Private ruling: sale of dwelling
Published: November 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers: | 1. Is there a capital gains tax event for you when you terminate your life interest in a dwelling on the sale of the dwelling? | Yes | 2. Can the capital gain or loss made on the termination of your life interest be disregarded? | Yes

Relevant facts and circumstances: The deceased purchased a dwelling before 20 September 1985. The deceased used the dwelling as their main residence until their death after 20 September 1985. You have a life interest in the dwelling. The will specifies the dwelling is to be distributed to your children in equal shares as tenants in common, provided they have reached the age of 18. Since the death of the deceased you have used the dwelling as your main residence. The dwelling has not been used and will not be used to earn assessable income. The trustee of the deceased's estate proposes to sell the dwelling at its market value and then distribute the proceeds between you (life tenant) and the remaindermen (in proportions yet to be agreed). The dwelling will be sold before 30 June 2015. The dwelling will remain your main residence until sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 104-25. | Income Tax Assessment Act 1997 Section 118-110. | Income Tax Assessment Act 1997 Section 118-130.

Reasons for decision: Detailed Reasoning - Capital gains tax: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can make a capital gain or a capital loss if and only if a CGT event happens to a CGT asset. A CGT asset can be a life interest and a CGT event can be the creation or termination of that life interest. You make a capital gain if the capital proceeds from the surrender are more than the assets cost base. Alternatively, you can make a capital loss if the capital proceeds from the surrender are less than the reduced cost base. Paragraph 66 of taxation ruling TR 2006/14 states: If a life interest or remainder owner surrenders or releases their interest, CGT event A1 (in section 104-10 of the ITAA 1997) rather than CGT event C2 (in section 104-25 of the ITAA 1997) happens. The Commissioner considers that CGT event A1 is the applicable event, as there is a change of ownership of the interest from one party to the other, rather than a mere ending of it. | Detailed Reasoning - The main residence exemption: Your life interest is a right to occupy the dwelling and, as such, falls within the definition of an ownership interest in the dwelling, as outlined in section 118-130 of the ITAA 1997. As the dwelling in which you hold the ownership interest (life interest) is your main residence, the provisions of the ITAA 1997 dealing with exemption of the main residence from CGT must be considered. Under section 118-110 of the ITAA 1997, any capital gain or loss that you made on a dwelling is disregarded provided that: 1. you are an individual; 2. the dwelling was your main residence (home) throughout your ownership period; and 3. the interest in the dwelling did not pass to you as a remainder beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. A life interest established by a will comes into existence only on the death of the person whose will establishes it. As the life interest does not form part of the deceased's property while alive, it does not form part of their estate. Therefore, section 118-110 of the ITAA 1997 can apply to a life interest in a property that was created under a will. Section 118-110 of the ITAA 1997 has effect only when any of a number of specified CGT events happens to your ownership interest in your main residence. The list of eligible CGT events includes CGT event A1, so section 118-110 of the ITAA 1997 will have effect in this case. | Detailed Reasoning - Your situation: In your case, you intend to terminate your life interest in your main residence. Your life interest was created by a will, and was not, therefore, passed to you as part of a deceased estate. Your life interest is classed, under section 118-130 of the ITAA 1997, as an ownership interest in the dwelling in question. Under section 118-110 of the ITAA 1997, the capital gain or loss that you make when you surrender your ownership interest in your home (main residence) is disregarded for taxation purposes. Therefore, the capital gain or loss that you make on terminating your life interest in your home (main residence) is disregarded.