Edited version of private advice

Authorisation Number: 1052359972424

Date of advice: 19 February 2025

Ruling

Subject: CGT - deceased estate

Question 1

Is the first element of the cost base of the interest in the property you inherited from Person E equal to its market value calculated as at the date Person E passed away?

Answer 1

No.

Question 2

Is the first element of the cost base of the interest in the property you inherited from Person D equal to its market value calculated as at the day Person D passed away?

Answer 2

No.

Question 3

Will you be entitled to a partial main residence exemption due to the sale of the property?

Answer 3

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You acquired a property (the Property).

The Property is a ground floor shop, with an upstairs residence that is accessed from the rear.

The whole Property, compromising of the ground floor shop and residence, is listed under the one title deed.

In 19XX, the Property was purchased by the Deceased Person A, who lived in the Property.

In 19XX, Deceased Person A moved out of the Property, and it became a rental property. It has remained a rental property.

In 19XX, Deceased Person A passed away and the Property was inherited by Deceased Person A's spouse (Deceased Person B).

In 19XX, Deceased Person B passed away and the Property passed to Deceased Person C and Deceased Person D, in equal shares, as tenants in common.

In XX 20XX, Deceased Person C passed away, leaving their 50% share of the Property to Deceased Person E.

In XX 20XX, Deceased Person D passed away, leaving their 50% share of the Property to you.

In XX 20XX, Deceased Person E passed away, leaving their 50% share of the Property to you.

You earn rental income from the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Question 1

Is the first element of the cost base of the interest in the property you inherited from Person E equal to its market value calculated as at the date Person E passed away?

Summary

In XX 20XX, Deceased Person E passed away and you acquired a 50% interest in the property. The cost base and reduced cost base to you for this share of the property; is the cost base to Deceased Person E in 20XX. The cost base of the share to Deceased Person E is the market value of the asset on the day Deceased Person B passed away in 19XX.

Question 2

Is the first element of the cost base of the interest in the property you inherited from Deceased Person D equal to its market value calculated as at the day Deceased Person D passed away?

Summary

In XX 20XX, Deceased Person D passed away and you acquired a 50% interest in the property. The cost base and reduced cost base to you for this share of the property; is the cost base to Deceased Person D in 20XX. The cost base of the share to Deceased Person D is the market value of the asset on the day Deceased Person B passed away.

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event. The most common CGT event is CGT event A1. CGT Event A1 happens when you dispose of an asset to another entity, for example, you sell the property.

Your capital gain is the difference between the capital proceeds and the cost base of the property. Your capital proceeds are the amount your received or expect to receive from the event.

Cost base of an inherited asset to a beneficiary

When you inherit a CGT asset, the acquisition date for you, is the date of death of the former owner.

Section 128-15 of the ITAA 1997 confirms that if a CGT asset you (the deceased) owned just before dying, devolves to your Legal Personal Representative (LPR) or passes to a beneficiary in the deceased estate. Subsection 128-15(2) of the ITAA 1997 states that the LPR or beneficiary, is taken to have acquired the asset on the day the deceased died.

In your case, the Property was acquired by the Deceased Person E and Deceased Person D after 20 September 1985, as the Property was not the main residence of any of the previous holders of the asset when they passed away, subsection 128-15(4) confirms at item 1 that when you acquired the asset, the cost base and reduced cost base to you, is the cost of the Property to Deceased Person E and Deceased Person D.

Deceased Person E and Deceased Person D, themselves, acquired the Property as a post-CGT asset, and the Property was not the main residence of the previous owners (Deceased Person B and Deceased Person C) when they passed away.

If you acquire an asset owned by a deceased person as their executor or beneficiary, you are taken to have acquired the asset on the day the person died. In your case, Deceased Person E and Deceased Person D inherited their ownership interests in the property after 20 September 1985. The cost base and reduced cost base to you is the cost base of both Deceased Person E (in 20XX) and Deceased Person D (in 20XX). The cost base to Deceased Person E and Deceased Person D is the market value of the Property on the day Deceased Person B died pursuant to subsection 128-15(4) because they held it as a pre-CGT asset.

