Private ruling: Main residence exemption
Date of advice: 25 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did the beneficiary have a right to occupy the property under the deceased’s will? | A1: Yes. | Q2: Are you entitled to a full main residence exemption when you dispose of the dwelling? | A2: Yes.

Relevant facts and circumstances: The deceased owned a property. The property was not used to produce assessable income and was the deceased’s main residence prior to their death. The deceased’s will is a simple will in which it directs the trustees to apply the residual of the estate as necessary or desirable to meet the needs and comforts of a relative (the beneficiary). On the death of the beneficiary, the residual of the estate is to go to the trustees. Accordingly, the trustees took the view that the will allows the beneficiary to reside at the property until their death. The beneficiary later moved out of the property and moved into supported accommodation. The property was later sold. From when the beneficiary moved out of the property until when it was sold, the beneficiary continued to treat the dwelling as their main residence.

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

Reasons for decision: Summary: 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 property was acquired by the deceased 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, 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. In this case, the property was the deceased’s main residence prior to death, and at that time, was not being used to produce assessable income. The deceased’s child then continued to live in the property after the deceased’s death. ATO ID 2003/109 discusses when an individual has a right to occupy a dwelling and states: An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will (see Evans v. Friemann (1981) 53 FLR 229 at 238). In this case, the beneficiary was a resident of the property at the date of the deceased’s death. The deceased’s will stated that their estate is to meet the needs and comforts of the beneficiary. While it was not mentioned in the will that a “right to occupy” of the property was given to the beneficiary, it can be ascertained from the words of the will that the beneficiary lived in the property in accordance with the terms of the will. 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. Therefore, as the beneficiary did have the right to occupy the dwelling, and they continued to treat the property as their main residence after they moved out, the capital gain made on disposal of the property can be disregarded in full.