Private ruling: Main residence
Published: December 2014
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20YY
Date scheme commenced: 1 July 200X

Ruling: Q1: Are you entitled to a full main residence exemption on the sale the property? | A1: No | Q2: Are you entitled to a partial main residence exemption on the sale of the property? | A2: Yes | Q3: Will the payment made under the deed be included in the cost base of the property? | A3: Yes | Q4: Do you need to lodge a return in the year ended 30 June 20XX? | A4: The Commissioner has declined to rule as we would be required to make assumptions to provide a ruling. We have provided general advice to help you determine if you are required to lodge a return. | Q5: Do you need to lodge a return in the year ended 30 June 20YY? | A5: Yes

Relevant facts and circumstances: You are the trustee of a deceased estate. The deceased person acquired a property post 20 September 1985. The property was there main residence until they died. The deceased person will left the property to you and two of your siblings. It granted x a life interest in the property. On xx/xx/xxxx, X called and advised that they wanted to release themself from the life tenancy as he had moved on to a new relationship. They advised that they had abandoned the property approximately xx months before and that he no longer wished to reside in the property or be responsible for paying the required items under the will. X advised that they would not just walk away and that they would not hand over the keys unless you compensated them. They mentioned that they would like to be reimbursed for paying for the deceased persons funeral expenses and for replacing the carpet when they vacated the unit. You spoke to a lawyer who drew up a deed, for the agreed sum of $X. Which X signed on the X. The deed stated the amount paid was a settlement. The lawyer advised this was the best course of action to prevent X from making further claims against the estate. The funds from this settlement came from the private account of one of the remainder owners. The remainder owners have agreed that this payment to the life tenant should be reimbursed to that remainder owner prior to distribution, once the property was sold. You entered into a contract to sell the property on the X, which settled on the X.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 110-25(6) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 Main residence exemption for a deceased estate | Section 118-195 and 118-200 of the Income Tax Assessment Act 1997 (ITAA 1997) deal with the eligibility of both a beneficiary and trustee of a deceased estate in relation to the main residence exemption. Section 118-195 provides the following: | A *capital gain or *capital loss you make from a *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 | Beneficiary or trustee of deceased estate acquiring interest | Item | One of these items is satisfied | 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 | (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. | Section 118-200 provides that you get only a partial exemption (or no exemption) if section 118-195 does not apply. To work out your partial exemption you use the following formula: | CG or CL amount | × | Non-main residence days Total days | For a property acquired after the 20 September 1985 your non-main residence days will be those days where the property was not the main residence of either the deceased or a person mentioned in column 3 of the table in section 118-195 of the ITAA 1997. | Application to your circumstances | We consider that you will not be entitled to a full main residence exemption as there is a significant period between when you ownership interest in the property ended (X) and when the individual released their life tenancy in the property (X). You will however be entitled to a partial main residence exemption. | For the purpose of calculating your partial main residence exemption your 'Non-main residence days' will only include the days between when X released their life interest in the property and when you sold the property. | Cost Base | You make a capital gain if the capital proceeds received in relation to a CGT event are greater than the cost base of the asset. Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base. Subsection 110-25(6) deals specifically with the fifth element of the cost base. It provides that the fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. | Clause X and X of the deed provided that in exchange for the settlement sum: | It is a well-established principle of tax law that the advantage sought is a important factor in determining the tax treatment of expenditure ( Hallstorms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634) . While the other party to a the settlement may have viewed the amount as a reimbursement, it is clear that the advantage sought by you was to remove an encumbrance on the legal title you held over the property and prevent the other party from making any other claims against the estate. | We consider the definition of fifth element expenditure under subsection 110-25(6) of the ITAA 1997 is sufficiently broad to include the above expenditure. This expenditure will be incurred by the deceased estate when it is reimbursed to the party who provided the initial funds. | Requirement to lodge | The Commissioner cannot provide a ruling on whether you have to lodge a return as it would require us to make assumptions. We have however provided general advice to help you determine if you are required to lodge. | The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith . | General advice | A trust income tax return of a deceased estate is a separate tax return from the final personal tax return (date of death return) of the deceased person. | To work out whether or not to lodge a trust tax return for the deceased estate, refer to the reasons listed below. Take into account only the income received by the deceased estate after the person's death. | The executor will be required to lodge a return where the deceased estate: | • derived income including capital gains | • has received dividends (after the date of death) and they wish to claim franking credits | • has received income from which tax has been withheld, or | • carried on a business. | A trust tax return may need to be lodged for each income year until the deceased estate is fully administered (all of its assets and income are distributed to the beneficiaries) and no longer deriving income. | For more information please see Tax responsibilities of being an executor (QC 40483) on www.ato.gov.au.