1 In your hands is the land and the constructed dwelling considered separate assets for CGT purposes?
No. While the land and dwelling were separate assets from the deceased's perspective, they are a single post-CGT asset from your perspective. Question 2 Is the first element of the cost base in your hands the market value of the Property at the date the deceased died? Answer Yes. Item 4 in the Table in subsection 128-15(4) states that if an asset was acquired by the deceased on or before 20 September 1985, the first element of the asset's cost base is the market value of the asset on the day the deceased died. Question 3 Can you disregard the capital gain or loss on the sale of the Property? Answer No. You have not met the requirements of section 118-195 of the ITAA 1997 to disregard the capital gain or loss on the sale of the Property. Question 4 Are you entitled to a partial main residence exemption on the sale of the Property? Answer Yes. You are entitled for a partial exemption for the period the individual who had a right to occupy was physically in the property under the deceased's will. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: XX XXXX 20XX
Prior to 20 September 1985, the deceased purchased vacant land. On XX XXXX 20XX, the deceased subdivided the land into 3 lots, each under 2 hectares in size. • Lot 1 consisting of XX metres squared • Lot 2 consisting of XX metres squared • Lot 3 consisting of XX metres squared. On XX XXXX 20XX, the deceased constructed the dwelling situated on Lot 1 (the Property). The Property was not the main residence of the deceased. The deceased had the following children: • Person A • Person B, • Person C, • Person D, and • Person E. On XX XXXX 20XX, the deceased executed their last Will and testament. Under clause XX of the Will, Person B and Person C were appointed executors and trustees of the Will. Clause XX of the Will stated:
I give and devise and bequeath my house property at the Property to my trustees upon trust to permit my child Person A and any other child of mine who in the absolute discretion of my trustees shall be in need of accommodation to reside therein rent free during Person A or their lifetime and during any time of residence therein Person A or them paying the rates and keeping the property insured and maintained to the satisfaction of my trustees but in the event my Person A choosing not live at the said property or the property is not required for any other child of mine then my trustees may let the property to a tenant and in such case the rental from such tenancy shall be distributed upon trusts hereinafter declared concerning my residuary estate and upon the death of Person A son my trustees shall hold the said property upon trusts herein contained concerning my residuary estate. On XX XXXX 20XX, the deceased passed. On XX XXXX 20XX, Person A temporarily moved into the deceased principal place of residence. Person A was unable to move into the property until the current tenants' lease expired. Prior to XX XXXX 20XX, the Property was used to produce income as a rental property.
On XX XXXX 20XX, the tenant vacated the Property and repairs were carried out. On XX XXXX 20XX, Person A moved into the Property. On XX XXXX 20XX, Person A passed away. After XX XXXX 20XX, the Property was unoccupied until it was sold. On XX XXXX 20XX, the Property was sold. On XX XXXX 20XX, the Property settled.
Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 Division 115 Income Tax Assessment Act 1997 section 118-195 Income Tax Assessment Act 1997 section 118-200 Income Tax Assessment Act 1997 section 128-10 Income Tax Assessment Act 1997 section 128-15 Income Tax Assessment Act 1997 subsection 128-15(4) table item 4
Question 1 Summary No. While the land and dwelling were separate assets from the deceased's perspective, they are a single post-CGT asset from your perspective. Detailed reasoning All future legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Practice Statement Law Administration PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust , explains the trustee of a testamentary trust is treated in the same way as a legal personal representative (LPR) for the purposes of Division 128. Paragraph 2 of Taxation Determination TD 96/18 Income tax: capital gains: if after 19 September 1985 a person makes a capital improvement to a pre-CGT asset, does subsection 108-70(2) of the Income Tax Assessment Act 1997 deem the improvement to be a separate CGT asset on the person's death or on any later disposal by the legal personal representative (LPR) or a beneficiary?, explains what happens on the later disposal by the LPR when land is considered a pre-CGT asset and the dwelling is considered a post-CGT asset in the hands of the deceased.
