Edited version of private advice

Authorisation Number: 1052357148479

Date of advice: 4 February 2025

Ruling

Subject: CGT - deceased estate

Question 1

Can the Trustee for the Estate (Trustee) disregard any capital gain or capital loss on the sale of Property 1 under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

Can the Trustee disregard any capital gain or capital loss on the sale of Property 2 under section 118-195 of the ITAA 1997?

Answer 2

No.

Question 3

If the answer to question 2 is no, will the first element of the cost base of Property 2 in the hands of the Trustee be the Deceased's cost base at the date of the Deceased's death according to section 128-15 of the ITAA 1997?

Answer 3

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XY

Year ended 30 June 20XZ

The scheme commenced on:

20XX

Relevant facts and circumstances

The Deceased's spouse acquired a pre-CGT property (Pre-subdivision Property) comprised of 3 lots. The Pre-subdivision Property was used as their main residence.

The Deceased's married their spouse who then transferred the Pre-subdivision Property on DD MM 20XV such that the Deceased and their spouse owned the property as joint tenants.

The Pre-subdivision Property originally comprised of three lots and in 19XX the three lots were realigned into two allotments. Lot 1 contained the main residence of the property owners. The land size for Lot 1 was xm². Lot 2 was a vacant block containing grass that was mowed to keep it in reasonable condition. Lot 2 was used solely for private and domestic purposes as part of the main residence. The land size of Lot 2 was xm².

The Deceased's spouse died on DD MM 20XW. The spouse's interest in the Pre-subdivision Property was transferred to the Deceased, who became the sole proprietor of the Pre-subdivision Property.

The Deceased died on DD MM 20XX. The Trustee for the Deceased Estate (Trustee) acquired the Pre-subdivision Property on the death of the Deceased.

The two allotments of the Pre-subdivision Property were further realigned in 20XX to adjust in a minor way.

The Trustee applied for a subdivision of the two allotments in 20XX. The subdivision application for the two allotments has recently been approved and finalised by the local council. The house block (Property 1) and the vacant land block (Property 2) are now on separate legal titles and individually saleable.

The Pre-subdivision Property was the main residence of the Deceased at the date of their death and was not then being used for income producing purposes. The Deceased was an Australian resident just before their death.

The Pre-subdivision Property had a market value of approximately $X at the date of the Deceased's death.

A contract for the sale of Property 1 was signed on DD MM 20XY and the settlement date is DD MM 20XY, which is within 2 years of the Deceased's death.

Property 2 is currently listed for sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

Property 1 contains the dwelling that was Deceased's main residence just before their death, it was not being used for the purpose of producing assessable income and the Deceased was an Australian resident. Therefore, the Trustee can disregard any capital loss or capital gain on the sale of Property 1 in accordance with section 118-195.

Detailed reasoning

As is relevant, subsection 118-195(1) provides that if you own a dwelling in your capacity as trustee of a deceased estate, a capital gain or capital loss made on the disposal of the dwelling will be disregarded if:

•                     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,

•                     your ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner, and

•                     the deceased was not an excluded foreign resident.

Section 118-115 provides that:

(1)           A dwelling includes:

(a)           a unit of accommodation that:

(i)            is a building or is contained in a building; and

(ii)           (ii) consists wholly or mainly of residential accommodation; and

(b)           a unit of accommodation that is a caravan, houseboat or other mobile home; and

(c)           any land immediately under the unit of accommodation.

(2)           However, except as provided in section 118-120, a dwelling does not include any land adjacent to a building.

The Deceased had two interests in the Pre-subdivision Property. Each of these interests is a separate CGT asset. The Deceased acquired one interest on DD MM 20XV and acquired the other interest when their spouse died on DD MM 20XW.

The Trustee acquired the Deceased's interests in the Pre-subdivision Property as the trustee of the deceased estate.

The Pre-subdivision Property was subdivided into Property 1 and Property 2. The subdivision is not a CGT event.

