Edited version of private advice

Authorisation Number: 1052355049091

Date of advice: 21 February 2025

Ruling

Subject: CGT - deceased estates

Question 1

Will CGT A1 event occur under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) when the trustees of the deceased estate dispose of the property?

Answer

Yes.

Question 2

Will the capital gain made on the disposal of the property be disregard under section 118-195 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX/XX/19XX (pre-CGT), a company, with the deceased as director, acquired the property as vacant land.

On XX/XX/19XX, the deceased acquired the land from the company.

The total area of the property is 1.99 hectares.

The property at present, consists of a main house, a dual residence (two apartments), a flat above the garage (billiard room) and a caretaker's cottage.

The main house was built between 19XX and 19XX.

The deceased lived at another property during the construction.

The deceased moved into the main house in 19XX.

From 19XX until 20XX the deceased lived in the main house with their de-facto partner.

In 19XX, approval was given to construct a garage with an extension in the form of an upstairs 'billiard room'. The approval for the billiard room contained a condition that it would not be occupied as a separate dwelling. It was used by family when visiting.

In 20XX the construction of an attached dual residence (apartment 1 and apartment 2) was completed. The deceased and de-facto partner moved into apartment 1 as their main residence.

The deceased separated from their de-facto partner and met and married their current spouse in 20XX. The current spouse moved into apartment 1 with the deceased.

From 20XX the main house and apartment 2 were rented out.

The deceased went into an aged care facility in 20XX.

The deceased passed away on XX/XX 20XX.

The Solicitors are the executors of the deceased's estate.

Clause 5 of the deceased's Will includes provisions for the property as follows:

"I give my one bedroom unit on top of the garage shown on the plan attached hereto and signed by me and the witnesses to this Will at my property to my executors on trust for my spouse for life to permit them to reside there or if they wishe to lease the unit and receive the rental income therefrom and upon their death or the cessation of their interest in the said unit it shall form part of the residue of my estate".

On XX/XX/20XX, probate was granted to one of the solicitors.

The deceased's spouse has continued living in apartment 1 since 20XX.

The billiard room above the garage has been rented out since the deceased passed away in 20XX although, council approval at the time of construction stipulated this was not to be occupied as a separate dwelling.

The caretaker cottage has not been rented out to the caretaker but used by the caretaker in exchange for carrying out caretaking duties.

The property is for sale with all the dwellings included.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-200

Reasons for decision

Issue

Question 1

Summary

A CGT A1 event will occur for the trustees of the deceased estate under section 104-10 of ITAA 1997 when they dispose of the property. The timing of CGT A1 event will occur when the trustees enter into a contract to sell the property.

Detailed reasoning

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event occurring to a CGT asset that you have an ownership interest in. Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

The property consists of a main house with a garage, a billiard room above the garage, a caretaker cottage, and dual residences (apartment 1 and apartment 2) on approximately 1.99 hectares of land.

The deceased passed away on XX/XX/20XX. The entire property has been listed for sale by the trustees of the deceased estate. Consequently, when the trustees enter a contract to sell the property a CGT A1 event will occur.

Question 2

Summary

The dwellings on the land have been used for different purposes. The CGT implications for each dwelling will need to be proportioned and calculated separately by considering the use of each dwelling. Consequently, as conditions have not been satisfied within the table under section 118-195 (1) any capital gain or capital loss will not be disregarded on the property under section 118-195 of the ITAA 1997.

Detailed reasoning

Dwelling acquired from a deceased estate

Section 118-195(1) of the ITAA 1997 provides a full CGT exemption for capital gains and capital losses made by a beneficiary or a trustee of a deceased estate from one of the specified CGT events in relation to a dwelling or the taxpayer's ownership interest in the dwelling. The exemption only applies if certain conditions are satisfied.

A full exemption is available if at least one of the items in column 2 and at least one of the items in column 3 of the table in subsection 118-195(1) of the ITAA 1997 are satisfied.

Table: Beneficiary or trustee of deceased estate acquiring interest

Column 2

One of these items is satisfied if:

1.            The deceased acquired the ownership interest on or after 20 September 1985 and the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income

2.            The deceased acquired the ownership interest before 20 September 1985

Column 3

And also one of these items if:

1.            Your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner

2.            The dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

a)            the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

b)            an individual who had a right to occupy the dwelling under the deceased's will; or

c)            if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary- that individual.

