We all know that a gain on the sale of a person’s main residence is exempt from capital gains tax. Despite this simple concept, there are about 30 sections in the CGT law that deals with this “simple” tax outcome.
One issue that complicates the matter is death. When a person dies and the ownership of a main residence is transferred to another person (often not immediately), what happens? I won’t deal with all of the scenarios here. The general position is that the death of the individual, of itself, does not create an event that causes tax to be paid. However, the operation of the will, who occupies the house after the deceased person, when it was purchased, how soon it was sold after death and the extent to which the house has been used to produce income can all have an impact on the eventual taxation outcome.
Take this situation.
The deceased purchased a house in 1969 and lived in it until the date of her death in 1992. She originally owned the house jointly with her husband. He died in 1980. The deceased had a grand-daughter who she gave, under the will, the right to live in the house after the deceased’s death for as long as the grand-daughter wanted, rent-free. When the grand-daughter moved out of the house, it was then to be sold and the proceeds split among all of the deceased’s grand children.
The lawyers assisting the executor of the will advised the grand-daughter that she should not occupy the dwelling until probate was granted. There was 6 months between the date of death and the grant of probate. During this time the house was left empty. When probate was granted, the grand-daughter moved into the house shortly after and lived there while she completed her university degree.
The grand-daughter lived in the house for about 3 years and then moved out. The house was then sold by the trustee of the deceased’s estate. Is there any tax to pay? The short answer is “no”, but a number of issues need to be considered before that conclusion is reached.
To begin, the deceased purchased the house before the tax on capital gains was introduced in September 1985. This means that is a pre-CGT asset and if the grandmother had sold the house while she was alive, there would have been no tax to pay. When the grandmother died, the ownership of the house passed to the executor/trustee of her deceased estate. This is a change in ownership and therefore raises CGT issues.
The CGT law permits the trustee of a deceased estate to disregard any capital gain made from the sale of a house that was the main residence of a deceased person in a number of circumstances. One of those circumstances is where the deceased acquired the house before 20 September 1985 and the house was, from the deceased’s death until the trustee’s ownership interest ends, the main residence of an individual who had a right to occupy the house under the deceased’s will. That’s not quite what happened here. The grand-daughter did not start living in the house until probate was granted.
Under the CGT provision just referred to, the grand-daughter is required to live in the house from the date of death until the trustee’s ownership interest ends. But, she was not legally permitted to live in the house until probate was granted. So is the trustee facing a tax liability? Again, the answer is “no”.
The reason for this is that the CGT law provides a type of concession for people who own or have the right to occupy a dwelling as their main residence and they cannot move in as soon as their ownership interest starts. This concession states that the period from the start of the ownership interest until “the time it was first practicable for you to move into it after you acquired your ownership interest in it” will be regarded as a period when the dwelling was the main residence of the person even though, in fact, it was not.
So what about the period of time it took to grant probate? Can it be said that the grand-daughter moved into the house at the first practicable time? The ATO has ruled in ATO ID 2007/128 that the house would be treated as the grand-daughter’s main residence from the date of death until the grant of probate, even though she was not actually living in the house.
John M. Jeffreys
Disclaimer – please refer to the disclaimer below.