Q: A husband died on February 24, 1985 and left House 1 (principal place of residence) to his wife as life tenant. In 1989, the wife sold House 1 and the executors of the estate allowed this so fund could be used by the wife to buy House 2 (new principal place of residence). In 1996, the wife wanted to return to Sydney and wished to buy House 3 (principal place of residence). The executors of the estate allowed this but there was a shortfall of funds to purchase House 3. The executors permitted son A to purchase one-third of House 3. The estate purchased two-thirds of the house. The wife and son continued to live in House 3. To document this transaction, a deed of family arrangement was signed by the executors and other children on March 11, 1996. In total, there are five adult children including son A. The deed grants an option to son A to purchase the estate's share of House 3 on the vesting of the property to the original beneficiaries. The wife died on August 2, 2015. Under the terms of the deed, son A purchased the estate's share of House 3 at market value.
What are the CGT consequences for the estate and beneficiaries?
A: The main residence exemption would ordinarily be unavailable to the deceased estate of the husband because House 3 was acquired by the estate and was not a main residence or an asset of the deceased husband. Item 2(c) in the table in s 118-195(1) of ITAA 1997 can apply only if a relevant CGT event happens to an individual beneficiary to whom an ownership interest in a dwelling of the deceased has passed.
Under s 118-210 of ITAA 1997, the main residence exemption could thus be available to the estate because it purchased its interest in House 3 for occupation by the wife. The legal advice should be taken, or a private ruling obtained (or both) and the will of the husband should be considered. The advice or ruling application would need to consider whether the terms of the deed of family arrangement were given force by a court order and thus could be taken into account or if not whether the will alone gives the necessary terms for the acquisition of House 3 for the occupancy of the wife in a way that is sufficient to attract s 118-210. The son has two CGT assets —interest in House 3 bought in 1996 (Asset 1) and interest in House 3 bought in 2015 (Asset 2). The son could apply the main residence exemption to Assets 1 and 2 for the period and to the extent he occupied House 3 as his home when he realizes House 3