Private ruling: Capital gains tax - deceased estate - life interest - disposal of main residence
Published: January 2014
Ruling period: Year ended 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you liable for capital gains tax (CGT) on the disposal of the deceased's main residence? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Prior 20 September 1985, deceased A and deceased B jointly purchased a dwelling. They moved into the dwelling and established it as their main residence. The following year deceased A died and their interest in the dwelling was transferred to deceased B. Deceased A and deceased B had a number of children. Child A and child B married and moved out of the family home. Child C never married and lived with deceased B in the dwelling. After 20 September 1985, deceased B died. Deceased B's children are the trustees and the beneficiaries of their estate, with each to receive an equal share. Deceased B's will contained provisions giving one of the beneficiaries, child C, the right to have the use, occupation and enjoyment of the dwelling. Under deceased B's will child C was responsible for all expenses and up keep of the dwelling. Under the deceased B's will, upon the death of child C the dwelling be disposed of and the proceeds are to be equally distributed to child A and child B. Child C died approximately 18 months ago. The dwelling was disposed of at public auction shortly after child C's death. Child A and child B each received an equal share of the proceeds. You have provided the following documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling: · the Last Will and Testament of deceased B.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 115-215 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-200 | Income Tax Assessment Act 1997 Section 128-15

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common CGT event is CGT event A1, which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract - when a change of ownership occurs. CGT event A1 occurred when you disposed of the dwelling. | Detailed Reasoning - Life tenancy: In some cases, an individual's will may provide a life interest in a dwelling that they owned when they died. In these circumstances, the deceased's trustee is taken to have acquired the original asset on the date of the deceased's death, for the market value on that date. In your case, deceased B's will made provisions for child C to have the use, occupation and enjoyment of the dwelling. The will also provided that upon child C's death the dwelling or the proceeds from its disposal pass to child A and child B in equal shares. | Detailed Reasoning - Disposal of main residence: There are a number of exemptions or partial exemptions from CGT that may apply in certain situations. One of these exemptions is the main residence exemption. Special rules apply if you acquire the dwelling as a trustee of a deceased estate. Where a dwelling was originally acquired by the deceased before 20 September 1985, and an individual had the right to occupy the dwelling under the deceased's will, any capital gain or capital loss arising from the disposal of the dwelling will be disregarded if the individual occupied the dwelling as their main residence for all of the trustees' ownership period. The ownership period commences from the deceased's date of death and ends on the date the contract for the sale of the dwelling is settled. In your case, the trustees' ownership period began when deceased B passed away. One of the beneficiaries, child C, was given a life interest in the dwelling under deceased B's will. Child C passed away approximately 18 months ago. | Detailed Reasoning - Cost base: If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling. The first element of the cost base and reduced cost base of a dwelling is its market value at the date of death where the dwelling was acquired by the deceased before 20 September 1985. | Detailed Reasoning - Market value: Where the market value of an asset needs to be determined an individual can obtain it by a number of means such as a qualified valuer or compute their own valuation based on reasonable objective and supportable data. Note: The Australian Taxation Office may challenge valuations where appropriate. We have released a publication titled 'Market valuation for tax purposes', which is available on our website - www.ato.gov.au. | Detailed Reasoning - Partial exemption: If the dwelling ceases to be the main residence of the life tenant before it is disposed of the beneficiaries are entitled to a partial exemption. You calculate your capital gain or capital loss using the following formula: Capital gain or capital loss X Non main residence days Total days Capital gain or capital loss is the amount that you made from the disposal of the dwelling. Non main residence days are the number of days that the dwelling was not the main residence of one of the following: · a person who was the spouse of the deceased, or · an individual who had the right to occupy the dwelling under the deceased's will. Total days are the number of days from the deceased's death until the day you dispose of the dwelling. | Detailed Reasoning - How it applies in your circumstance: In your case, child C resided in the dwelling as their main residence from deceased B's date of death until their death. You are unable to obtain the full exemption as child C did not occupy the dwelling for your entire ownership period, as child C passed away and settlement occurred several months later after the contract for sale was signed on its auction. You do not qualify for a full exemption on the disposal of the dwelling; however, you do qualify for a partial exemption. Therefore, you will need to use the above formula to calculate your capital gain or capital loss. Your non-main residence days are calculated from the deceased date of death until settlement date on the disposal of the dwelling. You can apply the CGT discount method to calculate your capital gain as you meet all the relevant criteria. The discount percentage is 50% for individuals and trusts.