Private ruling: Main residence exemption
Date of advice: 22 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will any capital gain or capital loss arising from the disposal of your ownership interest in the replacement dwelling disregarded? | A1: No.

Relevant facts and circumstances: Under the terms of the deceased’s Will, they provided a lifetime right for their spouse to use and occupy their main residence. As the years progressed, the maintenance on the property became too much of a physical burden for the deceased’s spouse so the estate trustees sold the property and purchased a replacement property on behalf of the estate. The replacement dwelling continued to be the main residence of the deceased’s spouse until they were placed into a nursing home. As such, the deceased’s spouse has voluntarily relinquished their lifetime occupancy right under a Deed of Arrangement. The trustee is in the process of transferring the replacement dwelling to the beneficiaries as tenants-in-common ad it is their intention to sell the property. There has never been any income-producing use of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 section 118-210

Reasons for decision: Summary: Subsection 118-195(1) of the ITAA 1997 states that if 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, 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 before 20 September 1985, or the property was acquired by the deceased 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, and ● your ownership interest ends within two years of the deceased’s death (the Commissioner has discretion to extend this period in certain circumstances); or ● 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 their 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 your case, the trustee sold the deceased’s property and purchased a replacement property for the spouse to live in. As the replacement dwelling was purchased by the trustee of the deceased estate which arose after the death of the deceased, and was not acquired by the deceased, section 118-195 of the ITAA 1997 cannot apply. Section 118-200 of the ITAA 1997 contains a partial main residence exemption that may apply in situations where the full exemption is not available under section 118-195 of the ITAA 1997. However, its application is also limited to situations where the dwelling was acquired by the deceased, so section 118-200 of the ITAA 1997 also cannot apply. Section 118-210 also contains an exemption if you are the trustee of a deceased estate and you acquire an ownership interest in the dwelling under the deceased's Will. However, you are not the trustee to the deceased estate and there was no provision in the deceased's Will that empowered the trustee to dispose of the original dwelling and acquire a replacement dwelling. Consequently, section 118-210 of the ITAA 1997 cannot apply. There are no other exemptions or partial exemptions that will apply to any capital gain or capital loss made from the disposal of the replacement dwelling. Therefore, you are not entitled to an exemption when you dispose of your ownership interest in the replacement dwelling.