Private ruling: capital gains tax - deceased estate -partial main residence exemption
Date of advice: 6 May 2020
Published: June 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 June 2019

Ruling: Q1: Under the table in subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997), is the first element of the cost base of The Property the cost base on the date of the Deceased's death? | A1: Yes | Q2: Would paragraph 110-25(2)(a) of the ITAA 1997 operate so that the first element of The Deceased's cost base of The Deceased's 25% ownership interest in The Property, acquired in 1987, was the money paid in respect of acquiring it? | A2: Yes | Q3: Would the market value substitution rule in section 112-20 of the ITAA 1997 operate to provide that the Deceased is taken to have received the further XX% ownership interest in the Property in XXXX at market value? | A3: Yes | Q4: Are you eligible for a partial main residence exemption for the residential component of the Property (The Dwelling) under section 118-190 of the ITAA 1997? | A4: Yes | Q5: Can you calculate the capital gain or loss on the remainder of the land (Farmland component) by apportioning the capital proceeds and the cost base on the basis of a valuation undertaken by a suitably qualified valuer? | A5: Yes

Relevant facts and circumstances: The Deceased purchased a property (The Property) in XXXX. The Property was approximately XX hectares in size. The residential component consisted of the Deceased's home (The Dwelling), a self-contained flat and land with a total of approximately X hectares. The remaining adjoining land was farmland. The Property was registered in the names of the Deceased, their ex-spouse, and their parents as joint proprietors, each with a XX% ownership interest in the Property. The Deceased's marriage broke down in XXXX and was subsequently dissolved. As part of the property settlement, the Deceased was registered as the sole proprietor. In approximately XXXX, the Deceased commenced their business in a workshop they set up at the Property. The business occupied approximately XX% of the space of The Dwelling. The Deceased passed away on XXXX. Probate was granted to the Trustee on XXXX. The Property was sold on XXXX for $XXXX. Settlement date was XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 110-25(2) (a) | Income Tax Assessment Act section 112-20 | Income Tax Assessment Act paragraph 112-20(1) (a) | Income Tax Assessment Act 1997 section 118-190 | Income Tax Assessment Act 1997 subsection 118-190(2) | Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subsection 128-15(4)

Reasons for decision: Summary: The Property was acquired by the Deceased in XXXX. It was being used to produce assessable income at the time of the Deceased's death. Under the modifications to the cost base rules in section 128-15(4) of the ITAA 1997, where a CGT asset has passed to a Personal Legal Representative of the Deceased and the CGT asset was being used to produce income at the time of the Deceased's death, the first element of the cost base will be the cost base of the CGT asset (here The Property) on the date of the Deceased's death. Subsection 110-25(2) of the ITAA 1997 states that the first element of the cost base of an asset is a) the money you paid, or are required to pay, in respect of acquiring it, and b) the market value of any other property you gave, or are required to give in respect of acquiring the asset. Subsection 110-25(2) of the ITAA 1997 will therefore operate so that the first element of the Deceased's cost base of the Deceased's XX% interest in the Property, acquired in XXXX, was the money they paid in respect of acquiring it and the market value of any other property they gave, or were required to give in respect of acquiring the asset. Paragraph 112-20(1) (a) of the ITAA 1997 states that where the taxpayer did not incur expenditure to acquire the relevant asset, the first element of the cost base will be the market value of the asset at the time of acquisition. The relevant asset here is the Property. In XXXX, the Deceased was registered as sole proprietor of the Property. Prior to this, they held a XX% ownership interest in the Property as a joint proprietor with their parents and ex-spouse. As the Deceased did not incur expenditure to acquire the remaining XX% ownership interest in the Property he received from his parents and ex-spouse, the first element of the cost base of the property (XX% ownership interest) will be its market value in XXXX. Under section 118-195 of the ITAA 1997, a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if you owned it as the trustee of a deceased estate; and, at the time of the Deceased's death it is not being used to produce income. If the dwelling is being used to produce income, you will only be entitled to a partial main residence exemption Subsection 118-190(2) of the ITAA 1997 provides that a capital gain or capital loss that you would have made apart from section 118-190 of the ITAA 1997 from a CGT event which happens in relation to your dwelling is increased if you used it at any time for the purpose of producing assessable income. The capital gain is increased by an amount that is reasonable having regard to the extent to which interest would have been deductible if you had borrowed money to acquire the dwelling. This is a hypothetical test which assumes that you had borrowed money to acquire the dwelling and had incurred interest on the money borrowed. The Dwelling was used by the Deceased for income producing purposes from the year XXXX to XXXX. Approximately XX% of the floor space of the Dwelling was utilised for this purpose. From XXXX to XXXX, the Deceased used the Dwelling solely as their main residence. You have indicated that the assessable part of the gain will be calculated using the calculation as below: Capital gain x % of floor area not used as main residence x % of period of ownership that part of the house was not used as main residence = taxable portion The capital proceeds from a CGT event (subsection 116-20(1) of the ITAA 1997) is the total of: (a) the money you (the taxpayer) have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). Where your selected area of land not subject to a main residence exemption can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of a valuation undertaken by a suitably qualified valuer. Paragraph 3 of Taxation Determination 1999/67 (TD 1999/67) Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land? states that where the value of the selected area of land for the main residence exemption is greater or less than the remainder of the land and both areas can be valued separately, the capital gain or capital loss is calculated by apportioning the capital proceeds and the cost base, or reduced cost base, on the basis of valuation. The whole of the property must be valued so that the apportionment percentage can be determined and applied in relation to the exempt and non-exempt areas of the property. The amount of the capital gain or loss must be reasonable in the circumstances.