Edited version of private advice

Authorisation Number: 1052220534176

Date of advice: 9 February 2024

Subject: Full main residence of exemption and partial exemption

Question 1

Pursuant to sec 118-195 ITAA 1997, will a full main residence exemption be available to the trustee of the deceased estate on the sale of the deceased's main residence?

Answer

No

Question 2

If a full main residence exemption is not available, will a partial exemption apply in accordance with section 118-200?

Answer

Yes

This private ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The deceased passed away on DD MM 20YY.

The deceased purchased the property on DD MM 20YY.

The dwelling on the property was the deceased's main residence at the date of death.

The property has never been used for income producing purpose.

The deceased will grant a life tenancy to the beneficiary.

This person lived in the property until on or about DD MM 20YY, following which they moved out as they required living assistance.

This person's personal belongings remained at the property until DDMM 20YY.

This person is not choosing to continue to treat the dwelling on the property as their main residence after they ceased to live there.

The property has remained vacant since.

You are now in the process of selling the property and distributing the proceeds to the beneficiaries under the will.

You have signed a contract dated DDMM 20YY and anticipate settlement by DD MM 20YY.

Assumption

For this ruling, it is assumed that settlement of the sale of the property will happen during the period of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 subsection 118-200(2)

Income Tax Assessment Act 1997 section 118-145

Reasons for decision

Question 1

Summary

Pursuant to section 118-195 of the ITAA 1997, a full main residence exemption will not be available to the trustee of the deceased estate on the sale of the deceased's main residence.

Detailed reasoning

Capital gains tax

You may make a capital gain or a capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity.

You make a capital gain when the capital proceeds received on the disposal of the CGT asset are more than the cost base of the CGT asset. In the case of the disposal of an inherited dwelling, if the conditions for an exemption are not met, the capital gain will be calculated on the difference between the proceeds on sale and the cost base of the CGT asset.

Main residence exemption

If you hold a deceased person's main residence as the trustee of their estate, you may be exempt or partially exempt when a CGT event happens to it.

To be eligible for a full exemption on the capital gain made on the disposal of such a dwelling that was the deceased person's main residence when they passed away, one of the following conditions must be met:

(a)          you disposed of your interest within two years of the deceased's death, or

(b)          from the date of the deceased's death until you disposed of your ownership interest, the property was not used to produce income and was the main residence of one or more of

•                    a person who was the spouse of the deceased immediately before the deceased death

•                    an individual who had a right to occupy the property under the deceased's will, or

•                    you as a beneficiary if you disposed of the property as a beneficiary.

The ownership interest of a beneficiary or trustee commences on the date of death of the deceased and ends on settlement of the disposal of the dwelling.

Application to your case

Settlement of the sale of the property has not been completed within two years of the deceased's death, so the first condition is not satisfied.

The will has given an individual the right to reside in the dwelling on the property, however, they vacated that dwelling before the property was sold. Further, they are choosing not to continue treating the dwelling on the property as their main residence after they moved out.

You are not entitled to a full main residence exemption on the sale of the property because neither of the conditions listed above are satisfied.

Question 2

Summary

As a full main residence exemption is not available, a partial exemption will apply in accordance with section 118-200?

Detailed reasoning

When the full exemption for beneficiaries and trustees of deceased estate does not apply because a condition listed above have not been satisfied, the beneficiary or trustee may be entitled to a partial exemption.

The partial exemption is available if the taxpayer is an individual and the ownership interest in the dwelling has passed to the taxpayer as a beneficiary of a deceased estate, or the taxpayer must have owned it as a trustee of such estate.

Generally, the partial exemption reduces the capital gain or loss to the proportion of total ownership days that are non-main residence days.

The following formula is used to calculate the capital gain:

Capital gain or capital loss amount X non-main residence days ÷ total days

Non-main residence days is the sum of:

(a)          the number of days in the deceased ownership period when the dwelling was not his or her main residence, and

(b)          the number of days from death until the taxpayer's ownership interest ends when the dwelling was not the main residence of one of the following

•                    the spouse of the deceased at the time of the death

•                    someone entitled to occupy the dwelling under the will, or

•                    a beneficiary who brought about the CGT event.

You ignore any non-main residence days before the deceased's death if the property was their main residence just before their death (and certain other conditions are satisfied).

Total days is the number of days from the acquisition of the dwelling by the deceased until the taxpayer's ownership interest ends.

Application to your case

As you meet the condition for section 118-200 of the ITAA 1997, you are eligible for a partial exemption. The relevant formula in subsection 118-200(2) as mentioned above is used to determine how much of a capital gain or capital loss is not exempt.

Considering you held the property as trustee of the estate after 19 September 1985, you will have to adjust the formula in subsection 118-200(2) of the ITAA 1997 to consider the number of days when the dwelling was or was not the main residence of an individual in the inheritance or beneficiary chain.

Conclusion

You will not be eligible for the full main residence exemption because the individual given the right to reside there is not making the 6-year absence choice, however, a partial exemption can be applied based on the facts provided to us. You can calculate the partial exemption based on the formulae and rule provided above.