Private ruling: capital gains tax - deceased estate - main residence and disposal
Published: October 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1:  | A1: Question 2: Are you liable for CGT on the disposal of dwelling two? Answer: No .

Relevant facts and circumstances: After 20 September 1985, you and your parents jointly purchased a property for a specified amount, which includes stamp duty and additional expenses. The property comprised of X square metres of land with two houses situated on the land. One house was built in the 1980's (dwelling one) advertised for a specified amount and the other house was built in the 1950's (dwelling two) advertised for a specified amount. You established the houses as your main residences, your parents resided in dwelling one and you resided in dwelling two. Some time ago your parent A passed away and the property title was registered in you and your parent B's names as joint tenants shortly after. Your parent B continued to reside at dwelling one and you continued to reside at dwelling two. Some time later your parent B thought that they might like to downsize, so you and your parent A decided to subdivide the property and dispose of dwelling one. The property was subdivided and Lot 1 - dwelling one and Lot 2 - dwelling two was registered in you and your parent B's names as joint tenants. Your parent B became ambivalent about the disposing of dwelling one so you both continued to reside in your own houses. Some time later, your parent B needed to be moved into residential care. You took out a mortgage on dwelling two for the bond and dwelling one was rented out to cover your parent B's residential care expenses. Dwelling one was your parent B's main residence for their entire ownership period. Your parent B died a few years ago. Shortly after, the titles to dwelling one and then dwelling two were transferred into your name. You continued to rent out dwelling one until the recent year and you then commenced preparing it for disposal. In the recent year you put dwelling one on the property market for a specified sum. You put dwelling two on the property market for a specified amount. You have supplied documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 115-5 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200 | Income Tax Assessment Act 1997 Section 115-5

Reasons for decision: Summary: The most common CGT event, CGT event A1 which occurs when you dispose of a CGT asset and the time of the event is when you enter into the contract for the disposal or if there is no contract when a change of ownership occurs. CGT is the tax that you pay on any capital gain and capital loss you include in your annual income. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate. | Detailed Reasoning - Subdivision of land: Subdivision itself is not a CGT event. If you subdivide a block of land, the CGT provisions treat the subdivided blocks as though they were always separate assets, as each is registered with a separate title. The acquisition date of the subdivided block will be your original purchase date. However, the cost base of the original land is apportioned between the subdivided blocks on a reasonable basis. The enclosed Taxation Determination TD 97/3 provides that the Commissioner will accept any reasonable method of apportioning the original cost base between the new blocks, such as on an area basis or relative market value basis. The costs of subdivision should also be apportioned between the blocks. If the blocks are of unequal market value the Commissioner considers that costs such as survey, legal fees and application fees associated with the subdivision should be apportioned in accordance with relative market values of the two blocks. However, any cost solely related to one block should be attributed to that block. In your case, even though when you and your parents acquired the property, each of the dwellings had been valued - dwelling one - a specified amount and dwelling two - a specified amount you will need to apportion the cost base. For CGT purposes of apportioning the cost base between the above properties you will also need to take into consideration the area size of each the subdivided block and any other works undertaken on one or both such as the demolition of a carport. | Detailed Reasoning - Main residence: Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your main residence. To get the full exemption from CGT: § the dwelling must have been your home for your entire ownership period § you must not have used the dwelling to produce assessable income, and § any land on which the dwelling is situated must be two hectares or less. Once a property has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. When the property is left vacant you may continue to treat the dwelling as your main residence for an indefinite period. Where the property is rented out, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. In your case, dwelling one was your parent B's main residence for their entire ownership period and it was rented out for less than six years. Therefore, dwelling one is considered to be their main residence under the absence choice for the period it was rented out until their death, | Detailed Reasoning - Dwelling two: In your case, dwelling two has been your main residence since you acquired it and you meet all of the above conditions. Therefore, any capital gain or capital loss made on its disposal is disregarded. | Detailed Reasoning - Dwelling one: You will be liable for CGT upon the disposal of a specified percentage interest in dwelling one as it has never been your main residence. | Detailed Reasoning - Deceased estate: Normally when a beneficiary of a deceased estate acquires a dwelling, which was the deceased main residence. The beneficiary acquires the dwelling on the deceased's date of death. A capital gain or capital loss made from the disposal of a dwelling acquired by the deceased after 20 September 1985 that was their main residence immediately before their death and not being used to produce income, is disregarded if: · from the time of death until its disposal of it, the property was the main residence of the deceased's spouse or an individual who had a right of occupancy under the will , or · the property is disposed of within two years of the death of the deceased. If you do not qualify for a full exemption from CGT for the home, you may be entitled to a partial exemption. You calculate your capital gain or capital loss as follows: capital gain or capital loss X non-main residence days total days | Detailed Reasoning - Non-main residence days: In this case, the number non- main residence days is the number of days from the death of parent B until settlement of the contract for sale of the property | Detailed Reasoning - Total days: Total days is the number of days in the period from when the dwelling was originally acquired until you dispose of your ownership interest. As dwelling one was not disposed of within two years of your parent B's date of death you are liable for CGT upon disposal of it. Even though you are not entitled to the full main residence exemption on the disposal of dwelling one you are entitled to a partial exemption. You will need to use the above formula to calculate your capital gain upon it disposal. If acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling. The first element of the cost base and reduced cost base of the dwelling is its market value at the date of death if it was the main residence of the deceased immediately before their death and was not being used to produce income at that date. In your case, you and your parents had an ownership in dwelling one. During a specified period you acquired the following interests: · a specified percentage interest on the date of acquisition · you acquired another a specified percentage interest (your parent B acquired another specified percentage interest) on the death of your parent A), and · you acquired your parent B's interests on their date of death). The cost bases of the above interests are as follows: · original percentage interest - percentage of original purchase price · a specified percentage interest - the market value on parent A's date of death, and · a specified percentage interest - the market value on parent B's date of death You can use the discount method to calculate your capital gain as you meet all the relevant criteria.

Subject: capital gains tax - deceased estate - main residence and disposal: Question 1: Are you liable for capital gains tax (CGT) on the disposal of dwelling one?