Ask Ban Tacs Question
This is a follow-up question but you may well determine it constitutes an additional question—if so please let me know where/how to pay for that if so.
The scenario that I had asked about quoted in the email thread further below back in July 2023 turned out in the end *slightly* differently than we’d anticipated, so I just wanted to confirm some aspects with you, in order to be able to complete my FY24 tax return coming up.
The key difference is that my sister and I sold my father’s unit on the open market instead of me selling my 50% to my sister’s partner. Still all WITHIN 2 years of DoD mind you.
So the pertinent facts I think are:
- Unit was generating rental income before DoD but is treated as dad’s PPoR despite his absence from it (due to incapacity). In any case he held no other property.
- DoD in April 2022.
- We transferred the unit out of the deceased estate into our own names (50%/50%) in August 2023.
- We gave the tenants notice to vacate September 2023 (in preparation for sale).
- The unit sold in December 2023.
- Settlement was January 2024.
I’m just looking to confirm with you that in my tax return, this is how I should address Question 18 in the Supplementary section:
- Put an “X” in the “Yes” box at Label G (“Did you have a capital gains tax event during the year?”)
- Put an “X” in the “Yes” box at Label M (“Have you applied an exemption, rollover or additional discount?”), and put an “I” in the “CODE” box.
- Quantify the Net capital gain simply as “0” (ie. ZERO) at Label A.
- Quantify the Total current year capital gains simply as “0” (ie. ZERO) at Label H.
This assumes that I have no other CG events or carried-forward losses. If I did have, I would reflect these at Labels A and H accordingly—but the key point being that the Apartment sale doesn’t add or subtract from these.
I just wanted to make doubly sure with you, since if it worried me that when I followed the ATO’s flowchart it seemed to tell me that only a part exemption applies, since it was rented out and generating income at the time of dad’s DoD:
The issue seems to arise at Step.4.:
4. Just before they died, was the dwelling being used to produce income?
…which seems to lead to a partial exemption no matter what the other facts may have been?
Or is this just the limits of the Flowchart tool, not encompassing the various ITAA Section permutations/interactions you had mentioned back in July?
Answer
I have read back over your previous question and noted there is now a change in that the property at the time you sold it to a third party, was owned by you and your sister in your own rights, the estate had distributed it to you. So the way this would work for CGT is:
ITAA 1997
- Section 118-190 (3) can use the 6 year rule to cover the deceased’s home with their main residence exemption up to date of death even though it was being used to produce income in your father’s absence
- Section 128-15 as was the deceased’s home at DOD cost base reset to market value at DOD
- Section 118-195 if deceased’s home sold by estate or beneficiary within 2 years no CGT. That is DOD to settlement date
As you had transferred the property into your name it is a CGT event to you personally, so it is yes to the CGT event in your tax return. As it is less than 2 years since DOD the capital gain is disregarded under 118-195 and there is no code in the exemption list for that. You are going to have to use X for other exemption. I would not like you to use I as the code because it was never covered by your main residence exemption and using that may come back to haunt you when you sell your own home. The main thing is that you answer yes to a CGT event so that they don’t come looking when they data match your name on the deed.
- Label G Yes
- Label M Yes Code X
As a result you really don’t have to put anything in label A and H unless that produces an error in the software you are using then zeros should work.
As you say if you have any carried forward losses or other gains then they would go into label A and H the important thing is the sale of your father’s until does not affect the amount.
Regarding the flow chart on the ATO web site. If you go to the real estate and main residence tab then scroll all the way down that page to click on Inheriting main residence it will take you to a very long spiel https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2023/part-a-about-capital-gains-tax/real-estate-and-main-residence?anchor=Real_estate_and_main_residence#ato-Inheritedmainresidence and at the end of that it explains that (despite appearing to contradict it at every chance above) if the property is being covered under the 6 year rule when the deceased dies then it is still considered their main residence for the purpose of section 128-15 ITAA 1997 and the cost base is reset to market value at date of death and you have 2 years to sell without triggering CGT. This is all very clear in the legislation at sections 118-190(3) and 118-190(4) but you would have to be very determined to read though all the statements implying that you don’t get the reset because it was being used to produce income before you come to this one example. Yet all they had to say was – if being used to produce income and not being covered by the absence rule. So in my opinion they are deliberating being misleading. Tricking people into paying tax when they don’t have to.
