Private ruling: CGT – deceased estate – main residence exemption
Date of advice: 27 February 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the estate be entitled to apply the full main residence exemption upon the disposal of the property? | A1: No | Q2: Will the estate be entitled to apply a partial main residence exemption upon the disposal of the property? | A2: Yes

Relevant facts and circumstances: The deceased died on XX November 19XX. The deceased acquired the property before 20 September 1985. The property was the deceased’s main residence from acquisition until the time of death. Probate was granted on XX July 19XX, appointing F as Executor. The Will established a life interest over the property for C. C lived in the house as their main residence from before the deceased’s death until the settlement of the property. On X December 20XX, the title was transferred from the Executor to “C a life estate for their life under the will dated XX November 19XX of the deceased and the transferee the said XX estate in remainder as executor under the said will”. On XX September 20XX, C initiated proceedings seeking a provision from the deceased’s estate, which resulted in Court Orders made on XX December 20XX. The Court Ordered the sale of the property and the balance of the proceeds to be paid to C pursuant to the relevant Family Provision Act in lieu of the provisions of the will of the deceased. The Court Order also allowed C to continue to reside at the property until the settlement of the sale of the property. The property was sold on XX March 20XX, with settlement occurring XX June 20XX. C rented a portion of the property between XX December 20XX to XX June 20XX, producing assessable income. C retained the rental income under the life interest established through the deceased’s will, extinguished pursuant to the Court Order. The area of the house rented consisted of a kitchenette, a small bathroom and two small rooms totalling approximately XXsqm of floor space. The total floor space of the dwelling was approximately XXXsqm.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-20(1) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 section 118-190

Reasons for decision: Summary: The deceased acquired the dwelling prior to 20 September 1985 and C was provided with a right to occupy the dwelling under the Court Order which varied the deceased’s will, however the Estate will only be entitled to apply a partial main residence exemption as a portion of the property was used to produce income. | Detailed Reasoning - Detailed reasoning: General rules regarding capital gains (or losses) as a result of death are covered under Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997). According to section 128-10 of the ITAA 1997 any capital gain or capital loss resulting from a capital gains tax (CGT) event in relation to an asset owned by the deceased person immediately prior to the time of death is disregarded. Section 128-15 of the ITAA 1997 provides that if a CGT asset owned by the deceased immediately prior to death devolves to the legal personal representative (LPR) or passes to a beneficiary of the estate, the LPR and the beneficiary is deemed to have acquired the asset on the date of death of the deceased owner. Any capital gain or capital loss made by the LPR when the asset passes to a beneficiary is also disregarded (subsections 128-15 (2) & 128-15(3) of the ITAA 1997). Subsection 128-20(1) of the ITAA 1997 provides that an ‘asset passes to a beneficiary’ if the beneficiary becomes the owner of the asset: a) under the will of the deceased person or that will as varied by a court order; or b) by operation of an intestacy law, or such other law as varied by a court order; or c) because it is appropriated to the beneficiary by the LPR in satisfaction of a pecuniary legacy or some other interest or share of the estate of the deceased; or d) under a deed of arrangement if: (i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and (ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate. The section also states that it does not matter whether the asset is transmitted to the beneficiary directly or through the LPR. In your case, the will of the deceased was varied by the Court Order, which extinguished C’s life interest and provided C with a share of the deceased’s assets and a right to reside in the property until its sale settled. Taxation Ruling TR 2006/14 provides guidance on life and remainder interests. Where the assets pass to the a taxpayer as a beneficiary under a deed of arrangement, there will be no consequences for the life and remainder interests as the intended owners of those interests are treated as if they had not been bequeathed them. The same principle applies for a variation by court order. | Detailed Reasoning - Deceased estate - main residence exemption: Section 118-195 of the ITAA 1997 provides that the executor (or beneficiary) will be entitled to a full main residence exemption where the: ● deceased acquired dwelling prior to 20 September 1985; OR ● deceased acquired dwelling after 20 September 1985 and it was their main residence just prior to their death AND ● you (either the executor or beneficiary) disposed of the ownership interest within 2 years of the deceased’s date of death; or ● from the deceased’s death until you disposed of your ownership interest, the dwelling was the main residence of one or more of: ● a person who was the spouse of the deceased immediately before the deceased’s death ● an individual who had a right to occupy the home under the deceased’s will ● you, as a beneficiary, if you disposed of the dwelling as a beneficiary In your case, The deceased acquired the dwelling prior to 20 September 1985 and C was provided with a right to occupy the dwelling under the Court Order which varied the deceased’s will, however the estate will not be entitled to apply the full main residence exemption as a portion of the property was used by C to produce assessable income. Therefore the entire property was not the main residence of C for the entire period from the deceased’s death until the estate disposed of the property. | Detailed Reasoning - Partial main residence exemption: Section 118-200 of the ITAA 1997 provides for a partial exemption for deceased estate dwellings where: ● you are an individual and your ownership interest in a dwelling passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and ● section 118-195 of the ITAA 1997 does not apply. You calculate your capital gain or capital loss as follows: Capital gain or capital loss amount x Non–main residence days Total days Non-main residence days – numbers of days in the period from the date of death until settlement of the contract that the dwelling was not the main residence of: ● person who was the spouse of the deceased immediately before the deceased’s death ● an individual who had a right to occupy the home under the deceased’s will ● you, as a beneficiary, if you disposed of the dwelling as a beneficiary. Total days – the number of days from the date of death until you disposed of your ownership interest Section 118-190 of the ITAA 1997 provides a further adjustment where the dwelling was a main residence, but was partly used to produce income. The main residence exemption is apportioned to take into account the portion of the dwelling that was used to produce income. For example : Anne was provided a right to occupy a dwelling under the will of the deceased. Anne lived in the property from the date of the deceased’s death on 1 March 2014, until the property was sold and settled on 30 June 2017. Approximately ¼ of the dwelling was rented and produced rental income between 1 January 2015 and 31 December 2015. Upon the disposal of the dwelling a capital gain of $10,000 was made. Non-main residence days : 365 days (1 January 2015 to 31 December 2015) Total days : 1218 days (1 March 2014 to 30 June 2017) To calculate the partial main residence exemption: Capital gain or capital loss amount x Non–main residence days Total days $10,000 x 365 1218 = $2,996 capital gain relating to the rental period. As the property was both Anne’s main residence and used to produce income during the non-main residence days, a further adjustment is required to apportion the capital gain to the portion of the dwelling actually used for income earning purposes. $2,966 x ¼ = $749 – capital gain to which the Estate would be assessed.