Edited version of private advice

Authorisation Number: 1052227887263

Date of advice: 5 March 2024

Ruling

Subject: Deceased estate

Question

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

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

XX XX (the deceased) passed away on XX XX 20XX.

The property is located at XX XX XX.

The deceased acquired the property XX 20XX.

This was the deceased's main residence for the next 17 years.

The deceased was eligibility for the disability pension from XX 20XX.

On XX XX 20XX, the deceased demolished the property with the intention of rebuilding.

On XX XX 20XX, The World Health Organization declared coronavirus a Public Health Emergency of International concern.

The State entered lockdown for an extended period and did not return to complete normalcy until much later.

The deceased had a heart attack in XX 20XX.

The deceased did not have a signed building contract for a dwelling to be built.

The deceased did not rebuild a dwelling on the land located at XX XX XX.

XX XX 20XX, the deceased estate sold the land only to a third party.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-120(3)

Income Tax Assessment Act 1997 section 118-150(3)

Income Tax Assessment Act 1997 section 118-155(2)

Reasons for decision

Issue

Deceased estate

Summary

Any capital gain or loss you make due to the sale of the property is not disregarded.

Detailed reasoning

Entitlement to the full main residence exemption is under section 118-195 of the ITAA 1997.

The conditions for the full main residence exemption under section 118-195 of the ITAA 1997 for the trustee for XX XX are:

•         The CGT event must happen in relation to a dwelling

•         You owned it as the trustee of the deceased estate (that means it was owned by the deceased when they passed away)

•         One of two conditions about the deceased's ownership is satisfied (either the deceased acquired it before 20 September 1985 or, if acquired after 20 September 1985, it was their main residence when they passed away and not then being used to derive assessable income)

•         One of two conditions for the period after the deceased's death is satisfied (either settlement of the disposal is completed within two years of the deceased passing away or the dwelling is occupied by certain individuals for the whole of the period from the date of death until settlement of the sale), and

•         The deceased was not an excluded foreign resident just before their death.

The full main residence exemption under section 118-195 of the ITAA 1997 is not available if any of these conditions are not satisfied.

The first condition is that the CGT event must happen in relation to a dwelling.

It is the state and nature of the CGT asset that is the object of the CGT event at the time of the CGT event and at the date of settlement that determines whether or not the CGT event is in relation to a dwelling.

Section 118-165 of the ITAA 1997 states:

•         The exemption does not apply to a CGT event that happens in relation to land ... to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership int it.

That means that the dwelling and the adjacent land are disposed of to the same purchaser at the same time in the same contract. (See paragraph 7 of Taxation Determination TD 1999/68.)

The deceased demolished the property on the XX XX 20XX.

The deceased did not sign a contract to have a new dwelling built.

There was no dwelling on the land when it was sold, therefore section 118-195 of the ITAA 1997 cannot be applied.

We also considered the renovation and repair rules, death during renovations and repairs rules and the 4 years before the individual's death rule.

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.

The CGT main residence attaches to a dwelling, and, under subsection 118-120(3) of the ITAA 1997, it also attaches to any land that is adjacent to the dwelling (capped at two hectares). It is not uncommon for individuals to renovate or repair an existing dwelling which is their main residence, such that the original dwelling may be demolished, with a new dwelling built. 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.

Specifically, a taxpayer may make a choice under section 118-150 of the ITAA 1997 to apply Subdivision 118-B to the dwelling being built, repaired or renovated on the land, as if it were their main residence from the time the taxpayer acquired their original ownership interest.

As there was no dwelling being built, we cannot use this section of the legislation.

Death during renovations and repair rules

Section 118-155 of the ITAA 1997 applies in scenarios where a dwelling is being built, repaired or renovated (ie. where section 118-150 applies), and an owner of the interest dies. There are three potential scenarios where section 118-155 can apply, namely where the individual 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).

In your case the deceased did not enter into a contract for a dwelling to be built so we cannot apply this part of the legislation.

4 years before the individuals death rule

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.

The effect of this provision is to allow one of the conditions about the deceased's ownership to be satisfied.

Because there was no dwelling at the time of sale the Commissioner cannot use this section of the legislation.

Consideration of your circumstances

You contend that consideration should be given to the deceased's medical issues in concluding whether the main residence exemption should be available.

In this case the Commissioner does not have any discretion to exempt the sale of XX XXX from Capital Gains Tax as the legislation to exempt CGT requires a dwelling to be present.

We have taken the following into consideration when making our decision:

•         We acknowledge that the mental health issues the deceased experienced during the time of the deceased's passing would have made entering a building contract more difficult. However, there is nothing in the legislation that allows the Commissioner to exempt CGT from a sale due to extenuating circumstances presented by the deceased.

Conclusion

As a result of the dwelling being demolished the resulting asset is vacant land.

CGT event A1 happened on XX XX 20XX when you disposed of the land as there was not a dwelling on the land there is no main residence exemption available.

The circumstances presented are of a different nature to the situations in which the Commissioner can exercise a discretion as there is no dwelling on the land. Having considered the relevant circumstances, the Commissioner does not have any discretion to exempt the land from CGT under the Main Residence exemption.