwelling B considered to be one dwelling for the purposes of the main residence exemption?

Two units of accommodation used as one dwelling for main residence exemption purposes

Section 118-110 of the Income Tax Assessment Act 197 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a capital gains tax (CGT) event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it and must not have been used to produce assessable income.

For the purposes of the main residence exemption, section 118-115 of the ITAA 1997 outlines that a dwelling includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation.

A dwelling can include more than one unit of accommodation if they are used together as one place of residence or abode.

Whether two or more units of accommodation are used together as one place of residence or abode for the purposes of the definition of 'dwelling' is a question of fact that depends on the particular circumstances of each case.

Taxation Determination TD 1999/69 outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These include:

•         whether the occupants sleep, eat and live in them,

•         the distance between and the proximity of the units of accommodation,

•         whether the units are connected,

•         whether the units are capable of being sold separately,

•         the extent to which the daily activities of the occupants in the units are integrated,

•         how the units are shared by the occupants; and

•         how costs of the units are shares by the occupants.

Application to your situation

We have taken the following into consideration when determining whether the Duplex will be viewed as one dwelling:

•         Following Person B's passing, and prior to the Adverse Possession claim of the Property, the Deceased and Person C paid rates and utilities for the Property while continuing to live in Dwelling A and using Dwelling B for storage purposes.

•         Both were renovated many years later, with Person D moving into Dwelling B to assist the Deceased and Person C, with Person C passing away after a short period

•         Following Person C's passing, the Duplex was used by both the Deceased and Person D in relation to their joint living arrangements.

•         The Deceased made an Adverse Possession claim in relation to the Property a significant period after Person C had passed, acquiring the Property on Date 1, with legal title being transferred on Date 1, with Dwelling A and Dwelling B continuing to be used together until the Deceased moved into an Aged Care facility a significant period after Date 1

•         Dwelling A and Dwelling B:

­   are connected and located on the same property, and from the street they look like one house

­   are on one title, having a Heritage Overlay, and the façade must be maintained

­   could not be sold separately, being sold together in the same sale transaction; and

­   have no dividing fence between them in either in the front or back yard.

Based on the information provided it is viewed that the Duplex had been used as one place of residence during the Deceased's ownership period. Therefore, the Duplex will be considered to be a 'dwelling' under section 118-115 of the ITAA 1997.

Question 2: Can you disregard the capital gain made on the disposal of the Property under section 118-195 of the Income Tax Assessment Act 1997?

CGT and dwellings acquired from deceased estates

Section 128-20 of the ITAA 1997 explains that where a taxpayer dies, there are no CGT implications where an asset passes to the legal personal representative or beneficiary, but CGT may apply when the asset is subsequently disposed of.

Subsection 118-195(1) of the ITAA 1997 allows a trustee of a deceased estate to disregard a capital gain or loss made from the disposal of a dwelling if:

•         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.

Application to your situation

We have considered the following when determining whether the capital gain made on the disposal of the Property can be disregarded:

•         The Deceased, acquired the property via an Adverse Possession claim after 20 September 1985

•         The Deceased resided at the Property both prior to and after they acquired the Property on Date 1 until they moved into an Aged Care facility, when they made the absence choice to continue to treat the Property as their main residence after she had moved out

•         The Property had not been used to produce assessable income either prior to or after the Deceased's passing

•         Settlement on the sale of the Property will occur on Date 3 and your ownership interest in the Property, as the Trustee of the Deceased Estate, will end within two years of the date the Deceased passed away.

Therefore, as the conditions in section 118-195 of the ITAA 1997 have been met, you as the Trustee of the Deceased Estate can disregard any capital gain made on the sale of the Property.