Private ruling: Capital gains tax – deceased estate – Commissioner’s discretion to extend the two year period – main residence exemption
Date of advice: 4 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the sale of your dwelling be fully exempt from capital gain tax under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: M purchased a dwelling prior to 20 September 1985 (the dwelling). M passed away in 2014 (the deceased). The dwelling was the deceased’s main residence and was not used to produce assessable income. The deceased’s child lived with the deceased prior to the deceased’s passing. The will of the deceased’s made provision for the deceased’s child to occupy the dwelling for a number of years commencing from the date of the deceased’s passing. The deceased’s child continued to reside in the dwelling after the right to occupy came to an end and resided in the deceased’s dwelling up until settlement of the sale in 2017.

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

Reasons for decision: Summary: You will be entitled to partial exemption from CGT on the sale of your dwelling. | Detailed Reasoning - Detailed reasoning: Capital gain tax (CGT) is the tax that you pay when a CGT event happens to a CGT asset, such as a dwelling. The most common CGT event is when you dispose of the asset to another entity (such as the disposal of a dwelling). Assets inherited through a deceased estate are acquired on the date of death. As you acquired your interest in the dwelling after 20 September 1985, the dwelling is subject to CGT upon its disposal. You can disregard all of the capital gain from the sale of the deceased’s main residence if section 118-195 of the ITAA 1997 is satisfied. Subsection 118-195(1) of the ITAA 1997 allows any capital gain to be disregarded if the following conditions are satisfied: ● The deceased acquired the ownership interest before 20 September 1985, and ● Your ownership interest ends within two years of the deceased’s death, or within a longer period allowed by the Commissioner; or ● 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 9except 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. In this case, the first condition is satisfied as the deceased acquired an ownership interest before 20 September 1985. However, the interest in the dwelling was not disposed of within two years of the deceased’s death. Furthermore, the deceased’s child’s right to occupy the dwelling ceased prior to settlement, as the will provided the deceased’s child with a right to occupy the dwelling for a specified number of years from the date of the deceased’s death. The deceased’s child continued occupation of the dwelling after their right to occupy ended until the date of settlement, which was not in accordance with the deceased’s will and therefore does not satisfy subsection 118-195(1)(b). Therefore, as the deceased’s child did not occupy the dwelling in accordance with the deceased’s will for the whole of the ownership period, a partial exemption may apply. | Detailed Reasoning - Partial exemption for deceased estate dwellings: You only get a partial exemption (or no exemption) if: ● Your ownership interest in a dwelling devolved to you as trustee of a deceased estate, and ● The dwelling was the main residence of an individual who had a right to occupy the dwelling under the deceased’s will for part only of your ownership period. Specifically, subsection 118-200(2) provides the following formula to be used when calculating the assessable capital gain: Capital gain or loss amount X Non Main Residence Days Total Days Subsection 118-200(3) provides that the non-main residence days consist of the number of days in the period from the deceased’s death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in row 2, column 3 of the table in subsection 118-195 of the ITAA 1997. The total days for a dwelling acquired by the deceased prior to 20 September 1985 is the number of days in the period from the deceased’s death until your ownership interest ends. In this case, the non-main residence days include the days from when the deceased’s child right to occupy came to an end up until settlement of the sale of the dwelling. The total days include the number of days in the period from the deceased death until your ownership interest ended. | Detailed Reasoning - Calculating the capital gain or loss: When calculating the capital gain or loss made upon the sale of the dwelling, subsection 128-15(4) of the ITAA 1997 states that the first element of the cost base where the dwelling was originally purchased by the deceased before 20 September 1985 is the market value of that dwelling. Applying the cost base modification rules to your situation, the capital gain or loss is calculated on the difference between the market value of the dwelling at the time of deceased’s death, plus any additional costs and the amount you received as a result of the sale. If the end result is a capital gain and you have no capital losses to offset against it or past year losses, you are able to discount this amount by 50% before including the remaining figure as your assessable income.