Edited version of private advice

Authorisation Number: 1052062574167

Date of advice: 14 December 2022

Ruling

Subject: CGT - deceased estate - life interest

Question

Are you entitled to a full or partial exemption under section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the property?

Answer

No.

Question

Is the capital gain you made from the sale of the property a discount capital gain under section 115-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

For the year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XXX passed away on XX August 19XX leaving a Will dated XX February 19XX (the Will).

In his Will, XXX granted a life interest to their common law spouse, XXX, in a residential unit situate at XXX (the First property). The First Property had been purchased by XXX on XX May 19XX.

Pursuant to the express provisions in the Will, XXX instructed the Estate of xxx (the Estate) to sell the First Property and purchase a residential unit situate at XXX (the Second Property).

The purchase of the Second Property occurred on XX January 20XX.

During the time that the Second Property was owned by the Estate, it was used by XXX during the winter months between three to seven months per year. The majority of the year, XXX lived at her home in XXX. At all times while the Estate owned the Second Property, XXX was a citizen of XXX for residence and income tax purposes and her main residence was in XXX. The Second Property was periodically let out to assist XXX in meeting the expenses on the maintenance and upkeep of the property.

XXX provided the Estate with notice of her desire to relinquish her life tenancy under the Will which prompted the Estate to sell the Second Property.

The Estate entered a contract for the sale of the Second Property on XX July 20XX with settlement occurring on XX September 20XX.

Relevant legislative provisions

section 118-210 of the ITAA 1997

section 115-5 of the ITAA 1997

section 115-10 of the ITAA 1997

section 115-15 of the ITAA 1997

section 115-20 of the ITAA 1997

section 115-25 of the ITAA 1997

Reasons for decision

You are not entitled to a full or partial exemption under section 118-210 of the ITAA 1997in relation to the sale of the dwelling.

Section 118-210 of the ITAA 1997 applies if a trustee of a deceased estate acquires an ownership interest in a dwelling under the deceased's Will, and it was acquired for occupation by an individual.

Subsection 118-210(2) of the ITAA 1997 states that if a CGT event happens to the interest in relation to the individual, and the trustee receives no money or property for it, any capital gain or capital loss that arises from the CGT event can be disregarded.

If however, the trustee receives money for the CGT event happening and the dwelling was the main residence of the individual from the time that the trustee acquired the interest until the time of the CGT event, the trustee does not make a capital gain or capital loss from the CGT event pursuant to subsection 118-210(3) of the ITAA 1997.

Subsection 118-210(4) of the ITAA 1997 allows for apportionment if the conditions set out in Subsection 118-210(2) are met, however it can only be established that the dwelling was used as the main residence for part of the period that it was owned by the trustee.

XXX acquired an ownership interest in the Second Property on XX January 20XX for the purpose of providing XXX with a dwelling that they could occupy if and when they desired. Accordingly, section 118-210 of the ITAA 1997 applies.

On XX July 20XX, the dwelling was disposed of which is a CGT event AI (disposal of a CGT asset). Whilst the trustee received money in exchange for the dwelling (therefore satisfying the first limb of subsection 118-210(3) of the ITAA 1997), the dwelling had not been used as the main residence of XXX from the time that it had been acquired until the time it was disposed. XXX main residence was in XXX where they spent the majority of the year.

The term 'main residence' is not definition in the ITAA 1997 however it is considered to be the main private dwelling house of an individual. Whilst it is accepted that XXX had a right to occupy the Second Property, it cannot be accepted that this was her main residence given that the travel records show they predominantly spent their time in XXX and the Second Property was more used as a holiday home. Accordingly, the Estate does not satisfy the test set out in section 118-210 of the ITAA 1997.

The capital gain you made from the sale of the property is a discount capital gain under section 115-5 of the ITAA 1997.

Section 115-5 of the ITAA 1997 provides that a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25 of the ITAA 1997. These sections provide that to be a discount capital gain, the capital gain must:

A.    be made by an individual, a complying superannuation entity, a trust or a life insurance company (section 115-10 of the ITAA 1997).

B.    result from a CGT event happening after 21 September 1999 (section 115-15 of the ITAA 1997).

C.   have been worked out using a cost base that has been calculated without reference to indexation at any time (section 115-20 of the ITAA 1997).

D.   Be on an asset acquired at least 12 months prior (section 115-25 of the ITAA 1997).

The Estate satisfies these four limbs because the capital gain is:

A.    being made by a trust (section 115-10 of the ITAA 1997);

B.    resulted from a CGT event happening after 21 September 1999 (section 115-15 of the ITAA 1997);

C.   has been worked out using a cost base that has been calculated without reference to indexation at any time (section 115-20 of the ITAA 1997); and

D.   Is on an asset acquired at least 12 months prior to the CGT event.

Accordingly, the Estate is eligible for a discount capital gain under section 115-5 of the ITAA 1997.