Edited version of private advice

Authorisation Number: 1052018004203

Date of advice: 30 August 2022

Ruling

Subject: Capital gains tax - deceased estate

Question 1

Can the capital gain that you made from the CGT event that happened to the property in the year of income be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, the capital gain that you made from the CGT event that happened to the property in the year of income cannot be disregarded under section 118-195 of the ITAA 1997.

Question 2

Can the capital gain that you made from the CGT event that happened to the property in the year of income be disregarded or reduced under section 118-200 of the ITAA 1997?

Answer

Yes, the capital gain that you made from the CGT event that happened to the property in the year of income cannot be disregarded but it can be reduced under section 118-200 of the ITAA 1997.

Question 3

Can the Commissioner amend your income tax return for the year of income under section 170 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes, the Commissioner can amend your income tax return for the year of income under section 170 of the ITAA 1936.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your relatives (A and B) acquired property as joint owners in 1954 (as a pre-CGT asset).

The property was always the main residence of A and B and was never used by them to produce income.

A passed away in 19XX and their ownership interest passed to B, and B then held a 50% pre-CGT and 50% post CGT interest in the property, having 100% ownership of the property.

The property was valued at A's date of death (DOD).

In or around in 20XX your sibling commenced living in the property and treated it as their main residence.

B (the deceased) passed away in 20XX. The property was valued at the deceased's DOD.

Your sibling and you were the named beneficiaries in equal shares of the deceased's estate. You each acquired at the deceased's DOD a 50% pre-CGT and 50% post CGT interest in the property.

The Will did not provide the right to occupy the property to either your sibling or you.

In 20XX, the property passed to your sibling and you as the beneficiaries in equal shares as instructed from the deceased's Will.

Your sibling vacated the property in or around 20XX.

In 20XX, a contract of sale for the property was executed.

The property remained vacant for 3 years.

You moved into the dwelling for 5 years and treated this property as your main residence.

Several years later from the contract of sale, settlement of the property occurred.

You lodged your 20XX-XX income tax return on 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 170(10AA) item 30

Income Tax Assessment Act 1936 Section 160ZZQ

Income Tax Assessment Act 1936 Subsections 160U(3)

Income Tax Assessment Act 1936 Subsection 160M(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Question 1

Main residence exemption requirements in the table in subsection 118-195(1) of the ITAA 1997

Subsection 118-195(1) of the ITAA 1997 states:

A *capital gain or *capital loss you make from a *CGT event that happens in relation to a *dwelling or your *ownership interest in it is disregarded if:

(a) you are an individual and the interest *passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied; and

Application to your circumstances

As noted above, to get an exemption under section 118-195, you need to satisfy 1 item in column 2 and 1 item from column 3. Item 2 (c) in column 3 is the relevant item for consideration here. It requires that the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual [emphasis added].

The property passed to your sibling and you in equal shares, and it was the main residence for each of you at some point for a period of time (but not from the deceased's death until when either your sibling's ownership interest or your ownership interest ended).

The disposal of the property in its entirety, could only be "brought about" by both beneficiaries selling the property together (one party could not dispose of their interest in the property independently of the other).

The property must have been the main residence of either your sibling or you for the full ownership period so that the CGT event can be "brought about" by them together, for the purposes of s118-195.

In this case, there were 2 individuals, each with an interest in a trust asset and neither individual occupied the dwelling as their main residence for their full ownership period. You cannot cumulatively treat these main residence periods together. That is, you do not get the benefit of your siblings main residence period and vice versa. Therefore, neither your sibling nor you as individuals meet the first criteria being "from the deceased's death until your ownership ends [it was] the main residence of....that individual [emphasis added]".

Therefore, you will not be eligible for a full main residence exemption under section 118-195 of the ITAA 1997, because you do not satisfy the conditions in item 2(c). The capital gain cannot be disregarded in the income year ended 30 June 20XX when the CGT event occurred.

Question 2

Partial exemption for deceased estate dwellings

While you are not entitled to a full exemption under section 118-195 of the ITAA 1997, you may be entitled to a partial exemption under section 118-200 of the ITAA 1997 if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary or as the trustee of a deceased estate.