Property 1 is x² and contains the house which was the Deceased's main residence. It was not being used for the purpose of producing assessable income just before the Deceased's death, therefore item 1 of column 2 of the table in paragraph 118-195(1)(b) applies.

A contract for the sale of Property 1 was signed on DD MM 20XY and the settlement date is DD MM 20XY, which is within 2 years of the Deceased's death as described in item 1 of column 3 of paragraph 118-195(1)(b).

The requirement in paragraph 118-195(1)(c) is met as the Deceased was an Australian resident just before their death.

As the requirements of section 118-195 are met, the Trustee may disregard any capital gain or capital loss on the sale of Property 1.

Question 2

Summary

The Trustee cannot disregard any capital gain or capital loss on the sale of Property 2 under section 118-195 as the land in Property 2 is not considered to be part of the dwelling that was the Deceased's main residence on Property 1.

Detailed reasoning

In accordance with subsection 118-115(2):

... except as provided in section 118-120, a dwelling does not include any land adjacent to a building.

As is relevant, section 118-120 provides that:

(1)           This Subdivision applies to a dwelling's adjacent land (if the same CGT event happens to that land or your ownership interest in it) as if it were a dwelling.

(2)           Land adjacent to a dwelling is its adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

(3)           The maximum area of adjacent land covered by the exemption for the CGT event (the current event) is 2 hectares, less the area of the land immediately under the dwelling.

In relation to the main residence exemption, section 118-165 provides that:

The exemption does not apply to a *CGT event that happens in relation to land, or a garage, storeroom or other structure, 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 interest in it.

Paragraph 7 of Taxation Determination TD 1999/68 Income tax: capital gains: is 'adjacent' land in terms of section 118-120 of the Income Tax Assessment Act 1997 limited to land contiguous to a dwelling? provides the following explanation:

The main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it: see section 118-165. If you dispose of adjacent land to the same person and at the same time as you dispose of your main residence, the exemption extends to the adjacent land. It does not extend to adjacent land, however, if you dispose of the land separately from the main residence, e.g., you dispose of the adjacent land to the same purchaser but at a different time from when you dispose of the main residence or you dispose of the adjacent land and the main residence to different purchasers even if the disposals happen at the same time.

The Trustee has entered a contract for the sale of Property 1, which contains the dwelling that was the Deceased's main residence just before the Deceased's death.

Property 2 is currently listed for sale.

As the Trustee has entered a contract of sale for Property 1, Property 2 will be sold at a different time to Property 1. Therefore, the land in Property 2 will not be considered as if it was the dwelling that was the main residence of the deceased.

Consequently, the exemption section 118-195 will not extend to include the sale of Property 2.

Question 3

Summary

As the Deceased's two interests in Property 2 were acquired after 20 September 1985, the first element of the cost base of Property 2 in the hands of the Trustee will be the Deceased's cost base at the date of the Deceased's death as set out in item 1 of the table in subsection 128-15(4).

Detailed reasoning

If the Deceased acquired the asset on or after 20 September 1985, the first element of the Trustee's cost base is generally what the Deceased's cost base for the asset was on the day they died.

Section 128-15 states:

(1)           This section sets out what happens if a CGT asset you owned just before dying:

(a)           devolves to your legal personal representative; or

(b)           passes to a beneficiary in your estate.

(2)           The legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.

(3)           Any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

(4)           This table sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.

Item 1 - CGT asset is one you acquired on or after 20 September 1985, except for one covered by item 2, 3, 3A or 3B.

The first element of the asset's cost base is the cost base of the asset on the day you died.

The first element of the asset's reduced cost base is: the reduced cost base of the asset on the day you died.

The Deceased had two interests in the Pre-subdivision Property. Each of these interests is a separate CGT asset. The Deceased acquired one interest on DD MM 20XV and acquired the other interest when the Deceased's spouse died on DD MM 20XW.

As the Deceased's two interests in Property 2 were both acquiredafter 20 September 1985, item 1 of the table in subsection 128-15(4) applies such that the first element of the asset's cost base in the hands of the Trustee will be the cost base of the asset on the day the Deceased died.