Private ruling: Capital Gains Tax - main residence / disposal
Published: June 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Question and answer | Will a capital gain or loss you make from the disposal of your ownership interest in Property B be disregarded under the Income Tax Assessment Act 1997 (ITAA 1997)? | No.

Relevant facts and circumstances: You have a spouse. Your sibling had a spouse and X children). Your parents acquired a property (Property B) before 1985. You and your sibling acquired another property (Property A) before 1985. One of your parents died in the 1990's. The deceased parent's interest in Property B was transferred to your sibling. Your sibling died in the 2000's. Your sibling's interest in both Property A and Property B was transferred to: your sibling's spouse and children in equal shares. Your other parent died later. This parent's interest in Property B was held by deceased estate (Estate). You were the Executor and Trustee of the Estate. Later, your sibling's spouse and the children executed a deed to exchange the children's interests in Property B with part of your sibling's spouse's interest in Property A. Shortly after that, you transferred the Estate's interest in Property B to you. You and your spouse have been living in Property A as your main residence since it was first acquired by you and your sibling. Your sibling and your sibling's spouse had lived in Property B for decades as their main residence until your sibling died. Your sibling's spouse and Child 1 continued living in Property B as their main residence until now. Neither your sibling's nor your other parent's Will granted "right to occupy" of the property/ies to any of the beneficiaries. Both of the properties are held by the parties as "tenants in common". You now plan to execute a Deed of Partition (Deed) between your sibling's spouse, the children and yourself to exchange your interest in Property B with the other parties' interests in Property A. According to the Deed, because Property A has a higher value than Property B, the monetary difference between the valuation of Property B and Property A will be paid by you to the children equally. Neither of the properties has been used to produce assessable income or left vacant.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-110. | Income Tax Assessment Act 1997 section 118-195. | Income Tax Assessment Act 1997 subsection 118-195(1).

Reasons for decision: Detailed Reasoning - Main residence: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or loss you make from the disposal of a dwelling or your ownership interest in that dwelling is disregarded if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. In your case, you plan to dispose of your ownership interest in Property B. You are an individual and the property has been used as a main residence for many years. However, it was not used as your main residence throughout your ownership period. Further, the interest passed to you as a beneficiary in the Estate. Therefore, main residence exemption does not apply to your situation and any capital gain or loss you make from the disposal of your ownership interest in Property B will not be disregarded under section 118-110 of the ITAA 1997. | Detailed Reasoning - Deceased estate: A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where you dispose of a dwelling, or ownership interest in that dwelling, if it passed to you as an individual beneficiary of a deceased estate. The availability of the exemption is dependent upon: • - who occupied the dwelling after the date of the deceased's death, or • - whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, you will be entitled to a full exemption if: • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. In your case, the ownership interest in Property B passed to you as an individual beneficiary of the Estate. However, after the date of the deceased's death, Property B was not used as the main residence of the deceased's spouse; or by an individual who had a "right to occupy" the dwelling under the deceased's Will; or by you (the beneficiary to whom the interest passed and who is disposing of the interest now). That is, the property was not used as the main residence of any "relevant individual". Also, your ownership interest did not end within two years of the deceased's death. Therefore, the deceased estate exemption does not apply to your situation and any capital gain or loss you make from the disposal of your ownership interest in Property B will not be disregarded by this means. Please note, given your situation, being "tenants in common" might give your sibling's spouse and Child 1 the "right to occupy", however, subsection 118-195(1) of the ITAA 1997 requires that, to be a "relevant individual", they had to have a right to occupy the dwelling " under the Will ". ATO ID 2003/109 Capital gains tax: Deceased estate - main residence exemption (ID 2003/109) further interprets the law, and is also relevant to your case: An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238). In this case, the beneficiary had no right under the will to reside in the house. The beneficiary resided in the house because the executors and other beneficiaries so agreed. This outcome is consistent with the general rule of construction that the intent of the deceased must be ascertained from the words of the will and that one cannot speculate or guess after that intention. (see Certoma, GL 1987, The Law of Succession in New South Wales , The Law Book Company, Sydney, p. 117) As the beneficiary did not have a right to occupy the dwelling under the will, the trustee cannot disregard the capital gain made on the disposal of the dwelling. In your case, it was not mentioned in the Will that a "right to occupy" of the property was given to any of the beneficiaries, the Trustee, or any third party. That is, it was not "ascertained from the words of the Will" that your sibling's spouse or children had the right to occupy the dwelling. Therefore, they are not a relevant individual on that basis. | Summary: To conclude, a capital gain or loss you make from the disposal of your ownership interest in Property B will not be disregarded under the ITAA 1997 if you execute the Deed of Partition as planned. Capital Gains Tax will apply accordingly. Should the Deed be executed, the cost base for your ownership interest of Property B needs to be calculated based on the market value as at when your other parent died (i.e. when the interest passed to the Estate), as the interest in the property was acquired by this parent before 1985.