Edited version of private advice

Authorisation Number: 1052166907828

Date of advice: 3 November 2023

Ruling

Subject: Deceased estate - main residence

Question 1

Was the Property the main residence of the Deceased at date of death?

Answer

Yes.

Question 2

Will the trustee of the Deceased Estate be entitled to treat both units (Unit 1 and Unit 2) constructed on the Property as the Deceased's main residence pursuant to sections 118-150 and 118-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will the trustee of the Deceased estate be entitled to disregard the capital gain on the sale of one of the units(Unit 1)if the Property issold and settled within 2 years of the Deceased's date of death pursuant to section 118-195 of the ITAA 1997?

Answer

Yes.

Question 4

Does GST apply to the sale of the Property?

Answer

No.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commenced on:

1July 2023

Relevant facts and circumstances

The Deceased passed away on DD MM 20XX.

The Deceased owned the Property which was acquired on DD MM 20XX and was situated on less than 2 hectares of land.

The Deceased moved onto the Property on or around MM 20XX. They chose to reside in their caravan on the Property given the condition of the original dwelling on the Property.

The Deceased resided at the property between MM 20XX and MM 20XX and also between MM 20XX and MM 20XX.

On or around DD MM 20XX, the Deceased signed a construction contract for the building of two units (Unit 1 and Unit 2) on the Property. The Deceased intended to live in Unit 1 and to rent out Unit 2.

In early 20XX, the Deceased had the original dwelling removed from the Property.

Construction of the units was not completed prior to the Deceased's date of death.

The Deceased did not have an ownership interest in any other property.

The Property was not being used to produce assessable income before the Deceased's date of death.

The Deceased was not registered for GST and has not claimed any GST credits on the construction costs paid to date.

The circumstances do not support the beneficiaries inheriting the property. Therefore, the Trustee of the Deceased Estate has decided to sell the property at the conclusion of the construction process.

The land has not been subdivided and Unit 1 and Unit 2 cannot be sold independently. Both dwellings are under one title. Unit 1 and Unit 2 are separate units of accommodation.

The Trustee of the Deceased Estate will exercise the absence choice to nominate the Property as the Deceased's main residence from when he vacated the Property.

Assumptions

The Property will be sold and settled within 2 years of the Deceased's date of death and will not be used to derive assessable income.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-150

Income Tax Assessment Act 1997 section 118-155

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Question 1

Was the Property the main residence of the Deceased at date of death?

Answer

Yes.

Question 2

Will the trustee of the Deceased Estate be entitled to treat both units (Unit 1 and Unit 2) constructed on the Property as the Deceased's main residence pursuant to sections 118-150 and 118-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will the trustee of the Deceased Estate be entitled to disregard the capital gain on the sale of one of the units(Unit 1)if the Property issold and settled within 2 years of the Deceased's date of death pursuant to section 118-195 of the ITAA 1997?

Answer

Yes.

Question 4

Does GST apply to the sale of the Property?

Answer

No.

Summary

Based on the application of sections 118-145,118-150 and 118-155 of the ITAA 1997, Unit 1 will be the Deceased's main residence as at the date of his death. With regards to the construction of Unit 1 and Unit 2 on the Property, it was the Deceased's intention to reside in one unit of accommodation (Unit 1) and to rent out the other unit of accommodation (Unit 2). We consider each unit constructed to be a separate dwelling or residence. Under section 118-195 of the ITAA 1997, given the Property will be sold and settled within 2 years of the Deceased's date of death, the trustee of the Deceased Estate can disregard the capital gain or loss it makes from disposal of Unit 1, being 1 of the 2 units of accommodation and separate residences on the Property. The proportion of the Property attributable to Unit 2, being the second dwelling, will be the same proportion of the capital gain that is assessable.

The sale of the property will not be subject to GST.

