Private ruling: : CGT - deceased estates
Date of advice: 18 August 2022
Published: November 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1July 20XX


Relevant facts and circumstances: Person A and Person B acquired a property (the Property) several decades ago. They acquired the Property as joint tenants. After Person A's death, the Property was transferred to Person B. Person B died many years later. Person C was Person B's adult child and the sole beneficiary of their estate. Person C inherited the Property on the death of Person B. Person C died the following year. Person D, Person C's only child, inherited the Property on the death of Person C. This occurred after 20 September 1985. Person C was residing at the Property at the time of their death. Person D has a severe disability, and Person C was their main carer. Person D was residing at the Property with Person C at the time of Person C's death. Person E and Person B were the executors of Person C's estate. However, Person B pre-deceased Person C. Person E was therefore the sole executor of Person C's estate. Person E held the Property as Person C's Legal Personal Representative (LPR) and on behalf of Person D because at the time they inherited the Property, they were a minor. Person E was also Person D's legal guardian. Person D continued to reside at the Property after Person C died. Several months after the death of Person C, Person D moved into a community residential unit. Several years later, Person D moved into specialist disability accommodation and has continued to reside at that accommodation. Company A was appointed as Person D's financial administrator by order of the relevant state tribunal. The Property became income producing after 20 August 1996 as a means to provide financial support for Person D. The Property was transferred into Person D's name in 20XX by the executor and LPR of Person C's estate. Some time later, a report was received from Person D's treating medical doctor. The report advised that Person D could no longer live independently in the Property by themself or with carer support. The report advised that Person D would have to remain living at the specialist disability accommodation. Company A decided to sell the Property due to property expenses and high maintenance costs. The tenant living at the Property was issued a notice to vacate request in 20XX. The Property became vacant shortly afterwards. The Property sold a short time later. Settlement occurred the following month. Person D will exercise the absence choice in accordance with section 118-145 of the Income Tax Assessment Act 1997 from when they vacated the Property .

Relevant legislative provisions: Income Tax Assessment Act 1997 section104-10 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-185 | Income Tax Assessment Act 1997 section 118-192 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: You became absolutely entitled to the Property on the death of Person C as against the Trustee of the Estate of Person C. At this time, the Property passed to you as the only beneficiary. From that point, you had a vested, indefeasible, and absolute interest in the asset; and were able to direct the trustee how to deal with the asset. | Detailed Reasoning - Detailed reasoning: An asset will 'pass' to the beneficiary of a deceased estate when the beneficiary becomes absolutely entitled to the asset as against the estate's trustee. A capital gains tax (CGT) asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997). However, the beneficiary will be the relevant taxpayer if a CGT event happens to the asset after it has passed to the beneficiary. An asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. Any capital gain or loss made when the asset passes to a beneficiary of the deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997 A CGT event in relation to an asset of a trust happens to the trustee on behalf of the trust unless a beneficiary is absolutely entitled to the asset. Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the ITAA 1997 states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. That is, the absolutely entitled beneficiary is treated as the owner of the CGT asset. A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is: • absolutely entitled in equity to the asset and thus has a vested, indefeasible, and absolute interest in the asset; and • able to direct the trustee how to deal with the asset. | Detailed Reasoning - Application to your circumstances: The Property passed to you under a will. At the time of the Person C's death, you became absolutely entitled to the Property as against the estate's trustee. You have a vested, indefeasible, and absolute interest in the Property., As a result, you had an absolute entitlement to the Property at the time of Person C's death as against the trustee of the Estate of Person C. | Summary: The first element of the cost base of the Property is the market value at the date the Property was first used to produce income. | Detailed Reasoning - Detailed reasoning: For a dwelling that was the deceased's main residence just before they died, the first element of the cost base and reduced cost base will be the market value of the asset on the date of death of the deceased. However, there is a special rule that modifies this first element, where a property has been used to produce income. There is a special rule if: (a) You would only get a partial exemption under Subdivision 118B of the ITA 1997 for a CGT event happening in relation to a dwelling or your ownership interest in it because the dwelling was used for the purpose of producing assessable income during your ownership period; and (b) You would have got a full exemption under Subdivision 118B of the ITAA 1997 if the CGT event had happened just before the first time (the i ncome time) it was used for that purpose during your ownership period. (c) The use must occur for the first time after 7.30pm, by legal time in the Australian Capital Territory, on 20 August 1996 If the above conditions are met, you are taken to have acquired the dwelling or your ownership interest in the dwelling at the income time for its market value at that time. | Detailed Reasoning - Application to your circumstances: You have met the conditions for the special rule for the first use to produce income. At the time the Property was first used to produce income, you would have got a full exemption from CGT if the Property had been disposed of just before that time. In addition, the use occurred for the first time after 7.30pm on 20 August 1996. As the Property was first used to produce income in 19XX, the first element of the cost base will be the market value of the Property at the date it was first used to produce income. | Detailed Reasoning - Question 3: Will you be entitled to a partial main residence exemption on disposal of the Property? | Summary: As you meet the conditions in subsection 118-185(1) of the ITAA 1997, you will be entitled to a partial main residence exemption on disposal of the Property. | Detailed Reasoning - First use to produce income rule: As the first income use rule in 118-192(3) of the ITAA 1997 applies to calculate the first element of the cost base of the Property, you must use subsection 118-185 of the ITAA 1997 to calculate any partial main residence exemption. Subsection 118-192(3) of the ITAA 1997 provides that: If your ownership interest in a dwelling passed to you as a beneficiary in a deceased's estate, or you owned it as the trustee of a deceased estate and the CGT event did not happen within 2 years of the deceased's death, you apply Subdivision 118B of the ITAA 1997 as if: (a) You had acquired the interest as an individual and not as a beneficiary or trustee of a deceased estate; and (b) for applying the formula in section 118-185 of the ITAA 1997, your non-main residence days were the number of days in your ownership period when the dwelling was not the main residence of an individual who had a right to occupy the dwelling under the deceased's will, the spouse of the deceased or a beneficiary | Detailed Reasoning - Main residence exemption: If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are entitled to a partial exemption. Subsection 118-185(1) of the ITAA 1997 provides that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if: (a)You are an individual; and (b)The dwelling was your main residence for part only of your ownership period and (c)The interest did not pass to you as a beneficiary in, and you did not acquire it as trustee of, the estate of a deceased person You calculate your capital gain or loss using the formula: CG or CL amount x (Non-main residence days ÷ Days in your ownership period) The non-main residence days is the number of days in your ownership period when the dwelling was not your main residence. | Detailed Reasoning - Absence choice: Section 118-145 of the ITAA 1997 provides that a dwelling can still be regarded as your main residence after you stop living in it, for a maximum of 6 years from the time it was first rented out (6-year absence choice period). Where the dwelling is not used for the purposes of producing assessable income, the absence choice can be exercised indefinitely. | Detailed Reasoning - Application to your circumstances: You resided in the Property at the time of your parent's death. Once you moved out of the Property, the Property was not used to produce income until 19XX. You will exercise the absence choice for 2 periods - from the time you vacated the Property until it was used to produce income in 19XX and from the time in 19XX it was first used to produce income for a period of 6 years from that date. Your ownership interest in the Property commenced on the death of the latest deceased, in accordance with subsection 118-192(3) of the ITAA 1997. The period from the expiration of the 6 year period until disposal of the Property will be non-main residence days for the purpose of calculating a partial main residence exemption. The days covered by the absence choice election in section 118-145 of the ITAA 1997 are not included when calculating non-main-residence days for the purposes of section 118-185 of the ITAA 1997. As a result, you are eligible for a partial main residence exemption on disposal of the Property.