Edited version of private advice

Authorisation Number: 1052216694007

Date of advice: 7 February 2024

Ruling

Subject: CGT - deceased estate

Question 1

Are the two units known as Unit A and Unit B one dwelling for capital gains purposes?

Answer

No.

Question 2

Is any capital gain or loss you make due to the sale of Unit A disregarded?

Answer

Yes.

Question 3

Is any capital gain or loss you make due to the sale of your original interest in Unit B disregarded?

Answer

Yes.

Question 4

Is any capital gain or loss you make due to the sale of your other interest in Unit B disregarded?

Answer

No.

Question 5

Is the first element of the cost base of your other interest in Unit B equal to its market value on DD/MM/20YY?

Answer

Yes.

This ruling applies for the following period:

Year ending DD/MM/20YY

The scheme commenced on:

DD/MM/20YY

Relevant facts and circumstances

On DD/MM/20YY, XXX (the Deceased) passed away.

On DD/MM/19YY, the Deceased and spouse acquired a dwelling at XXX (the Property).

In the late 19YY's the Deceased and spouse demolished this property and built a two-storey home. This consisted of two units, Unit A and Unit B.

Unit A is approximately XXXm and Unit B approximately XXXm.

The units share the same roof space, common walls and backyard.

The Deceased and spouse lived in Unit A as their main residence.

On DD/MM/20YY, the Deceased's spouse passed away.

At this time, the Deceased acquired the spouse's interest in Unit B as surviving spouse, and this property was never the Deceased's main residence.

As such, the Deceased has two separate interests in the two units and these are the original interests when the Property was built, along with the other interests acquired from the spouse on DD/MM/20YY.

At this time, Unit A was the spouse and the Deceased's main residence, and their child and family were living at Unit B to care for both parents. The child continued to look after the Deceased after the spouse passed away.

The child would prepare meals in their unit which would mostly be eaten together with the Deceased at Unit B.

The Deceased continued to sleep at Unit A, and resided there during the day, having carers come in to assist with daily living whilst the child was at work.

In MM/20YY the Deceased entered an aged care facility as they required 24-hour care and the assistance of two carers.

The executor made the absence choice to elect the property as the main residence after the move in to aged care.

You plan to place the property on the market in the coming weeks, with the aim of selling within 2 years of the Deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-15

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Can the term 'dwelling' as defined in section 118-115 of the Income Tax Assessment Act 1997 (ITAA 1997) include more than one unit of accommodation?

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 outlines the factors relevant in considering whether units of accommodation are used together as one place of residence or abode. These include:

(a) whether the occupants sleep, eat and live in them;

(b) the distance between and the proximity of the units of accommodation;

(c) whether the units are connected;

(d) whether the units are capable of being sold separately;

(e) the extent to which the daily activities of the occupants in the units are integrated;

(f) how the units are shared by the occupants; and

(g) how costs of the units are shared by the occupants.

Application to your circumstances

After the deceased acquired the property in MM/19YY, they subsequently demolished this house in the late 19YY's and built a two-storey home. This consisted of two units, Unit A and Unit B.

The deceased resided at Unit A and as such this was their main residence, and they never resided at Unit B.

The deceased's child and family moved into Unit B to care for the deceased and spouse.

This care continued after the passing of the Deceased's spouse, and the Deceased continued to sleep and spend most of the day at Unit A, having carers come to the house to assist, whilst having some meals at Unit B where the child and family were living.

There are no internal connecting doors for transfer between the two units.

Based on your circumstances, and after considering the relevant factors outlined in TD 1999/69, we do not consider that Unit A and Unit B were used together as one place of residence, and as such they cannot be treated as one dwelling for CGT purposes.

Whilst the deceased spent some time at Unit B with family (including evening meals), they spent most of each day at Unit A, and they also slept at that property each night.

There is no evidence to suggest that both properties were ever intended to be used as the one place of residence, and there was also no internal access between the properties.

As such, Unit A and Unit B cannot be treated as one dwelling for CGT purposes.

Cost base and date of acquisition 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) of the (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.

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 along with a dwelling that was acquired by the deceased after 20 September 1985, which was the deceased main residence just before the deceased's death and was not then being used for the purpose of producing assessable income 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:

­        the spouse of the deceased immediately before death, or

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

­        if the CGT event was brought about by the individual to whom the ownership interest passed to as a beneficiary - that individual.

The Deceased's original interests in both properties are pre-CGT and therefore will be exempt from capital gains tax if the property is disposed of within 2 years of the Deceased's death (refer to section 118-195).

As the properties were originally acquired by the deceased's spouse prior to 20 September 1985, the Deceased is taken to have acquired their ownership interests in the properties as a beneficiary as at the deceased's spouse's date of death under subsection 128-15(2) of the ITAA 1997 for its market value at that time under subsection 128-15(4) of the ITAA 1997. As such these other ownership interests acquired by the Deceased are taken to be post-CGT interests in both properties.

As the executor made the absence choice to elect the Unit A as main residence after the Deceased moved into aged care, the capital gain on this other interest in Unit B can be disregarded if the property is disposed of within 2 years of the deceased's death.

In relation to the Deceased's other interest in Unit B acquired upon deceased's spouse's death, despite the fact that deceased's spouse's interest was pre-CGT, as the Deceased acquired that interest in 2018 it is now a post-CGT interest, and therefore subject to capital gains tax (refer to sub-section 128-15(2) of the ITAA 1997). In addition, as Unit B was not the main residence of the Deceased at time of death, section 118-195 will have no application.

In addition, this other interest in Unit B is taken to have been acquired by the Deceased at its market value at the time of deceased's spouse's death under sub-section 128-15(4), and this will form the first element of the CGT cost base when calculating any capital gain made upon the disposal of the property, with Taxation Determination TD 1999/67 providing guidance on how you calculate any capital gain or capital loss you make this remaining portion of the property not covered by the exemption.

The cost of repairs can also be included in the cost base of the property. You are also entitled to the 50% CGT discount in relation to the property.