Edited version of private advice

Authorisation Number: 1052227301459

Date of advice: 15 March 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Will the Commissioner exercise the discretion under section 118 - 195 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow an extension of time for you to dispose of your ownership interest in the dwelling and disregard the capital gain or capital loss you made on the disposal?

Answer

No. The taxpayer does not meet the requirements in section 118-195 of the ITAA 1997 for the main residence exemption to apply for the property.

Question 2

Is a taxpayer entitled to a partial main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a dwelling inherited from the estate of a deceased person that was not the main residence of the deceased but which the deceased had earlier inherited from the estate of another deceased person whose main residence the dwelling had been?

Answer

Yes. The taxpayer meets the requirements for a partial main residence exemption under Subdivision 118-B of the ITAA 1997.

This ruling applies for the following period:

XX June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

On XX XXX 20XX XXX (the Deceased) passed away leaving a Will.

The beneficiaries of the Deceased's Will were the children XXX in equal XXX shares.

The Deceased acquired XXX (the Property) on XX XXX 19XX (as per the Real Estate Records).

The dwelling on the Property was the main residence of the Deceased just before he passed away.

The Property was situated on less than two hectares of land.

XXX (child) was named as the Executor in the Will.

The Certificate of Title for the Property was changed to the XXX beneficiaries, XXX in 20XX as the registered owners, with XX each ownership.

The Deceased moved to the XXX at the end of 19XX and was a resident at the XXX until their death on XX XXX 20XX.

The Property was under a caveat dated XX XXX 19XX.

The caveat was pursuant to a life tenancy to the Deceased's siblings.

There was an Agreement for Tenancy Residential Premises dated XX XXX 19XX.

Term: from the commencement date hereof to the date of the tenants' death.

Commencement date: XX XXX 19XX

Expiry date: the date of the tenants' death.

The rental was $XXX per annum if demanded indexed annually at CPI for the city of XXX.

Special conditions:

The parties agree that the Landlord shall be at liberty to reside in the premises and have the full use of all facilities in the premises, other than for those areas maintained exclusively for the use of the tenants, being such areas as are between the parties be for the exclusive use of the tenants from time to time.

The beneficiaries advised that the rental income did not cover the expenses for the Property, and they were left with a debt.

The final tenant, XXX moved to a (nursing) home in XXX 20XX and the following 12 months were spent in discussions to remove the caveat.

The caveat was removed according to the XXX Titles Registry Pty Ltd Registration Confirmation Statement issued on XX XXX 20XX.

The Second Deceased of the Deceased died on XX XXX 20XX.

Second Deceased's Will appointed XXX and XXX as the executors.

The title of the Property was changed to include XXX and XXX as personal representatives of a XX interest.

The Property was sold on XX XXX 20XX with settlement on XX XXX 20XX.

The sale proceeds went to 'The Estate of the Late XXX'.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 118-205

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Executor for XXX.

This is to explain how we reached our decision. This is not part of the private ruling.

Subdivision 118-B of the ITAA 1997 provides that a capital gain or loss made from a capital gains tax (CGT) event which occurs in relation to a dwelling that is the main residence of a taxpayer is excluded from the operation of the CGT provisions.

A capital gain or loss from a dwelling is disregarded if the taxpayer is an individual and the dwelling was the taxpayer 's main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person.

In this situation the property at XXX was the main residence of the Deceased prior to death. Ownership of the dwelling changed when the Certificate of Title was registered in the names of the beneficiaries, XXX in 20XX. The dwelling was never the main residence of the Second Deceased, and therefore the main residence exemption under section 118-195 of the ITAA 1997 does not apply.

The Second Deceased's share in the Property was left to the beneficiaries. The Certificate of Title for the Property, dated XX XXX 20XX, was changed to include XXX and XXX as 'personal representative' for the XX share.

In this situation the beneficiaries acquired their ownership interest from the Second Deceased.

Section 118-200 of the ITAA 1997 provides for a partial exemption. You calculate your capital gain or capital loss using the formula:

Capital gain / capital loss amount × (Non-main residence days ÷ Total days)

Section 118-205 of the ITAA 1997 provides the following:

Total Days - add to the component 'total days' in the formula the fewer of:

(a)  the number of days between 20 September 1985 and the day the ownership interest passed to the most recently deceased, and

(b)  the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual, except as a beneficiary in or as a trustee of a deceased estate, and the day when the interest passed to the most recently deceased (nil days).

In this situation the total days are calculated from the time the Second Deceased acquired the property from the Deceased's estate until their death. Added to this is the days the beneficiaries acquired the property from the Second Deceased's estate until the property was sold.

Non-main residence - add to the component non-main residence days in the formula the number of days in the period that the dwelling was not the main residence of one or more of:

(a)  an individual who owned the dwelling at the time of their death; or

(b)  the spouse (except a spouse who was living permanently separately and apart from the individual); or

(c)   an individual who had a right to occupy the dwelling under a will; or

(d)  an individual to whom an ownership interest in the dwelling passed as a beneficiary in a deceased estate.

In this case the effect of the application of the formula is that no exemption would be available because the non-main residence days would equal the total days.

The beneficiaries of the Second Deceased's estate inherited their ownership interest in the dwelling after 19 September 1985 and as beneficiaries through a chain of deceased estates, the beneficiaries adjust the formula in section 118-205 of the ITAA 1997 to consider the times when the dwelling was the main residence of an individual earlier in the inheritance chain. Therefore, the Deceased's main residence days are added to the total days to calculate the capital gain/capital loss.

The following example is provided to assist you in calculating the applicable CGT:

Taxpayer A acquired a property after 20 September 1985 and owned if for 3,700 days

• The property was the main residence throughout the time of ownership
• Taxpayer A left the property to their child, Taxpayer B

Taxpayer B owned the property for 2,600 days

• The property was not the main residence at any time during the period of ownership
• When Taxpayer B died, the property was left to Taxpayer C

Taxpayer C owned the property for 750 days

• The property was not the main residence at any time during that period.
• Taxpayer C sold the property and made a capital gain of $400,000.

The taxable proportion of Taxpayer C's capital gain is:

• The number of days that the property was not a main residence
• Divided by the total number of days from when Taxpayer B first acquired until the dwelling was sold by Taxpayer C.

Taxpayer C calculates their capital gain as follows:

$400,000 × ((2,600 + 750) ÷ (2,600 + 750 + 3,700)) = $190,071

The combined period that Taxpayer A, Taxpayer B and Taxpayer C owned the property was more than 12 months, Taxpayer C can reduce the capital gain by the 50% discount (after deducting any capital losses).

In this case, the dwelling appears to have been the main residence of the Deceased for their entire ownership period. The non-main residence days are calculated from the time the Property was transferred to the Second Deceased until the property was sold by the executors of the Second Deceased. Added to this amount is the main residence days of the Deceased to arrive at the total days.