Private ruling: Capital gains tax- deceased estate
Date of advice: 21 December 2017
Published: June 2018
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did the testator acquire their ownership interest in the dwelling on the date that the first deceased passed away? | A1: Yes | Q2: Are you entitled to a full CGT exemption on the sale of the dwelling? | A2: No

Relevant facts and circumstances: The first deceased acquired the dwelling (the dwelling) prior to 20 September 1985. The first deceased passed away in 1994. The Public Trustee was granted an order to administer the first deceased’s estate. Title to the dwelling was transferred to the Public Trustee in 1995. The first deceased left a life tenancy to a person (life interest owner) in the dwelling under his will, with the full ownership interest in the property to pass to the testator when the life estate ended. The dwelling was the main residence of the life interest owner until they passed away in 2014. Legal title to the property was transferred from the Public Trustee to the testator in 2016. The dwelling was never the testator’s main residence. The dwelling has been vacant since the life interest passed owner away. The dwelling has not been used to produce income. The testator passed away in 2016. Ownership of the dwelling was transferred the testator’s legal personal representatives (LPR) in early 2017. The LPR’s are also the Trustees of the testator’s estate. The sale of the dwelling was settled in early 2017.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-195 | Income Tax Assessment Act 1997 section 118-200 | Income Tax Assessment Act 1997 section 118-205 | Income Tax Assessment Act 1997 section 128-10 | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 section 128-20

Reasons for decision: Summary: Yes. The testator is taken to have acquired the asset on the date of the first deceased’s death. The first element of the testator’s cost base for the asset is the market value of the asset on the day the first deceased passed away, unless major improvements were made after that date. | Detailed Reasoning - Detailed reasoning: When a capital gains tax (CGT) asset that you owned just before you passed away devolves to your legal personal representative (LPR) or passes to a beneficiary of your estate, the LPR or beneficiary is taken to have acquired the asset on the day you passed away. Generally, the trustee of a testamentary trust is treated in the same way as an LPR for capital gains tax purposes. When does an asset ‘pass’ to a beneficiary? A CGT asset passes to a beneficiary if the beneficiary becomes the owner of the asset under the will of the deceased, or in one of the other ways set out in subsection 128-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Life interest and remainder interest The death of the owner of a life interest in the asset has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner; their existing interest is merely enlarged. In this case, when the life interest owner passed away the testator’s interest in the asset was no longer encumbered by the life interest. Cost base of asset If the deceased person acquired the asset before 20 September 1985, unless major improvements were made to it after that date, the first element of the beneficiary’s cost base and reduced cost base for the asset is its market value on the day the deceased passed away. Application to your circumstances The testator inherited the dwelling as a beneficiary under the will of the first deceased. The testator is taken to have acquired the property at the date that the first deceased passed away, rather than the date when the life interest owner passed away. Because the first deceased acquired the property before 20 September 1985, the first element of the testator’s cost base for the asset is the market value of the property on the day the first deceased passed away. | Detailed Reasoning - Question 2: Are you entitled to a full CGT exemption on the sale of the dwelling? | Detailed Reasoning - Answer: No | Summary: You are not entitled to a full main residence exemption on the sale of the dwelling, because the testator acquired their ownership interest in the dwelling after 20 September 1985 and the dwelling was not their main residence just before they passed away. Because the testator inherited the property from the estate of the first deceased, you may be entitled to a partial CGT exemption, to account for periods where the dwelling was the main residence of the first deceased. | Detailed Reasoning - Detailed reasoning: Full CGT main residence exemption Under section 118-195 of the ITAA 1997, a capital gain or capital loss that you make from CGT event that happens to a dwelling (or your ownership interest in it) is disregarded if 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: ● the deceased acquired their ownership interest in the dwelling prior to 20 September 1985, or ● the deceased acquired their ownership interest on or after 20 September 1985 and the dwelling was their main residence just before they passed away and was not then being used to produce income; And either one of the following conditions also applies: ● your ownership interest ends within two years of the deceased’s death, or within a longer period allowed by the Commissioner; or ● 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. Application to your circumstances In your case, the testator acquired their ownership interest in the dwelling on the date that the first deceased passed away. This date is after 20 September 1985, however the dwelling was not the main residence of the testator. Therefore you will not be eligible for a full main residence exemption under section 118-195 of the ITAA 1997, because you do not satisfy the condition that the deceased either acquired their ownership interest before 20 September 1985, or they acquired it after 20 September 1985 and the dwelling was their main residence. Partial exemption for deceased estate dwellings If you are not entitled to a full exemption under section 118-195 of the ITAA 1997, you may be entitled to a partial exemption under section 118-200 of the ITAA 1997 if you are an individual and your ownership interest in a dwelling passed to you as a beneficiary or as the trustee of a deceased estate. In these circumstances, you calculate your capital gain or capital loss using the formula: Capital gain or Capital loss x Non main residence days Total days Non main residence days Non main residence days for the purposes of this section is the sum of: ● If the deceased acquired their ownership interest in the dwelling on or after 20 September 1985, the number of days in the deceased’s ownership period when the dwelling was not the deceased’s main residence; and ● The number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of: – the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or – an individual who had a right to occupy the dwelling under the deceased's will; or – if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary -that individual Total days If the deceased acquired their ownership interest on or after 20 September 1985, the ‘total days’ are the number of days from when the deceased acquired the dwelling until your ownership interest ends. You can adjust the formula by ignoring any non-main residence days and total days in the period from the deceased's death until your ownership interest ended, if: ● the deceased acquired the ownership interest on or after 20 September 1985; and ● your ownership interest ends within: – 2 years of the deceased's death; or – a longer period allowed by the Commissioner; and ● you get a more favourable result by doing so. Application to your circumstances