Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

1   Part 3-3 Division 128

Division 128 - Effect of death

Guide to Division 128

128-1 What this Division is about

This Division sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate.

It also contains rules about what happens when a joint tenant dies.

General rules

128-10 Capital gain or loss when you die is disregarded

128-15 Effect on the legal personal representative or beneficiary

128-20 When does an asset pass to a beneficiary?

128-25 The beneficiary is a trustee of a superannuation fund etc.

Special rules for joint tenants

128-50 Joint tenants

[This is the end of the Guide.]

General rules

128-10 Capital gain or loss when you die is disregarded

When you die, a *capital gain or *capital loss from a *CGT event that results for a *CGT asset you owned just before dying is disregarded.

Note 1: Section 104-215 sets out an exception to this rule if the CGT asset passes to a beneficiary in your estate who is:

· an exempt entity, or

· the trustee of a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust; or

· not an Australian resident.

Note 2: There is a special indexation rule for deceased estates: see section 114-10.

128-15 Effect on the legal personal representative or beneficiary

(1) This section sets out what happens if a *CGT asset you owned just before dying:

(a) devolves to your *legal personal representative; or

(b) *passes to a beneficiary in your estate.

Note: Section 128-25 has different rules if the asset passes to a beneficiary in your estate who is:

· an exempt entity, or

· the trustee of a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust; or

· not an Australian resident.

(2) The *legal personal representative, or beneficiary, is taken to have *acquired the asset on the day you died.

Special rule for legal personal representative

(3) Any *capital gain or *capital loss the *legal personal representative makes if the asset *passes to a beneficiary in your estate is disregarded.

Cost base rules for both

(4) This table sets out the modifications to the *cost base and *reduced cost base of the *CGT asset in the hands of the *legal personal representative or beneficiary.

Note 1: Section 70-105 has a general rule that the person on whom the trading stock devolves is taken to have bought it for its market value. There are some exceptions though.

Note 2: Subdivision 118-B contains other rules about dwellings acquired through deceased estates.

Note 3: The rule in item 3 in the table does not apply to a dwelling that devolved to your legal personal representative, or passed to a beneficiary in your estate, on or before 7.30 pm on 20 August 1996: see section 128-15 of the Income Tax (Transitional Provisions) Act 1997.

Further rule for a beneficiary

(5) A beneficiary can include in the *cost base or *reduced cost base of the asset any expenditure that the *legal personal representative would have been able to include at the time the asset *passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

Example: You die on 1 May 1995 owning land. On 15 June 1995 your legal personal representative pays $500 council rates for the land.

On 31 July 1995 your representative transfers it to a beneficiary in your estate, who is taken to have acquired it on 1 May 1995.

The beneficiary can include the $500 in the third element of the cost base of the land. It is included on 15 June 1995.

Collectables and personal use assets

(6) The *legal personal representative or beneficiary is taken to have *acquired a *collectable or a *personal use asset if:

(a) you acquired it on or after 20 September 1985; and

(b) it was a *collectable or a *personal use asset (as appropriate) in your hands when you died.

Note 1: Capital losses from collectables can be used only to reduce capital gains from collectables: see section 108-10.

Note 2: Capital losses from personal use assets are disregarded: see section 108-20.

128-20 When does an asset pass to a beneficiary?

(1) A *CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:

(a) under your will, or that will as varied by a court order; or

(b) by operation of an intestacy law, or such a law as varied by a court order; or

(c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other *CGT assets that formed part of your estate.

(It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by your *legal personal representative.)

(2) A *CGT asset does not pass to a beneficiary in your estate if the beneficiary becomes the owner of the asset because your *legal personal representative transfers it under a power of sale.

128-25 The beneficiary is a trustee of a superannuation fund etc.

(1) This section has rules about *cost base and *reduced cost base that are relevant if you die and a *CGT asset you owned just before dying *passes to a beneficiary in your estate who (when the asset passes) is the trustee of:

(a) a *complying superannuation fund; or

(b) a *complying approved deposit fund; or

(c) a *pooled superannuation trust.

Note: A capital gain or loss is also made: see section 104-215.

(2) The beneficiary is taken to have *acquired the asset on the day you died. The first element of the *cost base and *reduced cost base of the asset is its market value on that day.

Note 1: If the beneficiary is an exempt entity, Division 57 of Schedule 2D to the Income Tax Assessment Act 1936 has rules about exempt entities that become taxable. It sets out what the entity is taken to have purchased its assets for when it becomes taxable.

Note 2: If the beneficiary is not an Australian resident, Subdivision 136-B sets out what happens if a non-resident becomes a resident. The entity is taken to have acquired each asset it owned just before becoming a resident for the market value of the asset at that time.

(3) The beneficiary can include in the *cost base or *reduced cost base of the asset any expenditure that your *legal personal representative would have been able to include at the time the asset *passes to the beneficiary. The beneficiary can include the expenditure on the day the representative incurred it.

Special rules for joint tenants

128-50 Joint tenants

(1) This section has rules that are relevant if a *CGT asset is owned by joint tenants and one of them dies.

(2) The survivor is taken to have *acquired (on the day the individual died) the individual's interest in the asset. If there are 2 or more survivors, they are taken to have acquired that interest in equal shares.

Note: Joint tenants are treated as owning a CGT asset in equal shares: see section 108-7.

(3) If the individual who died *acquired his or her interest in the asset on or after 20 September 1985, the first element of the *cost base of the interest each survivor is taken to have acquired is:

Cost base of the interest of the individual who died (worked out on the day the individual died) / Number of survivors

The first element of the *reduced cost base of the interest each survivor is taken to have *acquired is worked out similarly.

Example: In 1999 2 individuals buy land for $50,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001 one of them dies.

The survivor is taken to have acquired the interest of the individual who died on 1 May 2001. If the cost base of that interest on that day is $27,000, the survivor is taken to have acquired that interest for that amount.

(4) If the individual who died *acquired his or her interest in the asset before 20 September 1985, the first element of the *cost base and *reduced cost base of the interest each survivor is taken to have acquired is:

Market value of the interest of the individual who died (worked out on the day the individual died) / Number of survivors

Note: There is a special indexation rule for surviving joint tenants: see section 114-10.