Capital gains tax: main residence exemption: right to occupy dwelling under deceased's will

Is a right to occupy a dwelling granted by the court under the Family Provision Act (NSW) 1982 (varying the terms of a deceased individual's will), granted 'under the will of the deceased' for the purposes of applying the main residence exemption in subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Subsection 14(1) of the Family Provision Act 1982 (NSW) provides that the court order takes effect as if it had been made as a codicil to the deceased individual's will. It is therefore considered that the right to occupy the dwelling granted by the court was made 'under the deceased's will' for the purposes of applying the main residence exemption in subsection 118-195(1) of the ITAA 1997.

The deceased acquired a dwelling before 20 September 1985. The dwelling was the deceased's main residence until the time of their death in December 1999. The deceased's child also lived in the dwelling prior to the deceased's death.

Under the deceased's will the dwelling was to be sold by the trustees of the deceased's estate and the proceeds held on trust for the benefit of the deceased's children and grandchildren.

The deceased's child was dissatisfied with the terms of the will and lodged a claim under the Family Provision Act 1982 (NSW). In accordance with that Act the court ordered that the deceased's child be granted a right to reside in the property from the date of the deceased's death until the dwelling was sold.

The trustee sold the dwelling in April 2004 and made a capital gain.

Subsection 118-195(1) of the ITAA 1997 allows a trustee of a deceased estate to disregard a capital gain or loss from a dwelling that a deceased person acquired before 20 September 1985 if: • the trustee's ownership interest in the dwelling ends within two years of the deceased person's death, or • from the deceased's death until the trustee's ownership interest ends (the trustee's ownership period), the dwelling was not used to produce income and it was also the main residence of one or more of the following persons: • the spouse of the deceased immediately before death • an individual who had a right to occupy the dwelling under the deceased's will, or • an individual who brought about the CGT event and the ownership interest in the dwelling had passed to that individual as beneficiary.

In this case, the trustee's ownership interest in the dwelling ended more than two years after the date of the deceased's death. Therefore a full main residence exemption will only be available if the dwelling was the main residence of one of the specified individuals during the trustee's ownership period.

Under the terms of the deceased's will no individual was granted a right to occupy the deceased's dwelling. However, a right to occupy the dwelling was granted by a court order under the Family Provisions Act 1982 (NSW). Subsection 14(1) of the Family Provisions Act 1982 (NSW) provides that where an order is made by the Court for provision out of the estate of a deceased person, that order shall take effect where the deceased person has died leaving a will as if the provision had been made in a codicil to the will.

As a result, it is considered that the right to occupy the dwelling, granted by the court to the deceased's child, is a right to occupy the dwelling 'under the deceased's will' for the purposes of applying the main residence exemption in subsection 118-195(1) of the ITAA 1997. As the dwelling was this individual's main residence throughout the trustee's ownership period the trustee can disregard any capital gain made on the disposal of the dwelling.