Place of residence

Taxation Determination TD 1999/69 considers the situation where more than one unit of accommodation can constitute a dwelling for the purposes of the main residence exemption.

Where more than one unit of accommodation is treated as a dwelling for the purposes of section 118-110 and provided they are disposed of as the result of one capital gains tax (CGT) event, any capital gain or loss realised on the two units of accommodation is disregarded.

Whether more than one unit of accommodation is used together as one place of residence or

abode for the purposes of the definition of 'dwelling' is a question of fact that depends on the

particular circumstances of each case. Factors relevant in considering whether units of

accommodation are used together as one place of residence or abode include:

(a)            whether the occupants sleep, eat and live in them;

(b)            the distance between and the proximity of the units of accommodation;

(c)            whether the units are connected;

(d)            whether the units are capable of being sold separately;

(e)            the extent to which the daily activities of the occupants in the units are integrated;

(f)            how the units are shared by the occupants; and

(g)            how costs of the units are shared by the occupants.

Partial Exemption

Subsection 118-200(1) of ITAA 1997 states that if you do not qualify for a full exemption under section 118-195 of ITAA 1997 for an inherited property, you may be entitled to a partial exemption. Your entitlement to a reduction to your capital gain from the sale of the property is based on the proportion of your total days that are main residence days. Conversely, the capital gain remains to the extent of the proportion of your total days that are non-main residence days.

Application of Division 128 to Deceased Estates

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die passes to their legal personal representative or to a beneficiary in a deceased estate.

In accordance with subsection 128-15(2) of the ITAA 1997, a legal personal representative or beneficiary is taken to have acquired the asset on the day the deceased person died.

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base in the hands of the legal personal representative (LPR) or beneficiary.

Item 1 in the table in subsection 128-15(4) of the ITAA 1997 states that the first element of the cost base to the LPR or beneficiary for assets that the deceased acquired after 19 September 1985, is the cost base of the asset on the day the deceased person died.

A capital gains tax asset passes to a beneficiary if the beneficiary becomes the owner in one of the ways set out in section 128-20 of the ITAA 1997, including:

•                     Under the Will, or the Will as varied by a court order,

•                     Under a deed of arrangement which the beneficiary entered into to settle a claim to participate in the estate.

Application to your circumstances

Apartment 1 which was the deceased's main residence with their spouse before passing away, apartment 1, has continued to be their spouse's main residence. Therefore, the conditions are satisfied in the table under subsection 118-195(1) of the ITAA 1997 to allow a full CGT exemption for the portion of the property that contains apartment 1.

The trustees do not qualify for a full exemption for the portion of the property that contained the caretakers' cottage, the main house and apartment 2.

The portion of the property that contained the main house (which includes the billiards room) qualifies for a partial exemption, as it was the deceased's main residence for a period and was also used for income producing purposes.

When calculating the partial exemption, the non-main residence days will be the total of:

•                     The number of days from when the deceased died until settlement of the sale of the property and;

•                     The number of days during the deceased's ownership of the property that it was not their main residence.

Total days for the property, which was acquired by the deceased after 20 September 1985, is the total days from when the deceased acquired the property until the trustees dispose of it.

To work out the taxable portion of your capital gain or loss:

Step 1: Calculate your capital gain or loss from selling or disposing of the property.

Step 2: Multiply the amount at step 1 by the number of non-main residence days.

Step 3: Divide the amount at step 2 by the total days.

In considering the above details in TD 1999/69, the caretaker's cottage, and apartment 2 are separate dwellings in terms of section 118-115.

The caretakers' cottage was never the main residence of the deceased during their ownership period. It is not clear from the facts whether the caretaker's cottage already existed on the land when it was originally acquired by the deceased or it was constructed after the land was acquired by the deceased.

Apartment 2 was used for income producing purposes from the time its construction was completed.

The CGT calculations will need to be apportioned to include the area of the property that contained the main house, the caretaker's cottage, and apartment 2. When calculating the cost base for the main house, the caretaker's cottage, and apartment 2, the first element of the cost base is the cost base of the asset on the day the deceased died.