Private ruling: Capital gains tax - deceased estate and main residence exemption
Date of advice: 24 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will any capital gain or capital loss that you make from the sale of the property be disregarded as a result of the main residence exemption? | A1: No. | Q2: Is the first element of the cost base of the property its market value on the date of the deceased's death? | A2: Yes.

Relevant facts and circumstances: The deceased passed away sometime in the relevant income year. The deceased resided at a property (the property) from the time it was purchased until their death. The property was purchased by the deceased and their spouse sometime prior to 20 September 1985 (pre capital gains tax (CGT)). The deceased became the sole owner of the property when their spouse passed away after 20 September 1985 (post CGT). The land on which the dwelling stands is less than two hectares. The dwelling stands in the centre of the block of land. Sometime in the relevant income year you entered into a contract for sale of part of the property. The contract for sale is for half of the property after subdivision into two halves. However, the contract is silent as to the existence of the dwelling. For the purpose of this private ruling, the dwelling will be demolished and will not be in existence at the time that settlement occurs. You will not receive any capital proceeds for the demolition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 112-30, | Income Tax Assessment Act 1997 Section 116-25, | Income Tax Assessment Act 1997 Section 118-110, | Income Tax Assessment Act 1997 Section 118-130, | Income Tax Assessment Act 1997 Subsection 118-130(3), | Income Tax Assessment Act 1997 Section 118-195 and | Income Tax Assessment Act 1997 Subsection 128-15(4).

Reasons for decision: Detailed Reasoning - Will any capital gain or capital loss that you make from the sale of the property be disregarded as a result of the main residence exemption?: The main residence exemption in relation to deceased estates is provided in section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997). This section provides that a capital gain or capital loss that you make on the disposal of a dwelling that you acquire as a trustee of a deceased estate is disregarded if: • the deceased acquired their interest in the dwelling before 20 September 1985 (pre CGT) and - from the deceased's date of death until the ownership interest ends the dwelling was the main residence of one or more of the following persons: • the spouse of the deceased immediately before death • an individual who had a right to occupy the dwelling under the deceased's will or • an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary, or - your ownership interest ends within two years of the deceased's death. Where the deceased acquired their interest in the dwelling on or after 20 September 1985 (post CGT) the above exemption conditions will need to be met however, in addition, the dwelling must also have been the deceased's main residence for all of their ownership period and must not have been used to produce income. Section 118-195 of the ITAA 1997 specifies that the main residence exemption applies to a dwelling. This exemption does not apply to vacant land. This section also makes reference to ownership interest. Section 118-130 of the ITAA 1997 provides the meaning of ownership interest in land or a dwelling. Subsection 118-130(3) of the ITAA 1997 provides that for land or a dwelling where you have a contract for the happening of the CGT event, you have an ownership interest in it until your legal ownership of it ends. Legal ownership of a dwelling or land is from the date of settlement of the contract at purchase until the date of settlement of the contract of sale. This means that your ownership interest does not end until settlement occurs and that entitlement to a main residence exemption will be contingent on the dwelling being in existence at that time. This is further supported by Taxation Determination TD 94/89. This TD considers what year of income a taxpayer is required to include a capital gain or capital loss in relation to land disposed of under a contract which is made in one year of income, but which settles in a later year of income. Paragraph 3 of TD 94/89 states that settlement effects a change of ownership and a disposal. | Detailed Reasoning - Application to your circumstances: In your situation, the deceased held both a pre CGT interest and a post CGT interest in the property. The dwelling was their main residence until their death and a contract for sale was entered into within two years of their death. However, prior to the settlement of the contract, the dwelling will be demolished and will not be in existence at the time of settlement. Therefore no main residence will apply to the land. CGT event C1 will happen at the time that the dwelling is demolished. Generally, where no proceeds arise from the demolition, no capital gain or capital loss is made. This is because section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1 which will mean that the capital proceeds will be nil. As a consequence, the cost base and reduced cost base of the dwelling is nil as section 112-30 of the ITAA 1997 apportions all of the previous cost base to the land only. CGT event A1 will happen when the vacant land is sold and as no main residence exemption is available, CGT will apply. | Detailed Reasoning - Is the first element of the cost base of the property its market value on the date of the deceased's death?: Subsection 128-15(4) of the ITAA 1997 provides the cost base rules for assets that pass to you as the trustee of a deceased estate. Where a dwelling was the deceased main residence just before they passed away and was not then being used for the purpose of producing assessable income, the first element of the cost base and reduced cost base is the market value of the dwelling on the date of the deceased's death. Accordingly, the first element of the cost base, and reduced cost base of the property is its market value on the date of the deceased's death.