Edited version of private advice

Authorisation Number: 1052128876273

Date of advice: 14 June 2023

Ruling

Subject: CGT - exemptions - main residence

Question 1

Will the Trustees of the estate of Mr A not make a capital gain on the sale of a Replacement Dwelling pursuant to subsection 118-210(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the Trustees of the estate of Mr A partially disregard a capital gain on the sale of the Replacement Dwelling pursuant to subsection 118-210(4) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income tax year ending 30 June 2023

Relevant facts and circumstances

1.    Mr A was the sole registered owner of Property X. The dwelling on Property X had been the main residence of Mr A and his wife Mrs A for more than 50 years.

2.    Mr A died in 20XX. He was not an 'excluded foreign resident' pursuant to subsection 118-110(4) of the ITAA 1997.

3.    Mr A's will, appointed his 2 daughters and Mrs A as executors and trustees of the will (the Trustees).

4.    Clause 4 of Mr A's will provides:

4(a) I GIVE the rest and residue of my estate real and personal (hereinafter called "my residuary estate") to my Trustees UPON TRUST for my said wife for and during her life, she in respect of [Property X]

...

(b) I EMPOWER my Trustees, at the written request of my said wife, to sell part or all of the property [Property X] and

(i) to employ such part of the proceeds of sale as shall be necessary in the purchase or erection of a residence elsewhere to be held upon the same trusts, including the trust for sale and re-purchase or erection, as are herein declared in respect of the original residence...

5.    In June 20YY a contract was executed by the Trustees (in their capacity as trustees for the estate of Mr A) for the sale of the Property.

6.    In June 20YY a contract was executed by the Trustees (in their capacity as trustees for the estate of Mr A) for the acquisition of the Replacement Dwelling. Settlement for the acquisition of the Replacement Dwelling happened in August 20YY.

7.    The Replacement Dwelling was purchased for the use of Mrs A during her lifetime in substitution for Property X, in accordance with the terms of Mr A's will.

8.    Mrs A died in December 20ZZ.

9.    The Replacement Dwelling was Mrs A's principal place of residence from the date of acquisition by the Trustees (i.e. August 20YY) to the time of Mrs A's death. At no time was the Replacement Dwelling used for the purpose of producing assessable income.

10.  In February 2023 a contract was executed by the surviving Trustees (in their capacity as trustees for the estate of Mr A) for the sale of the Replacement Dwelling. Settlement for the sale of the Replacement Dwelling happened on March 2023.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 subsection 118-110(4)

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-210

Income Tax Assessment Act 1997 subsection 118-210(1)

Income Tax Assessment Act 1997 subsection 118-210(3)

Income Tax Assessment Act 1997 subsection 118-210(4)

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

Section 118-210 will apply to the sale of the Replacement Dwelling as it was acquired for occupation by Mrs A under the authority of Mr A's will. However, as the dwelling was not the main residence of Mrs A until the time of the relevant CGT event, the Trustees will only be entitled to a partial exemption calculated under subsection 118-210(4).

Detailed reasoning

Subdivision 118-B contains the rules for situations when capital gains and losses are ignored for main residence dwellings. There are special rules for dwellings that pass from or are owned by a trustee of a deceased estate.

Section 118-210 applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual (subsection 118-210(1)).

Section 118-210 is applicable in this situation as the Trustees of Mr A's estate acquired an ownership interest in the Replacement Dwelling for occupation by Mrs A (the deceased's wife), in accordance with Mr A's will.

Subsection 118-210(3) provides that if the trustee receives money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain or capital loss from the CGT event if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event. For the purposes of section 118-210 only those CGT events listed in subsection 118-210(5) are relevant.

Subsection 118-210(4) provides that if the dwelling was the main residence of the individual during part only of that period, the trustee makes a capital gain or capital loss worked out using the formula:

CG or CL amount × Non-main residence days ÷ Days in that period

In this formula, 'CG or CL amount refers to the capital gain or capital loss the trustee would have made from the CGT event apart from Division 118-B and 'non-main residence days' refers to the number of days in the period referred to in subsection 118-210(3) when the dwelling was not the individual's main residence.

In the case of the Trustees of Mr A's estate:

•         the Trustees' ownership period of the Replacement Dwelling commenced in August 20YY (i.e. the date the purchase contract was settled (see section 118-130);

•         the Replacement Dwelling was the main residence of Mrs A from the settlement date of the purchase contract (August 20YY) until the date of Mrs A's death (in December 20ZZ);

•         CGT event A1 (a listed event) happened when the Trustees entered into the contract to dispose of the Replacement Dwelling (in February 2023); and

•         the Trustees received money for the CGT event.

The Trustees will therefore be entitled to a partial main residence exemption under subsection 118-210(4). The Trustees will be required to calculate any capital gain they made on the disposal of the Replacement Dwelling having regard to the number of days that the Replacement Dwelling was not Mrs A's main residence (that is, from the date of Mrs A's death until the time the CGT event happened to the Replacement Dwelling).