Private ruling: Main residence exemption from CGT
Date of advice: 18 November 2015
Published: January 2016
Ruling period: Year ended 30 June 20WW
Date scheme commenced: 1 July 20ZZ

Ruling: Q1: Will you be eligible for a full exemption of the capital gain made in relation to the interest in the property that the deceased acquired prior to 20 September 1985? | A1: Yes | Q2: Will you be eligible for a full exemption of the capital gain made in relation to the interest in the property that the deceased acquired after 20 September 1985? | A2: No, however a partial exemption will be available


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 108-7 | Income Tax Assessment Act 1997 Section 128-50

Reasons for decision: Summary: As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (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 Your situation is also addressed in Section 108-7 of the ITAA 1997, which states: | Detailed Reasoning - 108-7 Interest in CGT assets as joint tenants: Individuals who own a *CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common. Additionally, section 128-50 of the ITAA 1997 provides that where one joint tenant dies, the surviving joint tenant(s) are taken to have acquired that individual's interest in equal shares on the date of their death. In this case, the deceased had acquired an ownership interest on multiple occasions. She/he initially acquired an ownership interest when she/he purchased the property prior to 1985. She/he also acquired an additional ownership interest following the death of her/his partner in 20XX by virtue of them owning the property as joint tenants. Each interest is considered to be a separate CGT asset. The building that the deceased lived in was set out as self-contained flats with the deceased living in one of the flats. Since 20YY the deceased and their partner rented part of the ground floor flat. The rented area was separated from areas that were retained for personal use and structural changes were made to accommodate this. There was a commercial arrangement with a real estate agent to manage the process and the money was paid to the owners on a regular basis. In 20ZZ the rent charged was $XXXX per month and was a commercial amount. The deceased had declared rental income on their annual tax return. It is accepted that part of the property was being used for the purpose of producing assessable income. Each of the deceased's ownership interests need to be considered separately in order to determine if the trustee of the deceased's estate can disregard the capital gain made on the disposal of the property. | Detailed Reasoning - Ownership interest that was acquired prior to 20 September 1985: With the application of section 118-195(1) of the ITAA 1997 the deceased's ownership interest acquired prior to 1985 satisfies item 2 in column 2 and item 1 in column 3 of the table in subsection 118-195(1) of the ITAA 1997 and as a result any capital gain from that interest is disregarded for the trustee. | Detailed Reasoning - Ownership interest that was acquired after 20 September 1985: As part of the property was used to produce assessable income the deceased's ownership interest acquired in 20XX does not satisfy either of the two conditions set out in column 2 of the table in subsection 118-195 of the ITAA 1997; therefore any capital gain made from this interest cannot be disregarded under section 118-195 of the ITAA 1997. However, where the requirements of section 118-195 have not been met, section 118-200 of the ITAA 1997 may provide a partial exemption. A partial exemption allowable under section 118-200 of the ITAA 1997 must be further reduced if part of the property was used to produce assessable income in accordance with section 118-190 of the ITAA 1997. Subsection 118-200(2) of the ITAA 1997 allows you to calculate a partial exemption where you owned a dwelling as the trustee of a deceased estate using the following formula: CG or CL amount × Non-main residence days Total days Non-main residence days include: (a) if the deceased *acquired the *ownership interest on or after 20 September 1985 - the number of days in the deceased's *ownership period when the *dwelling was not the deceased's main residence; and (b) the number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195 Total days are: (a) if the deceased *acquired the *ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or (b) if the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends. Subsection 118-200(3) of the ITAA 1997 allows the formula to be adjusted to ignore non-main residence days and total days after the deceased's death if the deceased acquired the ownership interest on or after 20 September 1985 and your ownership interest ends within 2 years of the date of the deceased's death if you get a more favourable result by doing so. In this case, the partial exemption can be calculated using either the formula in subsection 118-200(2) or (3) of the ITAA 1997. The resulting assessable capital gain will then need to be increased based on the extent to which the property was used to produce assessable income in accordance with section 118-190 of the ITAA 1997.

Relevant fact: The deceased died in 20ZZ. | Prior to their death she/he lived in her/his dwelling that she/he had acquired prior to 1985. She/he owned the dwelling with their partner as joint tenants. | The deceased's partner died in 20XX and at that time the ownership of the dwelling passed to the deceased. | The property was converted to enable part of the property to be rented. The conversion resulted in a number of self-contained flats. While an application was made to council to issue separate rate notices, the property continued to be held on one title. | A portion of the flat was rented for a number of years prior to the deceased's death. Several rooms were retained by the deceased as storage rooms and were physically separated from the rented area. | The rented area consisted of a bedroom, bathroom, dining room, kitchen and laundry and had a separate entrance. | In 20ZZ the rent charged was $XXXX per month and was paid to a real estate agent. The real estate agent charged a fee for their services. Rent collected was initially paid to the deceased and their partner and late to the deceased. The deceased had declared rental income on their recent income tax returns. | The deceased was confined to the flat due to ill health. | Following the deceased's death the property was valued wherein it was mentioned the property was not rentable in its present condition. | The property was sold and settled in 20WW.