Non main residence days For the purposes of this section you calculate the non main residence days by adding the number of days from when the testator acquired their ownership interest until they passed away, plus the number of days in the period from when the testator passed away until you sold the property, where the dwelling was not the main residence of: ● the spouse of the deceased immediately before the death; or ● an individual who had a right to occupy the dwelling under the deceased's will; or ● if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual In your case, the testator acquired her ownership interest in the dwelling on the date that the first deceased passed away. The dwelling was occupied by the life interest owner under the terms of the first deceased’s will from the first deceased’s death until the life interest owner passed away. You acquired your ownership interest in the dwelling on the date that the testator passed away. As you acquired your ownership interest from the testator (rather than the first deceased), the calculation under section 118-200 must be based on whether the dwelling was occupied by the testator’s spouse, or a beneficiary or person who had a right to occupy the dwelling under the terms of the testator’s will. The dwelling was never the main residence of the testator and has been empty since the life interest owner passed away in 2014 until it was sold 2017. None of the relevant categories of people have occupied the dwelling under the terms of the testator’s will. Therefore, the non main residence days will include the entire period from when the testator acquired their ownership interest until they passed away, plus the number of days between when the testator passed away until your ownership interest ended. The total days will be the number of days from when the testator acquired the dwelling until your ownership interest ended. Because the testator acquired their ownership interest after 20 September 1985 and you disposed of your interest within 2 years of her passing away, you may adjust the formula by ignoring any non-main residence days and total days in the period from the date when the testator passed away until your ownership interest ended, if you get a more favourable result by doing so. Adjustment if dwelling inherited from deceased individual The formula in section 118-200 of the ITAA 1997 must be adjusted under section 118-205 of the ITAA 1997 if the (most recently) deceased acquired the dwelling after 20 September 1985 as a beneficiary or trustee of deceased estate. This modification adjusts the formula to take account of periods where the dwelling was the main residence of individuals earlier in the inheritance chain. Where the most recently deceased acquired ownership of the dwelling after 20 September 1985 as the beneficiary or trustee of a deceased estate, you add to the number of total days the fewer of: ● the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and ● the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased. You add to the number of ‘non main residence’ days in the period that you have chosen above (ie. the lesser of the two periods), the number of days during that period that the dwelling was not the main residence of one or more of: (a) an individual who owned the dwelling at the time of the individual's death; or (b) an individual who, immediately before the death of an individual referred to in paragraph (a), was the spouse of that individual (except a spouse who was living permanently separately and apart from the individual); or (c) an individual who had a right to occupy the dwelling under a will; or (d) an individual to whom an ownership interest in the dwelling passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate. Application to your circumstances In your case, because the testator acquired their ownership interest in the dwelling from the estate of the first deceased, you must calculate: ● the number of days between 20 September 1985 and the day when the testator acquired their ownership interest, and ● the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual, except as a beneficiary or as trustee of a deceased estate and the day when the testator acquired their ownership interest. In your case, an ownership interest in the dwelling was not acquired on or after 20 September 1985 in circumstances other than as a trustee or beneficiary of a deceased estate. Because the second option results in a calculation of zero days, you would add the number of days in the period between 20 September 1985 and the date that the testator acquired their ownership interest to the number of total days. Once you have determined the relevant period (in this case, between 20 September 1985 and the date that the testator acquired their ownership interest), you then calculate the number of days during that period where the dwelling was not the main residence of one of the individuals listed. In your case, the dwelling was the main residence of the first deceased who owned the dwelling at the time they passed away, so you would not add anything to the number of non main residence days in the section 118-200 formula. CGT cost base If you acquire a CGT asset as the beneficiary or trustee of a deceased estate that the deceased person acquired on or after 20 September 1985 and the dwelling was not their main residence at the time they passed away, your cost base for the asset is the deceased persons cost base for the asset on the day they passed away. A beneficiary can include in the cost base or reduced cost base of an asset any expenditure that the LPR of the deceased estate would have been able to include at the time the asset passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it. For example: if you passed away on 1 May 1995 owning land and on 15 June 1995 your legal personal representative paid $500 council rates for the land and the n 31 July 1995 your representative transferred the land to a beneficiary in your estate, (who is taken to have acquired it on 1 May 1995), the beneficiary can include the $500 in the third element of the cost base of the land. It is included on 15 June 1995. Application to your circumstances Because the testator acquired their ownership interest in the dwelling after 20 September 1985 and the dwelling was not their main residence before they passed away, you are taken to have acquired the dwelling for the testator’s cost base on the day they passed away, which is the market value of the property at the date that the first deceased died. You may be able to include expenditure incurred by the LPR of the first deceased’s estate in the cost base for the dwelling, if the LPR would have been able to include that expenditure in the cost base at the time the asset passed to the testator. | Detailed Reasoning - Conclusion: The dwelling was acquired by the testator after 20 September 1985 and was not their main residence before they passed away, therefore you are not entitled to a full CGT exemption on the disposal of the property. Because the testator acquired ownership of the dwelling from a deceased estate, you will be entitled to a partial exemption to take account of the period between 20 September 1985 and the date they acquired an ownership interest in the dwelling, where the dwelling was the main residence of the first deceased. Your cost base for the asset will be the testator’s cost base as at the date that they passed away, and the testator’s cost base is the market value of the property at the date that the first deceased passed away, plus any other expenditure which the LPR of the first deceased’s estate would have been able to include in the cost base when the asset passed to the testator.