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Upon disposal of a dwelling, can the trustees of a deceased estate obtain a full exemption under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997), if the spouse of the deceased moved out of the dwelling but chose to apply the absence provision in section 118-145 of the ITAA 1997?

Yes. The trustees of a deceased estate can claim a full exemption under subsection 118-195(1) of the ITAA 1997 on disposal of the deceased's dwelling, even though the dwelling is the main residence of the spouse of the deceased only by virtue of a choice made under section 118-145 of the ITAA 1997.

The deceased acquired a dwelling prior to 20 September 1985. The dwelling was the main residence of the deceased and their spouse until the deceased's death after 20 September 1985.

The deceased's will provided that the trustees of the deceased's estate sell the dwelling and divide the proceeds between the deceased's spouse and children.

The spouse of the deceased continued to reside in the dwelling for a number of years. When the spouse moved out, the dwelling remained vacant for several months. The trustees then rented the dwelling. The trustees now propose to sell the dwelling.

Subsection 118-195(1) of the ITAA 1997 allows a capital gain or loss to be disregarded when a CGT event happens to a dwelling owned by a trustee of a deceased estate, if: - the deceased acquired the dwelling prior to 20 September 1985; and - the dwelling was the main residence of the spouse of the deceased from the date of the deceased's death until the trustee's ownership period ends.

There is no requirement in subsection 118-195(1) of the ITAA 1997 that the spouse of the deceased actually reside in the property in the period between the date of the deceased's death and the date that the trustee's ownership interest ends. The requirement is that the dwelling be the main residence of the spouse of the deceased and continue to be so for the relevant period. It is the status of the dwelling as a main residence that is relevant.

Subsection 118-145(1) of the ITAA 1997 provides that if a dwelling that was a person's main residence ceases to be their main residence, they may choose to continue to treat it as their main residence. If the dwelling is used for income producing purposes, there is a six year time limit for which the person can continue to treat the dwelling as their main residence (subsection 118-145(2) of the ITAA 1997). However, if this choice is made, no other dwelling can be treated as that person's main residence during that period (subsection 118-145(4) of the ITAA 1997).

As the dwelling was the main residence of the deceased's spouse, the spouse can choose under subsection 118-145(1) of the ITAA 1997 to continue to treat it as their main residence. A full exemption will be available under section 118-195 of the ITAA 1997 provided the dwelling was not rented for more than 6 years.

Date of amendment Part Comment 23 May 2014 Decision Updated for clarity. Facts Updated for clarity.

Date of amendment | Part | Comment

23 May 2014 | Decision | Updated for clarity.

Facts | Updated for clarity.