Private ruling: Capital gains tax - deceased estate
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any capital gain from the disposal of the property fully exempt under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The family home (the property) was acquired by the deceased prior to 20 September 1985. A number of the deceased's children had moved out of the property at various times over the years. However, one adult child (X) never married and continued to live in the property following the deceased's death. The deceased's will provided that all of the property in their estate was to be divided equal shares for each of her/his children. There was no specific provision in the will that allowed for X to occupy the property. However, it was verbally requested by the deceased prior to his/her death that X be able to continue to live in the property. The property was sold during the 2014-15 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Summary: As per subsection 118-195(1) of the ITAA 1997, a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. | Detailed Reasoning - And also one of these items: 1 the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling 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 your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner ........... 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual In this case, following the deceased's death, the property passed to the trustee of the deceased's estate. The deceased acquired the ownership interest in the property prior to 20 September 1985 satisfying item 2 of column 2 of the above table. 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) (ATO Interpretive Decision ATO ID 2003/109). However, the deceased's will did not provide any individual with a right to occupy the property. X continued to live in the will as a result of the informal agreement between the beneficiaries following a verbal request by deceased. This is not the type of arrangement that is contemplated by item 2(b) of column 3 of the above table. Accordingly, as none of the items in column 3 of the table have been satisfied, the trustee of the deceased estate cannot disregard the capital gain from the disposal of the property under section 118-195 of the ITAA 1997. | Detailed Reasoning - Partial exemption: Where section 118-195 of the ITAA 1997 does not apply to exempt a capital gain from the disposal of a dwelling acquired from a deceased estate, section 118-200 of the ITAA 1997 may provide a partial exemption. Where the property was acquired by the deceased prior to 20 September 1985, this provision allows a partial exemption calculated with reference to the number of days the property was the main residence of an individual referred to in item 2, column 3 of the table in section 118-195 of the ITAA 1997. However, as discussed, X did not have a right to occupy the property under the will, therefore she/he was not an individual referred to in item 2, column 3 of the table in section 118-195 of the ITAA 1997. Accordingly, no partial exemption will be available to the trustee under section 118-200 of the ITAA 1997.