Detailed reasoning

Question 1, 2 and 3

Main residence and absences from the property

The main residence exemption in section 118-110 of the ITAA 1997 applies to disregard a capital gain or capital loss a taxpayer makes from a capital gains tax (CGT) event that happens to a dwelling that is their main residence.

If a dwelling that was a taxpayer's main residence stops being the taxpayer's main residence, the taxpayer may choose to continue to treat it as their main residence pursuant to subsection 118-145(1) of the ITAA 1997. If the dwelling is not used for income-producing purposes during the taxpayer's absence this choice can apply indefinitely (subsection 118-145(3) of the ITAA 1997).

Renovation and repair rules

In some circumstances, the main residence exemption can be applied to land owned by a taxpayer for an additional period of up to four years if the taxpayer builds a dwelling on the land, or repairs, renovates or finishes building a dwelling on the land. Where this is the case, section 118-150 of the ITAA 1997 can apply, such that the new dwelling is deemed to be the individual's main residence from the time that they first acquired an interest in the land.

Under subsection 118-150(3) of the ITAA 1997, a taxpayer can only make the choice if:

•         The dwelling being built, repaired or renovated becomes their main residence as soon as practicable after the work is finished; and

•         It continues to be their main residence for at least three months.

Death during renovations and repair rules

Section 118-155 of the ITAA 1997 applies in scenarios where the taxpayer (referred to in subsection 118-150(1) ITAA 1997) dies before the building, repairs or renovations to the dwelling are completed. There are three potential scenarios where section 118-155 can apply, if the taxpayer passes away:

•         After the work began, or the individual entered into a contract for it to be done, but before it was finished; or

•         After the work was finished, but before it was practicable for the dwelling to become the individual's main residence; or

•         During the period of 3 months referred to in paragraph 118-150(3)(b).

Subsection 118-155(2) of the ITAA 1997 allows a taxpayer to choose to apply the CGT main residence exemption as if the dwelling were the main residence of the individual at the following times:

•         When the individual died; and

•         For the shorter of:

•         4 years before the individual's death; or

•         The period starting when the individual acquired the interest in the land and ending when the individual died.

Two units of accommodation constructed on the Property

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 Income tax: capital gains: can the term 'dwelling' as defined in section 118-195 of the Income Tax Assessment Act 1997 include more than one unit of accommodation? (TD1999 /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.

In certain circumstances two units of accommodation that are used together can be considered one place of residence or one 'dwelling'. In your case, you have stated the Deceased intended to live in one unit and rent the other, thereby creating separate residences on the property. Therefore, the Commissioner considers that the two units (Unit 1 and Unit 2) constructed on the land are two separate dwellings and are not used together as one place of residence or abode.

Disposal within 2 years

Subsection 118-195(1)of the ITAA 1997 provides that if you own or you have an ownership interest in, a dwelling in your capacity as the trustee of a deceased estate (or it passed to you as a beneficiary of an estate), then you can disregard any capital gain (or loss) made on the disposal of the dwelling if:

•         the dwelling was acquired by the deceased before 20 September 1985, or

•         the dwelling 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 (the Commissioner has discretion to extend this period in certain circumstances).

Application to your circumstances

The Deceased resided in a caravan on the property for approximately X months prior to his death. He initially vacated the Property on or around MM 20XX. Under subsections 118-145(1) and 118-145(2) of the ITAA 1997, a taxpayer can choose to continue to treat the Property as their main residence. In circumstances involving a deceased estate, the Trustee of the deceased estate may exercise the absence choice on behalf of the Deceased to nominate the Property as the Deceased's main residence from when he vacated the Property (subsection 254(1)(c) ITAA 1936).

Based on the application of sections 118-145,118-150 and 118-155 of the ITAA 1997, the Property will be the deceased's main residence as at the date of his death. With regards to the construction of the 2 units on the Property, it was the Deceased's intention to reside in one unit of accommodation and to rent the other unit of accommodation. We consider each unit constructed to be a separate dwelling or residence.

