Edited version of private advice

Authorisation Number: 1052030992751

Date of advice: 19 September 2022

Ruling

Subject: CGT - main residence exemption

Question

Will the trustees be subject to Capital Gains Tax on the sale of the property?

Answer

No.

Question

Are the substantiation documents held by the trustees sufficient to apply the main residence exemption to the property?

Answer

Yes, assuming the trustee of Person B's deceased estate makes, and documents, the choice to apply the absence rule to continue to deem the dwelling as Person B's main residence from the period they moved into more suitable accommodation until the date the property was sold.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A executed their will on XXXX.

Within this document they provided a life interest in the property, which they had acquired pre-CGT, to Person B.

Person A passed away in XXXX.

Person B was residing in the property prior to Person A's passing. They continued to maintain the property as their home until XXXX when they moved into more suitable accommodation for someone of their age and health.

The property was sold a couple of years later, in the XXXX financial year.

The current trustees of Person A's deceased estate, being Person C and Person D, hold a signed letter from Person B in which they stated that the property was their home until XXXX when they moved out as they were unable to keep up with the maintenance required.

The property was never rented out, a business was not run from the property, nor did Person B ever own another property.

Person B passed away in the XXXX financial year.

Person C has applied to be appointed as Trustee for Person B's deceased estate.

Assumptions

Person C will be appointed the trustee of Person B's deceased estate.

Person C, as trustee of Person B's deceased estate, will make, and document, the choice to apply the absence rule to continue to deem the dwelling as Person B's main residence for the period from when they moved into more suitable accommodation until the date the property was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 128-15(2)

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(1)

Income Tax Assessment Act 1997 subsection 118-145(1)

Income Tax Assessment Act 1997 subsection 118-145(4)

Reasons for decision

As the property was originally acquired by the deceased prior to 20 September 1985, you are taken to have acquired the property on the date of their death (subsection 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)) for its market value at that time (subsection 128-15(4) of the ITAA 1997).

As per section 118-195 of the ITAA 1997, a capital gain or capital loss you make on the disposal of a dwelling that was acquired by the deceased prior to 20 September 1985 may be disregarded if:

•                     Your ownership ends within two years of the deceased's death, or

•                     The dwelling was, from the deceased's death until your ownership interest ends, the main residence of either:

o        the spouse of the deceased immediately before death, or

o        an individual who had a right to occupy the dwelling under the deceased's will.

In this case, Person B was granted a life interest in the dwelling under the deceased's will. Although the life tenant moved out of the property before it was sold, there is no requirement in subsection 118-195(1) of the ITAA 1997 that the life tenant actually reside in the property in the period between the date of the deceased's death and the date that the ownership interest ends. The requirement is that the dwelling be the main residence of the life tenant and continues to be so for the relevant period. It is the status of the dwelling as a main residence that is relevant.

If a dwelling that was a Person's main residence ceases to be their main residence, they can choose to continue to treat it as their main residence (subsection 118-145(1) of the ITAA 1997). However, if this choice is made, no other dwelling can be treated as that Person's main residence during that period (subsection 118-145(4) of the ITAA 1997).

As the dwelling was the main residence of the life tenant and the trustee of their estate will choose under subsection 118-145(1) of the ITAA 1997 that it continued to be their main residence after they moved out, a full exemption will be available under section 118-195 of the ITAA 1997 on the disposal of the property.

As the trustees have Person A's will and the letter from Person B regarding their residency of the dwelling, and will have documentation of the absence choice, it is accepted that there will be sufficient substantiation for the claiming of the main residence exemption.