Private ruling: Capital gains tax - deceased estate - main residence exemption
Date of advice: 3 June 2020
Published: July 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you disregard the capital gain you made on the disposal of your interest in the Alternate Property? | A1: No.

Relevant facts and circumstances: Person A owned a dwelling (the House Property). Person A died in about 19XX (the deceased) and left a Will (the Will). Four siblings;siblingone, sibling two, sibling three and sibling four (you) are the beneficiaries under the Will and are all of full legal capacity. By clause 2 of the Will, the deceased gave all her jewellery to sibling two for their own use and benefit absolutely. By clause 3 of the Will, the deceased gave the House Property to sibling one for their own use and benefit absolutely. By clause 4 of the Will, the deceased gave her residual estate to her four children as tenants in common in equal shares. You lodged a caveat against the Will. After 19XX, an agreement between the four beneficiaries was entered into which provided the following: 1. In consideration of sibling one, sibling two and sibling three entering into this Agreement and performing and observing the terms and conditions hereof. Sibling four agrees to forthwith withdraw the caveat lodged by them against the Will. 2. Forthwith upon sibling four withdrawing the caveat as provided in Clause 1 of this agreement, the executors shall apply for a Grant of Probate of the estate of the deceased. 3. Upon Probate being granted to the executors, they shall forthwith arrange for the sale (whether by auction or otherwise) of "The House Property". 4. The executors shall deal with the contents of the house in accordance with provisions of the Will. 5. The proceeds of the sale of "The House Property" shall be applied as follows: a. firstly to pay all the expenses incurred in obtaining the Grant of Probate, b. secondly, to pay all the expenses incurred in the sale of "The House Property", and c. thirdly, to purchase an alternate dwelling "The Alternate Property" which shall be dealt with in the manner prescribed by clauses 6(1) and 6(2) of this Agreement including all legal costs and stamp duties payable in respect of such transaction. 6. (1) The title to "The Alternate Property" shall be in the names of sibling one, sibling two, sibling three and sibling four as tenants in common in equal shares. (2) Sibling one shall have the right to reside exclusively in "The Alternate Property" for the duration of their lifetime. They shall not be required to pay any rent respect of their occupation of "The Alternate Property" but shall maintain "The Alternate Property" and pay all rates and charges as required to be paid by any municipal or Statutory authority having jurisdiction over "The Alternate Property". 7. The parties agree that any money's on the Estate after the purchase of "The Alternate Property" in accordance with Clause 5 of this agreement shall be applied as follows:- (a) Firstly, to pay the removal and relocation expenses of sibling one; (b) Secondly, to pay the costs of connection of the necessary utilities to the "Alternate Property", and; (c) Thirdly, to be used by sibling one for their own living expenses. Upon the death of sibling one, a direction was issued by the executor of the estate to sell the Alternate Property. A real estate agent was engaged. The contract for sale of the Alternate Property was entered into. Settlement for the Alternate Property occurred a few months later. The proceeds from the sale were used to extinguish outstanding debts from the estate. The remaining monies were distributed to the beneficiaries as per the terms of the Agreement, that is 25% each to sibling one's estate, sibling two, sibling three and yourself. You have made a capital gain on the disposal of your interest in the Alternate Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 118-210 | Income Tax Assessment Act 1997 Subdivision 118-B

Reasons for decision: Summary: Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) contains the rules for situations when capital gains and losses are ignored for main residence dwellings. Having regard to your situation, there are two possible exemptions that could apply to the disposal of real property acquired from a deceased estate. In certain circumstances, section 118-195 of the ITAA 1997 provides that the trustee or beneficiary of a deceased estate can disregard an assessable gain or loss made from the disposal of a dwelling that passed to them as beneficiary or in their capacity as trustee of a deceased estate. One of the main conditions for this exemption to apply, is that the deceased owned the dwelling at the time of their death. In your case the deceased did not own the Alternate Property. The Alternate Property was purchased by agreement between the beneficiaries of the deceased's Estate, in the names of sibling one, sibling two, sibling three and yourself. Therefore the exemption under 118-195 of the ITAA 1997 cannot apply. Section 118-210 of the ITAA 1997 applies if you are the trustee of a deceased estate and under the deceased will, you acquire an ownership interest in a dwelling for occupation by an individual. Such an acquisition may be in pursuance of the will, but does not have to be by force of the will nor in strict conformity with it. Subsection 118-210(3) of the ITAA 1997 provides that if the trustee receives money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event. One of the conditions for this exemption to apply is that the dwelling is purchased in accordance with the deceased's will. This exemption cannot apply to the disposal of the Alternate Property because the Will did not confer upon you any right of sale in relation to the House Property owned by the deceased when they died or to acquire a replacement dwelling for the beneficiary of the House Property. The Alternate Property was not acquired under the Will. The Will directed that the House Property pass to sibling one for their own use and benefit absolutely. The Alternate Property was purchased by agreement between the beneficiaries. Therefore section 118-210 of ITAA 1997 cannot apply and you are unable to disregard the capital gain made on the disposal of your interest in the Alternate property. Any capital gain you made on the disposal will be subject to capital gains tax.