Edited version of private advice

Authorisation Number: 1052233928446

Date of advice: 20 March 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

Yes

Question 4

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

Answer

Contract of Sale date

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

No answer is applicable, refer to the answer to question 5 above.

This ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

X July 20XX

Relevant facts and circumstances

•         The name of the client: Client A

•         Date of death: XX March 20XX

•         The last will of the deceased was dated XX August 20XX

•         The Court A granted The Executor Probate of the will on XX August 20XX.

•         The deceased owned two properties:

•         Property A - purchased XX February 20XX.

•         Property B - purchased XX January 20XX.

•  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 with 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 20XX and lived in this dwelling as their main residence until XX January 20XX, as such this is a post CGT asset.

•  From the XX July 20XX this property was used to produce assessable (rental) income.

•  The deceased continued to treat this property as their main residence from the XX July 20XX until XX July 20XX

•  After the deceased passed away, in March 20XX, this property continued to be rented until XX October 20XX.

•  This property was left vacant after this date until it was sold by the Legal Representative, on the XX December 20XX with the settlement being completed X March 20XX.

Property B details:

•  The deceased purchased this property on the XX January 20XX and as such is post CGT asset.

•  The deceased used this property as their principal place of residence until they passed away on XX March 20XX.

•  The deceased classed this property as their main residence from XX July 20XX - XX March 20XX.

•  After the deceased passed away the property was left vacant until it was sold by the executors, XX May 20XX with the settlement date XX June 20XX.

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 20XX - XX July 20XX.

Then Property B was used as the Main residence from XX July XXXX until the deceased passed away on XX March 20XX.

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 20XX - XX July 20XX.

Then Property B was used as the Main residence from XX July 20XX until the deceased passed away on XX March 20XX.

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 20XX to when the X years lapsed on the XX July 20XX. 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 continued 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

Yes

The deceased purchased this property on the XX February 20XX and used it are their main residence until XX January 20XX. From the XX July 20XX the property was used to produce assessable (rental) income. The property continued to be rented until the XX October 20XX.

The total number of days will be calculated from when the property was first rented on the XX July 20XX to when it was sold on the XX December 20XX. Therefore, you are eligible to use the first used to produce income rule, as such, the total number of days is reset.

If a main residence was used to produce income after XX August 19XX, there is a special rule that affects the way you calculate your capital gain or loss.

The rule provided that you are taken to have acquired the dwelling at its market value at the time it is first used to produce income, the following conditions need to apply:

•        You acquired the dwelling on or after XX September 19XX.

•        You first used the dwelling to produce income after XX August 19XX.

•        When a CGT event does happen, you would only get a partial exemption because the dwelling was used to produce assessable income during the period that you owned it.

•        You would have been entitled to a full exemption if the CGT event happened immediately before you first it to produce income.

If all of the above conditions are met, then you are taken to have acquired their family home at its market value on the day you moved out and rented it.

The capital gain or loss is worked out under the below partial exemption formula:

Total Capital gain or loss - number of days in your ownership period

Made from the CGT event x when the dwelling was not your main residence

_________________________________________________________________________

Total number of days in your ownership period

Where the 'total number of days in your ownership period' will be the date of the settlement of purchase until the date of the settlement of sale.

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 XX February 20XX.

You have a legal ownership of a dwelling or land from the date of settlement of the contract of purchase, until the date of settlement of the contact of sale. This is called your ownership period.

A CGT event occurs when you enter into the sale contract. You include any capital gain on your tax return for the income year in which the CGT events occur.

The CGT event can therefore be in an earlier tax period that when the settlement date occurs

You choose to treat a property as your main residence in the income year a CGT event happens to the property when preparing your tax return. The year you sell the property is based on the contract sale date, not the settlement date.

Therefore, the contract sale date is when the ownership interest in the property ends.

Please refer to ato.gov.au QC 66030 Treating former home as main residence - under section heading - "When and how to make the choice" for further information.

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 Income Tax Assessment Act 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 19XX, 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's 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.