Edited version of private advice

Authorisation Number: 1052382990241

Date of advice: 8 April 2025

Ruling

Subject: Deceased estate - partial exemption

Question 1

Are you entitled to a partial exemption under section 118-200 of the Income Tax Assessment Act 1997 (ITAA 1997) on the capital gain made when you disposed of the property?

Answer 1

Yes.

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, the deceased and their spouse bought the property as joint tenants.

The property size is under 2 hectares.

The deceased's spouse passed away on XX/XX/19XX.

The deceased acquired their spouse's share of the property as the surviving joint tenant.

The deceased's Will details that the property is to be passed to beneficiaries (the grandchildren) equally as tenants in common.

From XX/XX/19XX until XX/XX/20XX, the property was the deceased's main residence.

In X 20XX the deceased moved into their partner's (partner) residence.

The deceased did not move back into the property after moving out in 20XX.

The property was leased out from XX 20XX until XX 20XX.

From XX 20XX until XX 20XX, the property was vacant.

From XX/XX/20XX until XX/XX/20XX, the property was occupied by the deceased's child (the child) rent free.

From XX 20XX until XX 20XX, the property was vacant.

From XX/XX/20XX until XX/XX/20XX, the child resided in the property.

From XX/XX/20XX, there was an agreement in place for the child to pay $X a week to reside in the property. The agreement continued until XX/XX/20XX.

From XX/XX/20XX until XX/XX/20XX, the child resided in the property rent free.

From XX/XX/20XX, the property remained vacant until being sold.

On XX/XX/20XX, the grandchildren entered a contract to sell the property.

On XX/XX/20XX, settlement occurred on the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Reasons for decision

Dwelling acquired from a deceased estate

Subsection 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 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.

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 the 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

The deceased and their spouse acquired the property after 20 September 1985. It was the deceased's main residence until 20XX when they moved out to live at their partner's property. The property was not the deceased's main residence just before passing away. Consequently, as the conditions were not met within the table under subsection 118-195(1) of the ITAA 1997 to allow a full exemption, a partial exemption will be applicable.

Under subsection 118-200(2) you calculate your capital gain or capital loss using the formula:

>

where:

CG or CL amount is the *capital gain or *capital loss you would have made from the *CGT event apart from this Subdivision.

non-main residence days is the sum of:

(a)           if the deceased *acquired the *ownership interest on or after 20 September 1985 - the number of days in the deceased's *ownership period when the *dwelling was not the deceased's main residence; and

...

(b)           the number of days in the period from the [deceased's] death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195 [of the ITAA 1997].

total days is:

(a) if the deceased *acquired the *ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or

(b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

Partial exemption calculation

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 settlement of the property.

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.