Question 3

Will you be entitled to a partial main residence exemption due to the sale of the property?

Summary

Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative (LPR), or beneficiary, is taken to have acquired the asset on the day the deceased died. You acquired your two 50% interests in the Property in 2016 and 2018, respectively.

You are not eligible to apply a main residence exemption on the Property, as neither yourself, Deceased Person E or Deceased Person D, used it as your main residence. You cannot disregard any capital gain or capital loss on the proposed sale of the Property.

Detailed reasoning

The main residence provisions contained in subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) allow an individual to disregard a capital gain or capital loss relating to the disposal of a dwelling which was that person's main residence.

Section 118-195 of the ITAA 1997 outlines the conditions under which you can disregard a capital gain or capital loss in full, when you acquire an ownership interest in a dwelling from a deceased estate.

You are an individual that has acquired the interest in the property as a beneficiary of the deceased estates Deceased Person E and Deceased Person D. Deceased Person E and Deceased Person D acquired their ownership interests in 20XX and 20XX (respectively).

In your case, the property that has passed through a chain of inheritance via deceased estates; was comprised of a shop, earning assessable income, and an upstairs residence, earing assessable income. You are not eligible for a full main residence exemption when you sell the CGT asset, as Deceased Person E and Deceased Person D acquired their ownership interest in the property after 20 September 1985 and the property was not their main residence just before they passed away.

The property has been used to derive income and you are not entitled to apply a full main residence exemption when calculating your cost base.

Partial main residence exemption

If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole to you owned it, you may be entitled to a partial main residence exemption.

To obtain a partial main residence exemption, you must have initially established the dwelling as your main residence.

In your case, neither yourself, Deceased Person E, Deceased Person D, nor Deceased Person C, resided in the property as a main residence. As the dwelling was not the main residence of any individual that acquired the asset as a post-CGT asset, you are not entitled to a partial main residence exemption when you sell the Property.

Application to your circumstances

In 19XX, Deceased Person A purchased the CGT asset.

In 19XX, Deceased Person B inherited the dwelling from Deceased Person A as a pre-CGT asset.

In 19XX, Deceased person C and Deceased Person D, inherited 50% of the property each, from Deceased Person B. Given Deceased Person B acquired their ownership interest as a pre-CGT asset, the first element of the cost base to Deceased Person C and Deceased Person D, is the market value of the asset on the day Deceased Person B passed away, as per item 4 of subsection 128-15(4) of the ITAA 1997.

In XX 20XX, Deceased Person E inherited Deceased Person C's 50% share of the property. Where an asset was acquired by the deceased, after 20 September 1985 (ie. Deceased Person C acquired their share in 19XX); the first element of the cost base to Deceased Person E, is Deceased Person C's cost base; which is the market value of the asset on the day Deceased Person B passed away.

In XX 20XX, Deceased Person D passed away, and you acquired Deceased Person D's 50% interest in the property. The cost base and reduced cost base to you for this share of the property; is the cost base of Deceased Person D in 20XX. The cost base of the share to Deceased Person D is the market value of the asset on the day Deceased Person B passed away in 19XX.

In XX 20XX, Deceased Person E passed away and you acquired the remaining 50% interest in the property. The cost base and reduced cost base to you for this share of the property; is the cost base to Deceased Person E in 20XX. The cost base to Deceased Person E is the market value of the asset on the day Deceased Person B passed away in 19XX.

Given neither yourself, nor any of the previous post-CGT holders of the asset ever resided in the Property, it was never established as a main residence. You are not eligible to apply either a full or partial main residence exemption when CGT event A1 occurs for you and you dispose of the Property. You cannot disregard any capital gain or capital loss on the proposed sale of the Property.