Private ruling: Capital gains tax main residence exemption on property held by a deceased estate
Published: June 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to a full main residence exemption on the sale of the property? | A1: No. | Q2: Are you entitled to a partial main residence exemption on the sale of the property? | A2: Yes. | Q3: Will the first element of the cost base of the property be its market value on the date of deceased 1's death? | A3: Yes.

Relevant facts and circumstances: A dwelling was acquired by the deceased (deceased 1) some time prior to 20 September 1985 as a principle residence. Sometime later, their relative came to live in the dwelling on a permanent basis. The deceased (deceased 1) passed away sometime later. Deceased 1's will stated that the dwelling was to remain for use by their relative. Ownership of the property was to be held by their other relatives in equal shares. One of the owners (deceased 2) passed away sometime later and their will left their interest in the property to their relatives. Deceased 1's relative continued to live in the dwelling for a number of years and then moved into a nursing home. The dwelling was retained by deceased 1's Estate to generate rental income to contribute to the ongoing nursing home costs of their relative. The relative (deceased 3) then passed away. The executor of deceased 3's estate is making the choice to continue to treat the dwelling as their main residence during the period they were not living in it. The dwelling is still being rented and is an asset of deceased 1's Estate. Deceased 1's Estate is now considering disposing of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 118-145, | Income Tax Assessment Act 1997 Section 118-195, | Income Tax Assessment Act 1997 Section 118-200 and | Income Tax Assessment Act 1997 Section 128-15.

Reasons for decision: Detailed Reasoning - Main residence exemption: Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss made from the disposal of a dwelling is disregarded where the deceased acquired the dwelling prior to 20 September 1985 and the dwelling is the main residence of a person who has been given a right to occupy the dwelling or a life tenancy under the deceased's will. Section 118-145 provides that a taxpayer can make a choice to continue to treat a dwelling as their main residence even though they no longer live in it. Where the dwelling is used to produce income, the choice is effective for a period of up to six years. Where the individual has passed away, this choice can be made by the executor of their estate. However, where the individual to who the main residence exemption applies passes away, the exemption period ceases. In your situation, deceased 1's relative (deceased 3) was provided with the right to remain in the dwelling under their Will. Deceased 3's executor has made a choice to continue to treat the dwelling as their main residence during the period they were not residing in it. Therefore the main residence exemption will apply up until the date that deceased 3 passed away. | Detailed Reasoning - Partial main residence exemption: As deceased 3 passed away some time ago and the property has not yet been sold, you will not be entitled to a full main residence exemption on its sale. However, you will be entitled to a partial exemption. This will mean that the capital gain or loss that you made when you sell the property will be adjusted using the following formula: Capital gain or capital loss amount multiplied by non main residence days divided by total days. In your situation, the non main residence days are the number of days from deceased 3's death until settlement of the sale of the dwelling. The total days are the number of days from the date of deceased 1's death until settlement of the sale of the dwelling. | Detailed Reasoning - Cost base: Where a dwelling passes to you under a deceased estate and the deceased acquired it prior to 20 September 1985, the first element of the cost base of the dwelling will be its market value on the date of the deceased's death. Accordingly, the cost base of the dwelling will be its market value on the date of deceased 1's death.