Private ruling: CGT - deceased estate
Published: April 2012
Ruling period: 1 July 2011 to 30 June 2012 | 1 July 2012 to 30 June 2013

Ruling: Question and Answer | Does the two year rule under subsection 118-195(1) of the Income Tax Assessment Act 1997 apply to the sale of a deceased's property from the date a life tenancy expires? | No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Prior to 20 September 1985 your parent acquired a property. The property was your parent's main residence until death. Your parent passed away. Under the deceased's Will life tenancy of the property was granted to the spouse. Upon the death of the spouse the property was to be left to the deceased's three children. The spouse passed away more than 2 years after your parent. The property is currently in the process of being cleaned up and it is expected to be listed with a real estate agent. You were unable to sell the property within two years of your parent's death because of the right to occupy under the Will allowing you parent's spouse to live in the property until their death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 subsection 118-195(1) | Income Tax Assessment Act 1997 Section 118-200

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can only make a capital gain or capital loss if a CGT event happens. Section 118-195 of the ITAA 1997 outlines the treatment of dwellings acquired from a deceased estate; it reads as follow: (1) 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 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 Partial Exemption from CGT Where section 118-195 of the ITAA 1997 does not apply, a partial main residence exemption may still be available under section 118-200 of the ITAA 1997 if an ownership interest in a dwelling passed to you as a beneficiary in a deceased estate. A partial main residence exemption will apply when you dispose of your ownership interest in the property. Partial exemption can be calculated using the following formula: Capital gain or capital loss x non-main residence days total days Non-main residence days are the total number of days that the dwelling was not the main residence of one of the following: · the deceased; · the spouse of the deceased; or · an individual who had the right to occupy the dwelling under the deceased's will. Total days are the sum of the number of days between the date of the deceased passing away and the date of the sale of the dwelling. | Detailed Reasoning - Indexation: Indexation means that you may increase your cost base in accordance with the Consumer Price Index (CPI). The indexation factor is an amount equal to the CPI figure for the quarter of the year in which the CGT event happened, divided by the CPI figure for the quarter of the year in which you incurred the expenditure included in any of the cost base elements (except the third element, as this cannot be indexed). The law has now changed to no longer allow indexation of assets acquired or expenditure incurred after 21 September 1999. As a result indexation has been frozen as at 30 September 1999. To calculate your capital gain using the indexation method, we must index the cost base in accordance with the CPI figures. Only expenditure incurred before 21 September 1999 can be indexed. As the CGT event happened after 11:45am on 21 September 1999, the following method is used to calculate the Indexation Factor: Indexation CPI figure for quarter ending 30.9.1999 Factor = CPI figure for quarter in which expenditure was incurred | Detailed Reasoning - CGT Discount: An individual may choose under certain circumstances to include only 50% of their capital gain in their assessable income, rather than claim indexation of the cost base. If you choose to use the CGT discount method, then you cannot "index" the cost base. Therefore, using the CGT discount method, you calculate your capital gain as follows: Capital proceeds cost base = capital gain You then apply any capital losses (current and/or prior year) against the capital gain before applying the 50% discount. (Capital gain capital losses) x 50% = net capital gain. | Detailed Reasoning - Application to your circumstances: You parent acquire the property prior to 20 September 1985, one item in column 2 has been met. In column 3 the ownership interest ends within 2 years of the deceased's death; has not been met. The recent amendment to subsection 118-195(1) of the ITAA 1997 of the legislation gives the Commissioner discretion to extend the 2 year time period, in certain situations, they are; · 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 (for example, 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 circumstances outside the beneficiary or trustee's control. Your circumstances do not fall with these categories. Consequently, the Commissioner is unable to use his discretion to extend the 2 year time period. For most of the period from the death of your parent the property was 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; Therefore you are entitled to a partial CGT exemption and you can either apply the Indexation or the 50% CGT discount methods to calculate the capital gain amount. As capital gains are not taxed separately, this gain is then added to your income in the year in which you incurred the gain, and the tax is calculated on your total assessable income using the normal marginal rates.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.