Private ruling: Capital gains tax – cost base – partial main residence exemption
Date of advice: 29 March 2018
Published: July 2018
Ruling period: Income year ended 30 June 20XX.
Date scheme commenced: XX February 19XX.

Ruling: Q1: Is the first element of the cost base of the property the market value of the property as at the date of your Person B’s death? | A1: No. | Q2: Is the first element of the cost base of the property the market value of the property as at the date of your Person A’s death? | A2: Yes. | Q3: Is Person C eligible to apply a full main residence exemption on the sale the property? | A3: No. | Q4: Is Person C eligible to apply a partial main residence exemption on the sale of the property in relation to Unit Z? | A4: Yes.

Relevant facts and circumstances: Person A acquired a pre-CGT property consisting of two adjacent lots on the one title as sole owner (the property). The property has always been treated as the one asset. The property contains a number of dwellings all constructed prior to 20 September 1985. The party wall between some of the dwellings did not correspond to the land boundary. As such, parts of dwelling building associated with one of the lots, encroached onto the other. The total land area of the two lots was less than 2 hectares. One of the lots was substantially larger than the other smaller lot. The property was divided into a number of units (dwellings). One of the units (Unit Z) was used as the main residence of Person A and their partner (Person B) and later rented out by Person C. The rest of the units were rented out. Your Person A and Person B always lived at a dwelling Unit Z at the property. Person A and Person had their own lockup garage, storage shed/workshop and laundry. The backyard was also used as by Person A and Person B as their own exclusive garden/BBQ area. Some decades ago, your Person A passed away. Under your Person A’s will, Person B received a life interest in the property, and specified Person C as the remainder. Person C could not sell the property so long as Person B wished to live there. Person B continued to reside at Unit Z as their main residence and rented out the other dwellings at the property until their passing several years ago. After the passing of Person B, Person C continued to rent out the other dwellings at the property, along with Unit Z. Person C has not resided during their ownership period. Person C recently you sold the property for specified amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-10 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Summary: Person C is considered to have acquired the property from your Person A on the date of their death. The first element of Person C’s cost base is the market value of the property at that date. Person C is eligible to apply a partial main residence exemption in relation to Unit Z for the period Person B continued to reside there from the date of Person A’s death until Person B’s death. | Detailed Reasoning - Cost base of asset: If the deceased acquired the asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died. In this case, Person A acquired the property before 20 September 1985; therefore the first element of Person C’s cost base will be the market value of the property on the date Person A’s death. The life interest Person B held in the property is a separate asset which ceased to exist on their death. In this instance, the sale of the property can be treated as the sale of one asset; however an apportionment of the main residence exemption would be required. | Detailed Reasoning - Partial main residence exemption in relation to Unit Z: Once we have considered the cost base of the property, we can consider the application of the main residence exemption on an apportioned basis to one of the dwellings, as Unit Z was the main residence of Person B until their passing. As the property was sold in the one transaction, a reasonable apportionment (for example, based on an area basis) of an amount attributable to the capital gain from Unit Z would be accepted. In this situation, Person C will not be eligible for a full main residence exemption in relation to Unit Z, but may be entitled for a partial exemption. The capital gain or loss in relation to Unit Z has been calculated. Non-main residence days Total days Total capital gain from the CGT event attributable to Unit Z 'Non-main residence days' is the number of days, in the period from Person A’s death until settlement of the sale of the dwelling, when it was not the main residence of one of the following: ● a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased) ● an individual who had a right to occupy the dwelling under the deceased's will ● you, as a beneficiary, if you disposed of the dwelling as a beneficiary 'Total days' is the number of days from Person A’s death until Person C disposed of their ownership interest.