Private ruling: Capital gains tax
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will you, as beneficiary of the estate, be able to disregard any capital gain or capital loss you make from the disposal of the dwelling under the 2 year exemption in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will you, as beneficiary of the estate, be able to disregard any capital gain or capital loss you make from the disposal of the dwelling under the 2 year exemption if the dwelling does not remain in the name of the deceased individual's estate? | A2: Yes. | Q3: Does the 2 year exemption apply to any increase in capital value during the 2 year period? | A3: Yes. | Q4: If the dwelling is rented during the 2 year exemption period are you, as the beneficiary of the deceased estate, entitled to the exemption? | A4: Yes. | Q5: Will you, as beneficiary of the deceased estate, be required to declare rental income earned from the dwelling? | A5: Yes.

Relevant facts and circumstances: After 1 July 1969, your relatives finalised the purchase of the family dwelling. Upon the death of your relative in after 1 July 1991, full ownership passed via their Will and testament to another relative. Your relative continued to live in the dwelling as their principal residence until their death in after 1 July 2010. Although there are several beneficiaries in your relative's will, you are the sole beneficiary in respect of the dwelling. Probate of the will was granted in after 1 January 2012. As some of the beneficiaries are pre school age or located interstate, finalising the bequests which are related to achieving majoring age and distribution is taking longer than anticipated. It is proposed to rent the premises to generate fund for its upkeep during these delays.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195.

Reasons for decision: Detailed Reasoning - Questions 1: The 2 year exemption in section 118-195 of the ITAA 1997, applies to disregard a capital gain or loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it. This exemption applies if you are an individual and the interest passed to you as a beneficiary of a deceased estate. In your case, you are the beneficiary of the deceased estate; therefore the 2 year exemption will apply to you. | Detailed Reasoning - Question 2: As per question 1, the 2 year exemption applies to an interest in a dwelling that has passed to the beneficiary of the deceased estate. | Detailed Reasoning - Question 3: The 2 year exemption in section 118-195 of the ITAA 1997 applies to disregard the capital gain made on a dwelling acquired from a deceased estate. That is, it applies to disregard the capital gain made on the date the dwelling is disposed of by the beneficiary. Provided the dwelling is sold within the 2 year period, you will be entitled to a total exemption of the capital gain made on the sale of the property. | Detailed Reasoning - Question 4: Taxation Determination TD 2000/31 states that if you own an interest in a CGT asset and you acquire another interest in that asset, the interests will remain separate CGT assets for capital gains tax purposes. If a CGT event occurs in relation to the interests held in the asset, there is a separate date of acquisition for each interest, a separate cost base for each interest and the capital proceeds are determined separately for each interest. In your case, the deceased had acquired 2 separate interests in the property at different times. The first interest was acquired in after 1 July 1969 when the property was originally purchased and the second interest on the date the deceased's spouse passed away in after 1 July 1991. | Detailed Reasoning - Interest acquired after 20 September 1985: As per Taxation Determination TD 1999/70, if a dwelling passes to you as a beneficiary of a deceased estate and you make a capital gain or loss from a CGT event that happens to the dwelling, you can disregard the gain or loss even if the dwelling has been used for income producing purposes. This is provided that the deceased acquired the dwelling on or after 20 September 1985, the dwelling was the deceased's main residence and your ownership interest in the dwelling ends within 2 years of the deceased's death. In your case, provided your ownership interest in the dwelling ends within 2 years of the deceased's death, renting the property will not affect your ability to disregard the capital gain on the interest in the property acquired after 20 September 1985. | Detailed Reasoning - Interest acquired before 20 September 1985: The 2 year exemption applies to an interest acquired before 20 September 1985 provided the dwelling is sold within 2 years of the person's death. This exemption applies whether or not the dwelling is used to produce income during the 2 year period. In your case, provided your ownership interest in the dwelling ends within 2 years of the deceased's death, renting the property will not affect your ability to disregard the capital gain on the interest in the property acquired before 20 September 1985. | Detailed Reasoning - Questions 5: Income Tax Ruling IT 2622, deals with the assessability of income of a deceased estate. Paragraph 8 states that the net income of the trust is assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability. In a deceased estate, whether a beneficiary is presently entitled to a share of the income of a trust estate depends on the stage reached in the administration of the deceased estate. Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. However, the beneficiaries are presently entitled to any amounts that are actually paid to them by the trustee. During the administration of a deceased estate, the point may be reached where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts. The executor in this situation might exercise the discretion, to pay some of the income to, or on behalf of the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them or on their behalf. If you, as a beneficiary, receive rental income from the dwelling which you are presently entitled to, you are required to declare the income in your tax return.

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