Private ruling: Capital gains tax (CGT) and the sale of property in a deceased estate
Published: April 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the repairs that were performed after the fire be considered to be a post CGT asset and therefore alter the pre-CGT status of the property? | A1: No. | Q2: Is the Estate liable for CGT on the disposal of the property? | A2: Yes. | Q3: Is the Estate entitled to a full main residence exemption on the disposal of the property? | A3: No. | Q4: Is the Estate entitled to a partial main residence exemption on the disposal of the property? | A4: Yes. | Q5: Is the Estate able to continue to treat the property as the deceased's main residence for the period that the property was income producing? | A5: No. | Q6: Will the two year period for the purposes of the main residence exemption provided in section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) apply from the date of death of the deceased's relative who had a right to occupy the property? | A6: No. | Q7: Will the Commissioner exercise his discretion to extend the two year period provided in section 118-195 of the ITAA 1997? | A7: No.

Relevant facts and circumstances: The deceased purchased a property sometime after 20 September 1985. The property is less than two hectares in size. The deceased and their relative resided in the property as their main residence. Whilst the deceased resided in the property, no major capital works were performed and the property was never used to produce assessable income. The deceased did not own any other properties. Sometime after 20 September 1985 the property was extensively damaged by fire and was unliveable. During the time that repairs were made to the property, the deceased and their relative resided in rental accommodation. Once the repairs to the property were completed, it was then placed on the rental market. The property generated rental income for a period of time. The deceased and their relative continued to reside in the rental accommodation. Due to deteriorating health, the deceased was placed in an aged care facility where they passed away sometime later. Probate was granted to the State Trustees Ltd to act as Executor of the deceased's Estate. The deceased's Will provided that the property is to be held on trust to permit their relative to have the full use occupation and enjoyment thereof or the rents and profits therefrom during their lifetime on condition that they paid all rates, taxes and other outgoings of a recurring nature. The deceased's relative returned to the property and began residing in it a number of years after the deceased's death. The property continued to be their main residence up until the date of their death. The deceased's relative did not own any other properties. Sometime later the State Trustees Ltd were notified of the deceased's relative's death by the administrators of their Estate. Delay in the sale of the property and distribution of the Estate has occurred due to the life interest granted to the deceased's relative under the terms of the deceased's Will. Delay has also been contributed by the cleanup of the property and legal issues involving the eviction of squatters from the property. The property was sold and settled sometime later.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Subsection 104-10(5), | Income Tax Assessment Act 1997 Section 108-70, | 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 Subsection 118-195(1), | Income Tax Assessment Act 1997 Section 118-200 and | Income Tax Assessment Act 1997 Section 128-15.

Reasons for decision: Detailed Reasoning - Prior to deceased's death: Generally, CGT will not apply to property or other CGT assets that are acquired prior to 20 September 1985 (pre-CGT). Therefore, where an individual owns a pre-CGT asset, it is not necessary to consider any of the main residence exemption provisions of the ITAA 1997. This is because CGT will not apply to the asset. If you own a pre-CGT property and you make major capital improvements after 20 September 1985, the capital improvements may be considered to be a separate CGT asset from the original asset. This may result in the capital improvements being a post-CGT asset to which CGT will apply. However, where any works performed on the property are done to repair damage rather than improve the existing structure, the repairs will not be considered to be a separate asset. | Detailed Reasoning - Application to your circumstances: In your situation, the property was a pre-CGT asset in the hands of the deceased. The works that were undertaken on the property were done so in order to restore the property to a liveable condition after a fire and are therefore considered to be a repair rather than a capital improvement. Therefore the property will retain its pre-CGT status and CGT will not apply to the property until the deceased's date of death. Accordingly, it is not necessary to consider any of the main residence exemption provisions, including the absence choice under section 118-145 of the ITAA 1997, prior to their death. | Detailed Reasoning - After the deceased's death: Section 128-15 of the ITAA 1997 provides that where a CGT asset passes to you as the legal personal representative or beneficiary of a deceased estate, you are taken to have acquired the asset on the deceased's date of death. Where the deceased acquired the property prior to 20 September 1985, the cost base of the property is its market value on the deceased's date of death. In accordance with section 118-195 of the ITAA 1997, a capital gain or capital loss that is made on the disposal of a property acquired by the deceased prior to 20 September 1985 is disregarded if: • your ownership interest ends within two years of the deceased's death; or • from the deceased's date of death until your ownership interest ends, the property was the main residence exemption of either the spouse of the deceased or an individual who had a right to occupy it. The two year period begins on the date of the deceased death. However, subsection 118-195(1) of the ITAA 1997 confers on the Commissioner discretion to extend the two year exemption period. The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion: • the ownership of a property or a will is challenged • the complexity of a deceased estate delays the completion of administration of the estate • a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (e.g. the taxpayer or a family member has a severe illness or injury), or • settlement of a contract of sale over the property is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control. In determining whether or not to grant an extension the Commissioner is also expected to consider whether and to what extent the property is used to produce assessable income and how long the trustee or beneficiary held it. | Detailed Reasoning - Application to your circumstances: You will not be entitled to a full main residence exemption on the disposal of the property however, you will be entitled to a partial main residence exemption. This is because while the deceased's relative was provided with a right to occupy the property under the deceased's Will, they did not actually do so until several years after the deceased's death. During the period between the deceased's date of death and the date that the deceased's relative returned to the property, the property was used for income producing purposes. However, should the deceased's relative (or in this case - their estate) make a choice under 118-145 of the ITAA 1997 to continue to treat the property as their main residence during the time that they were not residing in it, the property will be exempt for a period of six years from the deceased's date of death. As the deceased's relative did not occupy the property until several years after the deceased's date of death, the two year period provided under section 118-195 of the ITAA 1997 had expired prior to their occupation. You have not provided any circumstances whereby the property could not have been occupied sooner by the deceased's relative or sold within the two year period. Furthermore during this period the property was used for income producing purposes. Accordingly, having considered the relevant facts, the Commissioner is not able to exercise his discretion to allow an extension to the two year time limit. Section 118-200 of the ITAA 1997 allows a partial main residence exemption where section 118-195 of the ITAA 1997 will not apply to allow a full main residence exemption. Under section 118-200 of the ITAA 1997 a partial main residence exemption is calculated using the following formula: Capital gain or capital loss multiplied by non-main residence days divided by total days.