Private ruling: CGT - deceased estate - main residence exemption - absence rule
Date of advice: 20 April 2017
Published: September 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Upon disposal of the property will the trustees of the estate be entitled to a full exemption under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Upon disposal of the property can the trustees of the estate be entitled to a partial exemption under section 118-200 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: The deceased died in 198X. The deceased owned a dwelling (the property) which was their main residence at the date of their death. In the deceased's Will, they provided for their spouse, XY with the right to occupy the property during their life. The deceased acquired the property before 20 September 1985. XY continued to live in the property until 20XX, when they moved into a nursing home. The property was rented from 20XX to 20XX, whilst XY lived in the nursing home. XY made the choice that the property continues to be their main residence after moving into the nursing home. XY died in 20XX. The trustees of the estate intend to place the property on the market for sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 118-145 | Income Tax Assessment Act 1997 - Section 118-195 | Income Tax Assessment Act 1997 - Section 118-200

Reasons for decision: Summary: Main residence exemption Section 118-195 of the ITAA 1997 provides that a capital gain or capital loss made from the disposal of a dwelling is disregarded where the deceased acquired the dwelling prior to 20 September 1985 and the dwelling is the main residence of a person who has been given a right to occupy the dwelling or a life tenancy under the deceased's Will from the deceased's death until the ownership interest ends. Section 118-145 of the ITAA 1997 provides that a taxpayer can make a choice to continue to treat a dwelling as their main residence even though they no longer live in it. Where the dwelling is used to produce income, the choice is effective for a period of up to six years. Where the individual has passed away, this choice can be made by the executor of their estate. However, where the individual to who the main residence exemption applies passes away, the exemption period ceases. ATO Interpretive Decision 2002/52 (ATO ID 2002/52) provides guidance on the application of section 118-145 of the ITAA 1997 in relation to section 118-195 of the ITAA 1997. ATO ID 2002/52 extends the section 118-145 of the ITAA 1997 choice to a spouse who continues to live in a property as their main residence after the death of the deceased to make the choice to continue to treat the property as their main residence during a period of absence. In your situation, XY was provided with the right to remain in the dwelling under the deceased's Will. XY made the choice to continue to treat the dwelling as their main residence during the period they were not residing in it. Therefore, while a full exemption under section 118-195 of the ITAA 1997 will not be available, a partial main residence exemption will apply up until the date that XY passed away in accordance with section 118-200 of the ITAA 1997. Partial main residence exemption As XY passed away in 20XX and the property has not yet been sold, you will not be entitled to a full main residence exemption on its sale. However, you will be entitled to a partial exemption. This will mean that the capital gain or loss that you make when you sell the property will be adjusted using the following formula: Capital gain or capital loss x non-main residence days total days Where the deceased acquired their ownership interest before 20 September 1985: Non-main residence days are the total number of days from the death of the deceased until your ownership interest ends when the dwelling was not the main residence of one of the following: ● the spouse of the deceased at time of death, or ● an individual who had the right to occupy the dwelling under the deceased's Will; or ● a beneficiary who brought about the CGT event. Total days are the number of days in the period from the deceased's death until your ownership interest ends. In your situation, the non main residence days are the number of days from XY's death in 20XX until settlement of the sale of the dwelling. The total days are the number of days from the date of the deceased's death until settlement of the sale of the dwelling. | Detailed Reasoning - Further issues for you to consider: Cost base Where a dwelling passes to you under a deceased estate and the deceased acquired it prior to 20 September 1985, the first element of the cost base of the dwelling will be its market value on the date of the deceased's death. Accordingly, the cost base of the dwelling will be its market value on the date of the deceased's death.