Under section 118-195 of the ITAA 1997, the trustee of the deceased estate can disregard the capital gain or loss it makes from the disposal of one of the 2 dwellings which was intended to be the Deceased's main residence. The main exempt will apply to on the basis the said dwelling is disposed within 2 years of the Deceased's date of death.

Any capital gain or loss arising from the disposal of the other dwelling which was not intended to be the deceased's main residence, will be subject to CGT.

The proportion of the Property attributable to the unit 2, being the second dwelling, will be the same proportion of the capital gain that is assessable.

Question 4

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if:

(a)  you make the supply for consideration; and

(b)  the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)   the supply is connected with Australia; and

(d)  you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In accordance with subsection 184-1(3) of the GST Act, a legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity for GST purposes.

The executor of a deceased estate is the trustee of the deceased estate.

In your case, the proposed sale of the property will meet the requirements of paragraphs 9-5 (a) and (c) of the GST Act. This is because the sale of the property will be a supply made for consideration and the property is located in Australia.

Therefore, we must determine if the sale of the property will be made in the course of furtherance of an enterprise that the trustee, in their capacity as executor of the deceased estate, carries on and whether the trustee, in their capacity as executor of the deceased estate, is required to be registered for GST.

Are you carrying on an enterprise?

The term 'enterprise' under the GST Act has a wider meaning than the term 'business'.

An enterprise is defined in subsection 9-20(1) of the GST Act and it states, amongst other things, an enterprise is an activity, or series of activities, done:

•         • in the form of a business; or

•         • in the form of an adventure or concern in the nature of trade

Section 195-1 clarifies that the term 'carrying on an enterprise' includes doing anything in the course of the commencement or termination of the enterprise.

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) provides the Tax Office view on the meaning of 'enterprise' for the purposes of entitlement to an Australian Business Number (ABN).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the discussion in MT 2006/1 equally applies to the term 'enterprise' as used in the GST Act and can be relied on for GST purposes.

The question of whether an entity is carrying on an enterprise often arises where there are 'one-offs' or isolated real property transactions (paragraph 262 of MT 2006/1).

Paragraph 159 of MT 2006/1 explains that whether an activity constitutes an enterprise is a question of fact and degree depending on the circumstances of each individual case.

Paragraphs 258 and 259 of MT 2006/1 provide guidance on the distinction between trading/revenue assets and investment/capital assets:

•         Assets can be categorised as trading/revenue assets or capital/ investment assets. Assets purchased with the intention of holding them for a reasonable period of time, to be held as income producing assets or to be held for the pleasure or enjoyment of the person, are more likely not to be purchased for trading purposes.

•         Examples of capital/investment assets are rental properties, business plant and machinery, the family home, family cars and other private assets. The mere disposal of capital/investment assets does not amount to trade.

Paragraph 260 of MT 2006/1 explains that assets can change their character from being capital/investment assets to being trading/revenue assets, or vice versa, but cannot have a dual character at the same time.

GST registration

Section 23-5 of the GST Act provides that an entity is required to be registered for GST if:

(a) the entity is carrying on an enterprise, and

(b) the entity's GST turnover meets the registration turnover threshold.

Application to your circumstances

In your case, the Property was purchased by the Deceased in 20XX, upon which he resided in a caravan on the Property. In 20XX, the Deceased demolished the existing dwelling and signed a construction contract on DD MM 20XX to build a duplex. The intention was to live in one and rent the other out. The Deceased never lived in the Property or rented it out as it was not completed. The Property is now being sold by the executors as part of the administration of the estate.

Having considered the above factors, it is our view that the sale of the property will not be in the course of carrying on an enterprise, or an adventure or concern in the nature of trade by the executor of the deceased estate for the purposes of section 9-20 of the GST Act. It is merely a requirement of administering the estate to distribute the assets to the beneficiaries.

As we have determined that the executor of the deceased estate is not carrying on an enterprise, they are not required to be registered for GST.