Edited version of private advice

Authorisation Number: 1052225810075

Date of advice: 27 February 2024

Ruling

Subject: CGT - Deceased estate and main residence exemption

Property A

Question 1

Will the market value apply as the cost base of the property from the date the dwelling was first income producing under the deceased's ownership under section 118-192(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Under section 118-145 of ITAA 1997 will the absence rule be available to the Estate of the deceased for the first X-years that the property was income producing?

Answer

Yes

Question 3

Will the total days stipulated under section 118-200 of the ITAA 1997 be calculated from the date this property was first income producing to the date the ownership interest ended?

Answer

No

Question 4

Will the ownership interest end on the date of the contract of sale or on the date of settlement?

Answer

It will end on the date of the contract of sale.

Property B

Question 5

Will any capital gains from the disposal of this property be disregarded in full under section 118-195 of ITAA 1997?

Answer

Yes

Question 6

In the event that the full exemption is not granted please advise on the calculation of the capital gains tax including the determination of the cost base of the property.

Answer

Not applicable

This ruling applies for the following period:

Year ended XX June XXXX

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

The name of the client: Client A

Date of death: XX March XXXX

The last will of the deceased was dated XX August XXXX

The Court A granted The Executor Probate of the will on XX August XXXX.

The deceased owned two properties:

Property A - purchased XX February XXXX.

Property B - purchased XX January XXXX.

The executor of the estate has acted diligently and done all possible to ensure the sale of both properties were completed in a timely manner. With both properties sold within a X-year period.

The deceased was widowed at the time of passing. Therefore, there was no spouse to live in either property.

There was no "Right to Occupy" stipulation in the will for either property.

The executor held both properties as executor of the deceased estate.

The deceased acquired ownership of both properties after XX September 19XX.

The ownership interest on both properties ended within X years of the deceased death.

Property A and Property B were both less than X hectares in size.

Property A details:

The deceased purchased this property on the XX February XXXX and lived in this dwelling as their main residence until XX January XXXX, as such this is a post CGT asset.

From the XX July XXXX this property was used to produce assessable (rental) income.

The deceased continued to treat this property as their main residence from the XX July XXXX until XX July XXXX

After the deceased passed away, in March XXXX, this property continued to be rented until XX October XXXX.

This property was left vacant after this date until it was sold by the Legal Representative, on the XX December XXXX with the settlement being completed X March XXXX.

Property B details:

The deceased purchased this property on the XX January XXXX and as such is a post CGT asset.

The deceased used this property as their principal place of residence until they passed away on XX March XXXX.

The deceased classed this property as their main residence from XX July XXXX - XX March XXXX.

After the deceased passed away the property was left vacant until it was sold by the executors, XX May XXXX with the settlement date XX June XXXX.

Assumptions

You chose on the deceased's behalf to continue to treat Property A as their main residence (absence choice) from when they moved into their new property for the period XX July XXXX - XX July XXXX.

Then Property B was used as the Main residence from XX July XXXX until the deceased passed away on XX March XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 - section 118-192 (2)

Income Tax Assessment Act 1997 - section 118-145

Income Tax Assessment Act 1997 - section 118-200

Income Tax Assessment Act 1997 - section 118-195

Income Tax Assessment Act 1997 - section 128-15 (4)

Income Tax Assessment Act 1936 - section 254

Income Tax Assessment Act 1997 - section 109-5

Income Tax Assessment Act 1997 - section 104-10 (1) (2)

Reasons for decision

Property A

Question 1

Will the market value apply as the cost base of the property from the date the dwelling was first income producing under the deceased's ownership under section 118-192 (2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

You are taken to have acquired the dwelling at the income time for its market value at that time. Therefore, the ownership interest in the dwelling was acquired for the deemed acquisition cost, which is determined on the market value, as such, this is the cost base for any Capital Gains Tax (CGT).

The first element of your cost base is equal to the cost base of the deceased on the day they died. The cost base of the deceased is the market value at the time it was first rented out.

You chose on the deceased's behalf to continue to treat Property A as their main residence (absence choice) from when they moved into their new property for the period XX July XXXX - XX July XXXX.

Then Property B was used as the Main residence from XX July XXXX until the deceased passed away on XX March XXXX.

Question 2

Under section 118-145 of ITAA 1997 will the absence rule be available to the Estate of the deceased for the first X-years that the property was income producing?

Answer

Yes

In accordance with Section 118-145 of ITAA 1997 the deceased used that part pf the property that was the main residence for the purpose of producing assessable income and therefore treated this property as their main residence during this period.

The absence rule will apply from when the property was first rented on the XX July XXXX to when the X years lapsed on the XX July XXXX. If you choose to use this property to produce assessable income after the X-year period, it is subject to CGT.

Section 254 of ITAA 1997 enables a legal personal representative to stand in the shoes of the deceased when making choices that the deceased, if living, would have been able to make. In your case, in your capacity as executor, on the deceased behalf, you continue to treat the property as their main residence after they moved into their new home until the end of the six-year absence choice period.

Therefore, by applying the absence choice you can exclude the absence choice period from the non-main residence days.

Question 3

Will the total days stipulated under section 118-200 of the ITAA 1997 be calculated from the date this property was first income producing to the date the ownership interest ended?

Answer

No

The first used to produce income rule is applied to determine the time of your acquisition to calculate your cost base. The 'total' days' calculations is based on the deceased's acquisition dates.

The deceased acquired both properties post CGT, that is after XX September 19XX. Paragraph 118-200(2)(b) of the ITAA 1997 provides 'total days' is the number of days in the period from the acquisition of the dwelling by the deceased, until your ownership interest ends. There is no provision in the legislation which allows you to apply the first used to produce income rule to determine the deceased acquisition date for the purpose of calculating the partial exemption.

You are entitled to a partial exemption for the deceased's main residence days. The partial exemption is calculated by multiplying the capital gain amount by the number of non-main residence days, divided by the total days. This is for the period XX July XXXX to XX July XXXX.

Question 4

Will the ownership interest end on the date of the contract of sale or on the date of settlement?

Answer

In general, you acquire a CGT asset when you become its owner (section 109-5). In this case, the executor acquired the Property when they become its owner on DD August 20YY.

Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset (subsection 104-10(1)). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2)). In this case, CGT event A1 happened when the Deceased transferred the legal title to the Property to the Taxpayer by way of Probate on DD August 20YY and CGT event A1 happened when the Executor entered into the contract for the disposal of the Property on DD December 20YY.

Therefore, it is the contract of sale date when the ownership interest ends.

Property B

Question 5

Will any capital gains from the disposal of this property be disregarded in full under section 118-195 of ITAA 1997?

Answer

Yes

Subsection 118-195 (1) of the ITAA 1997 provided that you own or you have 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 at least one condition in the second and once condition in the third column are met.

In accordance with section 118-195 of the ITAA 1997, as the dwelling was acquired by the deceased after XX September XXXX, was the main residence of the deceased just before their death, was not being used to produce assessable income and the ownership period ended within X years of the deceased death, any capital gains from the disposal of this property will be disregarded in full.

Question 6

In the event that the full exemption is not granted please advise on the calculation of the capital gains tax including the determination of the cost base of the property.

Answer

This question is not applicable as any capital gains from the disposal of the property will be disregarded under section 118-195 of the ITAA 1997. The client was living in this property and using it as their main residence at the time when they passed away.