Private ruling: CGT – Main residence exemption
Date of advice: 25 June 2018
Published: September 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Was the original 50% interest in the property considered to be the main residence of the deceased for the purposes of the main residence exemption? | A1: Yes. | Q2: Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act (ITAA 1997) and allow an extension of time to the two year period to dispose of the original 50% interest in the property? | A2: Yes. | Q3: Was the second 50% interest in the property considered to be the main residence of the deceased for the purposes of the main residence exemption? | A3: No.

Relevant facts and circumstances: The deceased passed away in 20AA. The deceased purchased a property (the property) in 19XX with person A in equal shares. The deceased resided in the property with their spouse until 20BB; the spouse did not own another property during this time. In 20BB, the deceased’s spouse purchased another property, and they resided in that dwelling together. Person A continued to reside in the property with their family. They did not pay any rent or make any mortgage repayments on the property. In 20CC, the deceased and their spouse separated and the deceased lodged forms for the single pension. The deceased wanted to move back into the property, but person A had made the property unliveable. The deceased asked person A to transfer the property into their name so that they could leave it to their children in their will. The title was changed in 20CC. After the deceased passed away, person A continued to live at the property. The executors of the Estate allowed person A to continue residing at the property until they could arrange the sale of the property and to allow person A to find other accommodation. Person A did not have the right to occupy the property under the Will. Person A was required to pay weekly payments into a trust account to cover the cost of council rates, water bill and insurance. Person A committed to paying the weekly payments for a short amount of time and then refused to pay any further payments. At this point in time, the executors of the Estate decided that the property needed to be sold. The executors asked person A to allow a real estate agent to appraise the property, which person A refused the agent and executors entry to the property. A Form 11 Notice to leave was issued to person A to vacate the property by a certain date. Person A refused to leave the property or allow anyone access. A solicitor was appointed to help the executors remove Person A from the property. Person A was issued with a letter from the solicitor advising that the executors were applying for a court order to have them removed from the property if they didn’t move out. Once again Person A refused to move out and as a result the executors progressed with the court order. Person A vacated the property one day before the court hearing. The property was then listed for sale. The property was sold and settlement occurred more than 2 years after the deceased’s date of death. The executors did not obtain probate for the estate. They received advice from their solicitor that it was not required due to the minimal assets in the Estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 112-20(1) | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-170 | Income Tax Assessment Act 1997 Subsection 118-195(1) | Income Tax Assessment Act 1997 Subsection 128-15(4) CGT main residence exemption | Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. | A capital gain or loss may only be partially disregarded if the dwelling was | ● not your main residence throughout your entire ownership period, or | ● used for the purpose of producing assessable income. | A dwelling can only be considered your main residence if you actually occupied the dwelling. The mere intention to occupy the dwelling as a main residence is insufficient to obtain the CGT main residence exemption ( Administrative Appeals Tribunal in Couch & Anor v. FC of T [2009] AATA 41 ). | Spouses with different main residences | Section 118-170 of the ITAA 1997 deals with circumstances in which a taxpayer and their spouse each have a dwelling as their main residence during a particular period of time. | Applying the principle that only one dwelling at a time can qualify as a main residence, section 118-170 of the ITAA 1997 requires each spouse to: | (a) choose one of the dwellings as the main residence for both of them; or | (b) nominate different dwellings as each spouse's main residence. | Where the person and their spouse nominate different dwellings for the period and the person owns 50% or less of the home he/she has nominated, the person qualifies for an exemption on their share. | 'Spouse' is defined in the ITAA 1997 to include a person who, although not legally married to a person, lives with the person on a genuine domestic basis as the person's husband or wife. | Application to the deceased’s circumstances | In this case, there are three different periods of time to consider whether or not the dwelling was considered to be the deceased’s main residence. | Period 1 | During this period the deceased and their spouse resided in the property together and the deceased’s spouse did not own another property. The deceased’s 50% interest in the dwelling therefore qualifies as the main residence for that period. | Period 2 | During this period the deceased and their spouse owned different dwellings and resided together in the deceased’s spouse’s property. Section 118-170 of the ITAA 1997 will therefore apply. As the deceased only held a 50% interest in their property, they qualify for the full main residence exemption in relation to that interest in the property. | Period 3 | During this period the deceased and their spouse owned different dwellings and the deceased resided in their spouse’s property. | The deceased and their spouse were no longer living in a genuine domestic relationship. Section 118-170 of the ITAA 1997 therefore will no longer apply from this point to restrict the exemption. The original 50% interest will continue to be considered the deceased’s main residence. | The deceased then acquired person A’s 50% share in the property. As stated above, a dwelling can only be considered your main residence if you actually resided in it. As the deceased was not able to reside in the property again after they acquired person A’s 50% interest, this interest cannot qualify as their main residence. | In Summary, the deceased would be able to apply the main residence exemption to the original 50% interest held in the property. However, the deceased would not qualify for the main residence exemption to the 50% interest acquired from person A. | Extension of time to dispose of the deceased’s main residence | Subsection 118-195(1) of the ITAA 1997 states that if you are an individual who owns a dwelling in a capacity as trustee of a deceased estate, then you are exempt from tax on any capital gain made on the disposal of the property if: | ● The property was acquired by the deceased on or after 20 September 1985 and the property 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; or the property was acquired by the deceased before 20 September 1985; and | ● your ownership interest ends within two years of the deceased’s death (the Commissioner has discretion to extend this period in certain circumstances). | In this case, the property was not sold within the two year time limit. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner grants an extension to the two year time limit. | The Commissioner can exercise his discretion in situations such as where: | ● the ownership of a dwelling 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 (for example, the taxpayer or a family member has a severe illness or injury); or | ● settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control | In this case, the delay in the disposal of the property was due to complexities outside of your control which prevented the completion of the administration of the estate. | Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit to dispose of the original 50% interest in the property. | Application to the deceased estate: | For the deceased estate, there are two interests in the property. | ● The original 50% interest in the property that was considered to be the deceased’s main residence, and | ● The second 50% interest in the property that does not qualify as the deceased’s main residence main residence. | As above, the Commissioner has granted the estate an extension of time to dispose of the main residence of the deceased. As the 50% interest in the property that the deceased originally acquired qualifies as the deceased’s main residence; the disposal of that interest only, will be exempt from capital gains tax. | The Commissioner’s discretion to dispose of the property outside the two year time limit can be considered only for a deceased’s main residence, other assets of a deceased’s estate are still subject to regular capital gains tax provisions. | As the second 50% interest in the property does not qualify as the deceased’s main residence, the disposal of this interest will be subject to capital gains tax.