The view under TD 96/18, is that assets treated as separate assets under Division 108 do not remain separate assets when they pass to an LPR. TD 96/18 states that improvements built on land that was pre-CGT in the deceased's hands do not remain separate assets after the deceased's death when the LPR takes them, but instead become a single asset (i.e., part of the land). It reasons that an improvement isn't a separate CGT asset because section 108-70 doesn't apply to a CGT event that happens because of a person's death. Further, the section doesn't apply to any later disposal by a personal representative because the asset becomes a post-CGT asset in the hands of the LPR. While the land and dwelling were separate assets from the deceased's perspective, they are a single post-CGT asset from your perspective. Question 2 Summary Yes. Item 4 in the Table in subsection 128-15(4) states that if an asset was acquired by the deceased on or before 20 September 1985, the first element of the asset's cost base is the market value of the asset on the day the deceased died. Detailed reasoning
Section 128-10 states that when someone dies, a capital gain or loss from a CGT even that results for a CGT asset you owned just before dying is disregarded. Section 128-15 sets out the rules on what happens if a CGT asset you owned just before dying devolves to your LPR, for example the executor of a Deceased Estate, or passes to a beneficiary in your estate. Subsection 128-15(2) states that the LPR is taken to have acquired the asset on the day the deceased died. The table in subsection 128-15(4) shows modifications to the cost base and reduced cost base. Item 4 in the table in subsection 128-15(4) states that if an asset was acquired by the deceased on or before 20 September 1985, the first element of the asset's cost base is the market value of the asset on the day the deceased died. Question 3 Summary No. You have not met the requirements of section 118-195 of the ITAA 1997 to disregard the capital gain or loss on the sale of the Property. Detailed reasoning
Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Section 118-195 of the ITAA 1997 provides if you own a dwelling as the trustee of a deceased estate, you can disregard the capital gain or loss you make on the disposal of the property if: • The property was acquired by the deceased 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, and • Your ownership interest ends within 2 years of the deceased's death, or a longer period allowed by the Commissioner; or • One of the following items in column 3 of the table under subsection 118-195(1) of the ITAA 1997 applies. The dwelling was, from the date of the deceased's death until your ownership period ends, the main residence of one or more of:
- The spouse of the deceased just before they passed (not including a spouse that was living permanently separately and apart); or - An individual with a right to occupy the dwelling under the deceased's will; or - The individual to whom the ownership interest passed as a beneficiary if that individual also brings about the CGT event. Application to your circumstances In your circumstances, the Property was not the main residence of the deceased and was used to produce income. You also did not sell the Property within 2 years of the deceased's death due to the right to reside. Therefore, you have not met the requirements of section 118-195 of the ITAA 1997 to disregard the capital gain or loss on the sale of the Property. Question 4 Summary Yes. In your case, Person A was an individual who had a right to occupy the property under the deceased's will. The period Person A physically occupied the Property will not be counted in the non-main residence days. Furthermore, you will be entitled to apply the 50% discount when calculating the capital gain as you have held your ownership interest for more than 12 months. Detailed reasoning
As stated previously, the Property is treated as a single post-CGT asset in your hands. Section 118-200 considers eligibility for a partial exemption for the sale of a deceased estate dwelling when you are not eligible for a full exemption under section 118-195. In this situation, section 118-200 uses your ownership period (from death to disposal) when calculating the partial exemption. You calculate your capital gain or capital loss using the formula set out in subsection 118-200(2): CG or CL amount × Non-main residence days Total days non-main residence days is the sum of: (a) If the deceased acquired the ownership interest 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 (b) The number of days in the period from the death until your ownership interest ends when the dwelling was not the main residence of an individual referred to in item 2, column 3 of the table in section 118-195. total days is: (a) If the deceased acquired the ownership interest before 20 September 1985 - the number of days in the period from the death until your ownership interest ends; or
(b) If the deceased acquired the ownership interest on or after that day - the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends. Application to your circumstances. In your case, Person A was an individual who had a right to occupy the property under the deceased's will. The period Person A physically occupied the Property will not be counted in the non-main residence days. Furthermore, you will be entitled to apply the 50% discount when calculating the capital gain as you have held your ownership interest for more than 12 months.