Issue
Is a full main residence exemption available under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a dwelling which was occupied by an individual who was granted, under a will, a right to occupy it for only part of the period from the time of the deceased's death until it was sold by the trustees of a trust created under the will?
Decision
No. As the individual did not have a right to occupy the dwelling for the entire period commencing from the date of the deceased's death and ending when the trustees ceased to own the property, the trustees are not entitled to a full main residence exemption under subsection 118-195(1) of the ITAA 1997. However, the trustees will be entitled to a partial exemption calculated in accordance with section 118-200 of the ITAA 1997.
Facts
The deceased acquired a dwelling before 20 September 1985. The dwelling was the deceased's main residence until the time of their death in March 2000.
Under the deceased's will, the dwelling was to be held on trust for the deceased's children.
Under their will, the deceased granted one of their children the right to occupy the dwelling for a period of up to 18 months. The will also specified that the trustees were unable to dispose of the dwelling during this period.
The child who was granted a right to occupy the dwelling resided in it from the time of the deceased's death until the dwelling was sold in June 2003. The trustees made a capital gain on the disposal of the dwelling.
Reasons for Decision
Subsection 118-195(1) of the ITAA 1997 provides that a trustee of a deceased estate disregards 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 trustees' ownership interest in the deceased's 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 trustees' ownership period.
Throughout the trustees' ownership period, the dwelling was occupied by a child of the deceased. For the first 18 months of that period, the child occupied the dwelling pursuant to a right of occupancy contained in the deceased's will. From the end of the 18 month period until the time when the trustee ceased to own the dwelling, the deceased's child resided in it under an agreement with the trustees and other beneficiaries.
For the purposes of determining whether a full exemption is available to a trustee under section 118-195 of the ITAA 1997, an individual only has a right to occupy a dwelling under the deceased's will for the period specified in the will. An exemption is not available for any part of the trustee's ownership period that a person who had a right of occupancy continues to occupy the dwelling in some other manner (for example, as a licensee or tenant).
In this case, the deceased's will conferred on their child a right to occupy the dwelling for a limited period. The trustees are therefore unable to claim a full main residence exemption under subsection 118-195(1) of the ITAA 1997 on the sale of the dwelling.
However, a partial exemption is available under section 118-200 of the ITAA 1997.
The partial exemption will be calculated in accordance with the formula in subsection 118-200(2) of the ITAA 1997. In this case the non-main residence days used in the formula are considered to be the number of days in the period commencing when the right to occupy expired and ending when the trustee ceased to own the dwelling.