Private ruling: Capital gains tax - Deceased Estate Main Residence Exemption
Date of advice: 10 September 2015
Published: September 2015
Ruling period: 01 July 2015 to 30 June 2016
Date scheme commenced: 01 July 2015

Ruling: Q1: Will there be a capital gains tax (CGT) event when a 50% share of the house is transferred to your child? | A1: Yes | Q2: Will you be able to disregard any capital gain or capital loss made on the disposal of the dwelling? | A2: No

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. The property (the house) was acquired by your relative before 1985. It was a pre-CGT asset and your relative's main residence. Your relative invited your child to live in the house. Before dying, your relative asked you to allow them to continue to live in the house after their death. The house has been your child's main residence since then. No rent or other income has been made from the house. Your relative died a number of years ago and left the property to you. There was no right to occupy granted to your child in the will. You consider yourself bound by your relative's wishes as if it had been a right to occupy in their will. The house was valued at $X when it was passed to you. The house has currently been valued at $XX. You are proposing to transfer a 50% share of the house to your child in exchange for $XX.

Relevant legislative provisions: Section 102-20 of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Section 118-195 of the Income Tax Assessment Act 1997 | Section 128-15 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on certain gains you make. You may make a capital gain or a capital loss as a result of a CGT event. The most common event happens if you dispose of an asset to someone else, for example if you sell your dwelling. The sale of your dwelling constitutes CGT event A1. In your case, when you sell a 50% share of the house to your child CGT event A1 will occur. A capital gain or capital loss is disregarded under section 118-195 of the ITAA 1997 where a capital gains tax event happens to a dwelling if it passed to you as an individual beneficiary of a deceased estate or you owned it as the trustee of the deceased estate. The availability of the exemption is dependent upon: • who occupied the dwelling after the date of the deceased's death, or • whether the dwelling was disposed of within two years of the date of the deceased's death. For a dwelling acquired by the deceased, you will be entitled to a full exemption if: • the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of the following relevant individuals: • the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased) • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or • your ownership interest ends within two years of the deceased's death. In your case, when your relative died, an interest in the property passed to you. The property was your relative's main residence prior to death, and at that time, was not being used to produce assessable income. You would be entitled to an exemption from CGT if either: • Your child had the right to occupy the property granted by your relative's will, or • You, as beneficiary, occupied the property as your main residence. As there was no allowance made under the will for your child to occupy the property, and as you as the beneficiary you did not occupy the property as your main residence, you are not entitled to an exemption from CGT. Calculating the Capital gain on your interests When you calculate the amount of CGT that you need to include in your assessable income, you will first need to work out your cost base. When you deduct your cost base from any proceeds received from the disposal of a CGT asset, any amount left over is a capital gain. If your proceeds are less than your cost base, you have made a capital loss. The cost base of a CGT asset is made up of five elements: 1. Money or property given for the asset 2. Incidental costs of acquiring the CGT asset or that relate to that event 3. Costs of owning the asset 4. Capital costs to increase or preserve the value of your asset or to install or move it 5. Capital costs of preserving or defending your ownership of rights to your asset You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset. The first element of the cost base of a dwelling that was a deceased's main dwelling at the date of their death, or was acquired before 20 September 1985, is the market value of the dwelling as at the date of the deceased's death. You would also add to your cost base any amounts that you incurred during your ownership period that were cost elements that were second, third, fourth and fifth elements of calculating a cost base. For example, any costs paid towards maintenance of the property would be incidental costs and should be included when calculating your cost base. Any costs that you have incurred in owning the asset, such as council rates or land tax are third element costs, and also included in your cost base. You can use the discount method to calculate your capital gain provided you are an individual, and the asset has been held by the deceased and the deceased's estate for a longer period than 12 months. Please see the Guide to capital gains tax 2015 located on www.ato.gov.au for further information on calculation your capital gain or capital loss.

ATO view documents: ATO Interpretative Decision 2004/734 | ATO Interpretative Decision 2004/882 | ATO Interpretative Decision 2003/109 | NAT 4151 Guide to Capital Gains Tax