Private ruling: CGT - deceased estates - (2 year discretion)
Published: December 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the gain made on the sale of the property subject to capital gains tax where that portion of the gain will be distributed to the children of The Deceased? | A1: Yes. | Q2: Can the cost base of the property asset include non-deductible costs of owning the asset? | A2: No.

Relevant facts and circumstances: The Deceased purchased the property prior to 20 September 1985. The Deceased treated the property as their main residence. The Deceased died on the Month 19XX intestate. Letters of Administration were granted in Month 20XX. Relative one of the deceased resided in the property from approximately 19XX until their death in Month 20XX. Relative one's partner and four children lived in the property from approximately 19XX until separation in approximately 19XX. During this time they both acted as carers for The Deceased. Relative one paid the mortgage repayments when they occupied the property, but did not pay for the council and water rates. At the time of the death of The Deceased, the family agreed that the house should be made available for Relative one to occupy for as long as required, as they had looked after The Deceased for a considerable period of time. The property was occupied by Relative one's stepchild, from Month 20XX until Month 20XX. Relative one's stepchild had lived in the property caring for Relative one. Relative one's stepchild did not pay rent or make any contribution to council and water rates. The property was sold in Month 20XX for $X.

Relevant legislative provisions: Income Tax Assessment Act 1997 - section 118-195. | Income Tax Assessment Act 1997 - section 110-25. | Income Tax Assessment Act 1997 - subsection 110-45(1B).

Reasons for decision: Summary: As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling or your ownership interest in it is disregarded if: (a) you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and (b) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. Beneficiary or trustee of deceased estate acquiring interest Item One of these items is satisfied And also one of these items 1 the deceased *acquired the *ownership interest 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 your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner 2 the deceased *acquired the *ownership interest before 20 September 1985 the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: (a) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or (b) an individual who had a right to occupy the dwelling under the deceased's will; or (c) if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual The Commissioner has discretion to extend the two-year time period in relation to CGT events that happened in the 2008/09 income year and later income years. The explanatory memorandum (EM) to the Bill that added the discretion to Section 118-195 of the ITAA 1997, the Tax Laws Amendment (2011 Measures No 9) Bill 2011 , includes the following non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion: · the ownership of a dwelling or a will is challenged · the complexity of a deceased estate delays the completion of administration of the estate · a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (e.g. the taxpayer or a family member has a severe illness or injury), or · settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control. In your case, you were unable to dispose of the property within two years of the deceased's death due to the property being occupied by one of the beneficiaries and their step child. Accordingly, you do not meet any of the criteria above and are unable to disregard the capital gain made on the property. Consequently the gain made on the sale of the property is subject to capital gains tax and the trustee of the estate will be liable to pay the tax. Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset may consist of up to five elements. The third element of the cost base, which is the subject of this ruling, consists of the non-capital costs of ownership of an asset. Subsection 110-25(4) of the ITAA 1997 lists those items which may qualify as costs included in the third element of the cost base. These costs may include interest on money borrowed to acquire an asset, costs of maintaining, repairing and insuring an asset, rates and land tax, interest on money borrowed to refinance the money borrowed to acquire an asset, and interest on any money borrowed to finance capital expenditure incurred to increase an assets value. However, there are two conditions that must be satisfied before these non-capital costs can be included as the third element of the cost base. Subsection 110-45(1B) of the ITAA 1997 excludes such expenditure from the cost base to the extent that it has been claimed or can be claimed as a tax deduction. The second condition is that the third element costs can only be included in the cost base of an asset if you acquired the asset after 20 August 1991. There is no discretionary power included in the taxation legislation which would allow the Commissioner to disregard the date of commencement of the provisions which relate to the third element of the cost base. Consequently, as you acquired the property before 21 August 1991 you cannot include your non-capital costs of ownership in the cost base.