Written by:
Lee-Ann Hayes
Head of Education (Tax)
Accurium
The interaction between the main residence exemption (MRE) rules in Subdivision 118-B of the ITAA 1997 and the rules regarding the death of a taxpayer in Division 128 of the ITAA 1997 can provide some interesting outcomes with respect to timing. While clearly much of this timing cannot be changed, some of it we can influence, such as when to sell. Other factors that determine the tax outcome are whether the dwelling was a pre or post CGT asset of the deceased or whether it was income producing as at date of death (DOD).
The following matrix provides a useful overview of many of the various outcomes. It does not consider the situations where the property was used as a main residence after the DOD of the deceased by the deceased spouse, the beneficiary or by someone with a right to reside in the property under a life tenancy. Excluded foreign residents are also not considered.
Pre / Post CGT main residence of deceased
Income producing at DOD
Sold < 2 years after DOD*
MRE available
Days calculations
(see below for explanations)
Ref
(ITAA 1997)
Post
x
Yes – full
n/a
s. 118-195
Post
x
x
Partial
Outcome 3
s. 118-200
Post
Partial
Outcome 2
s. 118-200
Post
x
Partial
Outcome 1
s. 118-200
Pre
n/a
Yes – Full
n/a
s. 118-195
Pre
n/a
x
Partial
Outcome 1
s. 118-200
*or such further time as allowed by the Commissioner
Outcome 1 | Standard days calculation
Where a partial MRE is available the legislation requires the capital gain or loss to be calculated as:
CG or CL amount
x
Non-main residence days
Total days
Non- main residence days
The sum of:
- 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 just before the deceased’s death, the deceased was an excluded foreign resident — the number of remaining days in the deceased’s ownership period
- the number of days in the period from the death until the taxpayer’s ownership interest ends when the dwelling was not the main residence of:
- the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased)
- an individual who had a right to occupy the dwelling under the will, or
- if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary — that individual.
Total days
For a dwelling acquired by the deceased
For a dwelling acquired by the deceased
Pre CGT
death until the taxpayer’s ownership interest ends
Post CGT
acquisition by the deceased until the taxpayer’s ownership interest ends
Outcome 2 | Post asset sold within 2-years
The non-MR days and total days are adjusted by ignoring any non-main residence days and total days in the period from the death until the taxpayer’s ownership interest ends if:
- the deceased acquired the ownership interest on or after 20 September 1985
- the taxpayer’s ownership interest ends within two years of the deceased’s death, or a longer period allowed by the Commissioner
- the taxpayer gets a more favourable result by ignoring those days
the deceased was not an excluded foreign resident just before death.
Outcome 3 | Dwelling not used to produce assessable income as at DOD
Any non-main residence days before the deceased death are ignored if:
- the dwelling was the deceased’s main residence just before their death
- the dwelling was not being used for the purpose of producing assessable income just before their death, or any use for that purpose just before their death was ignored because of the absence rule
- the deceased was not an excluded foreign resident just before the deceased’s death.
Note
Under s. 118-145 a taxpayer can choose to continue to treat a property as their main residence for a period up to six years while they use it for producing assessable income, provided the property was their main residence prior to the income producing use and they are not treating any other dwelling as their main residence during this time. Section 118-195 notes that the absence rule can apply in the context of a deceased estate.
While the above provides a useful overview of the numerous outcomes that can arise, it is always essential to examine the particular facts and circumstances of each case.
See also Accurium’s article Death and the main residence exemption: Decision tree for a comprehensive decision tree that works through these complex provisions.
