Private ruling: Capital gains tax
Published: October 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are you required to pay capital gains tax on a property inherited from a deceased estate? | Yes.

Relevant facts and circumstances: Parent 1 died a number of years ago. Parent 1 left their property to you and your two siblings. The property was acquired by parent 1 pre 1985. The property was less than 2 hectares. Under their will parent 1 allowed parent 2 to occupy the property for as long as they wanted or until they died. Both your parents are now deceased. The Public Trustee was then able to distribute the assets in accordance with the will. Your sibling remained in the property with parent 2 until parent 2 died and remained in the property until it was sold. Your sibling did not have a right to occupy the property under parent 1 will. The property was sold a number of years after parent 2 died.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-130. | Income Tax Assessment Act 1997 Section 118-195. | Income Tax Assessment Act 1997 Section 118-200.

Reasons for decision: Summary: You make a capital gain or capital loss if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset) that you own. The most common CGT event is CGT event A1, the disposal of an asset. However, there are a number of exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part. | Detailed Reasoning - Sale of inherited dwelling: An exemption may apply to the disposal of a dwelling you acquired because you were a trustee of a deceased estate. Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the conditions under which a capital gain or capital loss can be disregarded in this situation. Subsection 118-195(1) of the ITAA 1997 allows a trustee of a deceased estate to disregard a capital gain or loss from a dwelling that a deceased person acquired before 20 September 1985 if: • The trustees ownership interest in the dwelling ends within two years of the deceased persons death, or • from the deceased's death until the trustees ownership interest ends (the trustee's ownership period), the dwelling was not used to produce income and it was also the main residence of one or more of the following persons: • the spouse of the deceased immediately before death • an individual who had a right to occupy the dwelling under the deceased's will, or • An individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary. The ownership interest of a beneficiary or trustee commences on the date of death of the deceased (section 128-15 of the ITAA 1997) and ends on the disposal of the dwelling. A full main residence exemption will only be available if the dwelling was the main residence of one of the specified individuals during the trustee's ownership period for the entire period. | Detailed Reasoning - Partial exemption from capital gains tax: Where section 118-195 of the ITAA 1997 does not apply, a partial main residence exemption may still be available under section 118-200 of the ITAA 1997 if an ownership interest in a dwelling passed to you as a beneficiary in a deceased estate. A partial main residence exemption under section 118-200 of the ITAA 1997 will apply when you dispose of your ownership interest in the property. Partial Exemption can be calculated using the following formula: Capital gain or capital loss x non-main residence days Total days Non-main residence days are the total number of days that the dwelling was not the main residence of one of the following: • the deceased • 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 sum of the number of days between the date of the deceased passing away and the date of the sale of the dwelling. In your case parent 2 had the right to occupy the property under the will until they died. The property was occupied by parent 2 from when parent 1 died until parent 2 died. The property will be exempt from CGT for the period XX XXXX XXXX to XX XXXX XXXX as parent 2 had the right to occupy the property under the terms of parent 1 will. The period XX XXXX XXXX to XX XXXX XXXX are non-main residence days as your sibling did not have the right to occupy the property under parent 1 will. CGT is payable for the non-main resident days between XX XXX XXXX and XX XXXX XXX as per the calculation set out above.