Private ruling: Deceased estate and the main residence exemption
Date of advice: 30 January 2017
Published: July 2017
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the trustee of a deceased estate be entitled to a full main residence exemption under section 118-210 of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of the property, that, in accordance with the deceased's will, was acquired for occupation by their family member? | A1: Yes. | Q2: Does the change in trustee in 20ZZ impact the main residence exemption for the trust? | A2: No.

Relevant facts and circumstances: The deceased died in 19AA. Under the terms of their will the Estate was to provide a unit and furnishings in a retirement home for their child for occupation and enjoyment during their life. This was determined as a right to reside in the property purchased for the remainder of their life. This provision was included on the deceased's will due to their being chronically ill for many years. The Estate is to pay all rates, taxes and other outgoings in respect of the Property. The Will also states that at the time of the child's passing the Estate will be directed to sell the unit and furniture with the residual proceeds to the distributed to the remaining beneficiaries upon the finalisation of the estate. The deceased's other child and friend were appointed joint executors and trustees of her Estate. Following the deceased's passing the trustee's enquired about purchasing a unit in a retirement village. However, they were advised that this would not be an option as retirement villages would not accept her child due to their young age and illnesses. The trustee's, in agreement with the other beneficiaries of the Estate, purchased a substitute property. The cost of this property was $XXX. In 20ZZ, Trustee B retired as trustee due to bad health and age. Upon Trustee B's retirement the trusteeship was transferred to Trustee C, with the land titles deed of the Property updated to reflect the change. The child lived in the house provided, as their main residence, from 19AA to 20YY. In 20YY, following treatment in hospital for various medical conditions, it was deemed that the child was unable to care for themselves and they were placed in a high care nursing home. The house was rented out from 20AA to 20YY. While the house was available for rent the trust declared all rental income. The trustee was assessed on all rental income for each of the years it has been rented. The property was compulsorily acquired by a government department. The acquisition was gazetted in 20YY. The find were disbursed to the Estate in 20YY. The child has not owned nor claimed any other residence as their main residence while they have been in the high care nursing home.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-55 | Income Tax Assessment Act 1997 Section 104-60 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-210 | Income Tax Assessment Act 1997 Subsection 118-210(3) | Income Tax Assessment Act 1997 Subsection 118-210(4) | Income Tax Assessment Act 1997 Section 118-145

Reasons for decision: Summary: Part 3-1 of the ITAA 1997 contains the capital gains tax provisions, commonly referred to as CGT. In particular, Part 3-1 of the ITAA 1997 contains exemptions and rollovers that may allow you to reduce, defer or disregard the capital gain made by you on the compulsory acquisition of the Property. The exemption which could be relevant in your case is the main residence exemption. Subdivision 118-B of the ITAA 1997 contains the rules for situations when capital gains are ignored for main residence dwellings. There are special rules for dwellings that pass from, or are owned by a trustee of, a deceased estate. In your case, the Property was purchased for the principal residence of the life tenant who was placed in a high care nursing home in 20YY. Section 118-195 of the ITAA 1997 contains a full main residence exemption if certain conditions are met, for a capital gain you make from the disposal of a dwelling that you owned as trustee of a deceased estate. You owned the property as trustee of a deceased estate, however, as the property was not owned by deceased when they died, section 118-195 of the ITAA 1997 can not apply. Section 118-210 of the ITAA 1997 applies if you are the trustee of a deceased estate and, under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual. In your case, the deceased's Will provided their child with a right to reside in dwelling to be purchased by the Estate in a retirement village. Given that this was not possible an alternative residence was purchased. On their death, the property was to be sold and the proceeds passed to the beneficiaries as outlined in the will. The Property was purchased for the principal residence of the child who is a beneficiary under the deceased's Will. Section 118-210 of the ITAA therefore applies in this case. Subsection 118-210(3) of the ITAA 1997 advises that if you receive money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event (in this case, the compulsory acquisition of the dwelling). As a general rule, a dwelling is no longer your main residence once you stop living in it. However under section 118-145 of the ITAA 1997 you may choose to have a dwelling treated as your main residence for capital gains tax purposes even though you no longer live in it. Under subsection 118-145(2) of the ITAA 1997, if you use the part of the dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is six years. You are entitled to another maximum period of six years each time the dwelling again becomes and ceases to be your main residence. The six-year period in relation to income-producing use need not be continuous. If there are intermittent periods of income-producing use during the one period of absence, those intermittent periods are aggregated in calculating whether the six year limitation has been exceeded. However if you make this choice, you cannot treat any other dwelling as your main residence while you apply this section. In your case, CGT event A1 (disposal) happened when the Government Department compulsorily acquired the dwelling, and you received money for the CGT event. Your ownership period of the dwelling commenced on the date the purchase contract was settled (section 118-130 of the ITAA 1997), and the dwelling was the main residence of the child until the disposal. You have elected the dwelling to continue its main residence status after the child was admitted to a high care nursing home in 20YY. The child had no other main residence during the time they were not residing in the Property. The time between the child moving out of the Property and it being compulsorily acquired is less than six years. You will be entitled to a full main residence exemption and will be able to disregard all of the capital gain from the sale of the property. Subdivision 104-E specifically discusses CGT events and trusts. Subsection 104-55(1) of the ITAA 1997 states CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Subsection 104-60(1) of the ITAA 1997 states CGT event E2 happens if you transfer a CGT asset to an existing trust. A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust. This means that CGT events E1 or E2 will not happen merely because of a change in the trustee. In this case Trustee B was one of the trustees of the trust. In 20ZZ Trustee B resigned as trustee of the trust and Trustee C was added in their place. The legal title to the Property was changed from Trustee B to Trustee C. As there has merely been a change in the trustee no CGT event has occurred.