Private ruling: Capital gains tax - deceased estate - main residence exemption
Date of advice: 13 June 2016
Published: July 2016
Ruling period: Year ending 30 June 20yy | Year ending 30 June 20aa | Year ending 30 June 20bb | Year ending 30 June 20cc | Year ending 30 June 20dd
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the estate eligible for the full main residence exemption on disposal of the property? | A1: Yes.

Relevant facts and circumstances: The deceased died in the 20xx-yy financial year. The deceased and the deceased's sibling owned a residential property as joint tenants. The property was the main residence of the deceased and the deceased's family for the duration of the deceased's ownership of the property. As the surviving joint tenant, the deceased's half interest in the property passed to the deceased's sibling. This was disputed by the deceased's spouse. Following initial proceedings in court between the deceased's spouse and the deceased's sibling, the parties agreed to settle the matter as per the Deed of Settlement made in the 20cc-dd financial year. In the Deed of Settlement it was agreed that the estate of the deceased be beneficially entitled to the deceased's initial half interest in the property. The property was sold and settled in the 20cc-dd financial year. The estate's share of the settlement proceeds were received by the estate in the 20cc-dd financial year. The property was resided in by the deceased's spouse and family as their main residence for the entire period from the deceased's date of death up until the date of settlement of the sale of the property. The property was not used to produce assessable income in this time.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10, | Income Tax Assessment Act 1997 section 108-7, | Income Tax Assessment Act 1997 Subdivision 118-B and | Income Tax Assessment Act 1997 section 118-195.

Reasons for decision: Detailed Reasoning - Disposal of CGT Asset: Under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) you dispose of a capital gains tax (CGT) asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. | Detailed Reasoning - Interest in CGT assets as joint tenants: Under section 108-7 of the ITAA 1997 individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common. | Detailed Reasoning - Disregarding capital gain or loss on death: As a general rule, CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 (pre-CGT). However under section 128-15 of the ITAA 1997 any capital gain or capital loss made on a post-CGT asset is to be disregarded if, when a person dies, an asset they owned passes either: • to their legal personal representative or to a beneficiary • from their legal personal representative to a beneficiary. | Detailed Reasoning - Deceased Estate - Main Residence Exemption: Section 118-195 of the ITAA 1997 states that if you own a dwelling in your 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 deceased acquired the dwelling after 20 September 1985, • it was their main residence just prior to their death and • from the deceased's death until you dispose of your ownership interest, the dwelling was not used to produce income and was the main residence of a person who was the spouse of the deceased immediately before the deceased's death. | Detailed Reasoning - Application to your circumstances: As the property owned by the deceased's sibling and the deceased, prior to their death, was held as joint tenants, the deceased's sibling would normally have acquired the deceased's interest in the property (both legal and equitable) on their death. However this was disputed by the deceased's spouse and the matter was brought before the court. The parties agreed to settle the matter as per the Deed of Settlement. Pursuant to the Deed of Settlement, legal and equitable interests in the property originally held by the deceased and the deceased's sibling were severed. Furthermore the trustee of the deceased estate acquired a x% equitable interest in the property the deceased previously held jointly with the surviving joint tenant. Therefore, it is considered that, through the Deed of Settlement, the deceased's interest in the joint tenancy property at their date of death devolved to their personal legal representative (the executor of the estate) as if the deceased and deceased's sibling had owned the property as tenants in common. In this instance a CGT event did occur, but under section 128-15 of the ITAA 1997 any capital gain or capital loss made on a post-CGT asset is to be disregarded if, when a person dies, an asset they owned passes to their personal legal representative (the executor of the estate). Therefore under section 128-15 of the ITAA 1997 the capital gain or loss is to be disregarded. Furthermore in your case: • the deceased purchased the dwelling after 20 September 1985, • the property was the deceased's main residence just prior to their death, • from the deceased's date of death till the date the executor of the estate disposed of their ownership interest in the property, the dwelling was not used to produce income and was the main residence of the spouse of the deceased. Therefore you would be entitled to the deceased estate main residence exemption under section 118-195 of the ITAA 1997.