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

[Capital gain or Capital loss × Non main residence days] ÷ Total days

Non main residence days for the purpose of subsection (2) is the sum of:

a)    If the deceased acquired their ownership interest in the dwelling on or after 20 September 1985, the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

b)    The number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195.

Total days is:

a)    If the deceased acquired the ownership interest before 20 September 1985, the 'total days' - the number of days in the period from the death until your ownership interest ends; or

b)    If the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

Cost base of inherited assets

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or to a beneficiary in a deceased estate.

Subsection 128-15(2) of the ITAA 1997 provides that your date of acquisition of property from a deceased estate, is the date of the deceased's death.

Section 128-15(4) (ITAA 1997) sets out the rules for determining the first element of the cost base of assets in the hands of the LPR or beneficiary. This is for the purposes of calculating any CGT liability in relation to subsequent CGT events such as selling the asset.

Pre CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for its market value at the date of the deceased death.

Post CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for the cost base of the asset in the hands of the deceased at their date of death.

Application to your circumstances

In this case, you acquired 2 interests - one pre-CGT and one post CGT - in a dwelling after 20 September 1985 as a beneficiary of a deceased estate under subsection 128-15(4):

a)    the 50% interest the deceased inherited from A at their date of death is a post CGT asset. The first element of the asset's cost base is the cost base of the asset at the deceased's date of death.

b)    the 50% original interest the deceased held at their date of death, pre-CGT asset. The first element of the asset's cost base is the market value of the asset on the day the deceased died.

Accordingly, you will need to apply the provisions of 118-200 to each inherited interest - one pre-CGT and one post CGT. Your 'total days' calculation will be different for each interest under this provision.

Question 3

Amendment of income tax return

Taxation Determination TD 94/89 - Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income - deals with subsections 160U(3) and 160M(1) of the ITAA 1936. Subsection 160U(3) was about acquisition or disposal under contract, and subsection 160M(1) was about change in ownership - both provisions were rewritten as section 104-10 of the ITAA 1997 and were repealed by Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 with effect from 14 September 2006.

Guidance on the status and binding effect of public rulings where the law has been repealed or repealed and rewritten is contained in Taxation Ruling TR 2006/10 Public Rulings, paragraphs 32 and 49-51. Relevantly, it explains:

If the Commissioner has made a public ruling about a relevant provision and that provision is re-enacted or remade, the public ruling is taken to be about the re-enacted or remade provision, insofar as the new law expresses the same ideas as the old law. However, if the law is substantively changed, the part of the public ruling dealing with the changed law ceases to apply.

Accordingly, TD 94/89 does apply in relation to the rewritten law in section 104-10 of the ITAA 1997 because the rewritten law expresses the same ideas as the repealed law in subsections 160U(3) and 160M(1) of the ITAA 1936.

TD 94/89 (at paragraphs 1 to 3) expresses the view that where the contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal. When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

Section 170 of the ITAA 1936 outlines the situations where the Commissioner may amend an assessment. The general rule is that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual: item 1 in the table in subsection 170(1) of the ITAA 1936.

Subsection 170(10AA) of the ITAA 1936 provides that nothing in section 170 prevents the amendment of an assessment at any time for the purpose of giving effect to certain provisions of the ITAA 1997. The table in that subsection lists the relevant provisions where the Commissioner may amend the assessment at any time. Item 30 of the table allows the Commissioner to amend an assessment to give effect to section 104-10(3) of the ITAA 1997. That is, the time of CGT event A1 is decided by there being a contract entered into for the sale or disposal of an asset, whereas the disposal of the asset happens when a change of ownership occurs.

Application to your circumstances

In this case, the sale contract for the property was entered into on DDMMYYYY. Accordingly, the timing of CGT event A1 is in the 20XX-XX income year pursuant to section 104-10 of the ITAA 1997.

The settlement date occurred several years later.

You originally lodged your 20XX-XX income tax return on 30 June 20XX which did not include any CGT liability from the sale of disposal.

Therefore, you are allowed to amend your tax return for the 20XX-XX income year to include any CGT liability from the disposal of the property under subsection 170(10AA) of the ITAA 1936.