Edited version of private ruling

Authorisation Number: 1011530876017

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax (CGT) - Deceased estate - Inherited real property

1. Is any capital gain or capital loss you make from the sale of your interest in the property disregarded?

No.

2. Is the market value of your interest in the house and two hectares of adjacent land (including the land under the house) as at the date the deceased died used when working out the cost base of this part of the property?

No.

3. Is the market value of your interest in the remainder of the property as at the date the deceased's parent died used when working out the cost base of the remainder of the property?

Yes.

This ruling applies for the following periods:

2008-09 income year

2009-10 income year

2010-11 income year

The scheme commences on:

1 July 1987

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The block of land in question comprises about four hectares. The land was originally granted to the deceased's other parent.

The deceased's other parent predeceased this parent prior to the introduction of CGT in September 1985. The deceased's parent inherited the house and land under this Will. It was the principal place of residence.

The deceased's parent passed away after September 1985. Under the Will they left a equal interest in the property to some of the children.

The first child to die left their interest in equal shares to the siblings that inherited from the deceased's parent.

The second child to die held the original interest in the block of land that they had inherited from the deceased's parent plus the share they had subsequently inherited. This interest is still held by their estate.

The property was the principal place of residence of the third child to die. At this stage they held the interest in the block of land that they had inherited from the deceased's parent plus the interest they had subsequently inherited. They left this interest equally to their siblings.

The property was the principal place of residence of the fourth child to die. At this stage they the original interest in the block of land that they had inherited from the deceased's parent plus the subsequent interest they had inherited. This sibling left their interest to a sibling.

The fifth child to die held the original interest in the block of land that they had inherited from the deceased's parent plus an interest they had subsequently inherited from siblings. The deceased left their interest to their children. You are one of these children.

Last year a contract was signed for the sale of the property. The contract is subject to conditions relating to the purchaser obtaining development approval. The proposed settlement date has recently been extended for a month.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 118-120,

Income Tax Assessment Act 1997 Section 118-195,

Income Tax Assessment Act 1997 Section 118-200,

Income Tax Assessment Act 1997 Section 118-205 and

Income Tax Assessment Act 1997 Section 128-15.

Reasons for decision

Question 1

Summary

Any capital gain or capital loss you make from the sale of your interest in the property is not disregarded. However, you may be entitled to a partial main residence exemption.

Detailed reasoning

A capital gain or capital loss you make from the sale of a property that is less than two hectares in size is disregarded if the dwelling on it was the main residence of the deceased just before they died (and it was not then being used for the purpose of earning assessable income) and:

· your ownership interest ends within two years of the date of the deceased's death

· the dwelling was the main residence of the spouse of the deceased from the deceased's death until your ownership of it ends

· the dwelling was the main residence of an individual who had a right to occupy it under the deceased's will from the deceased's death until your ownership of it ends, or

· the dwelling was your main residence from the deceased's death until your ownership of it ends.

You are not entitled to disregard any capital gain or capital loss you make from the sale of the property because:

· it wasn't the deceased's main residence when they died

· it is greater than two hectares in size, and

· none of the four conditions mentioned above are met.

However, you may be entitled to claim a partial main residence exemption based on the portion of the period from the deceased's parent's death in 1987 until the property is sold that it was the main residence of the owner of a particular interest in the property.

In performing this calculation, it is important to keep track of who have been the owners and who they passed their interests to.

Note: you cannot claim any main residence exemption on the part of the property that exceeds two hectares - see Taxation Determination TD 1999/67 for guidance on how to apportion the property into the exempt part and the remainder.

Question 2

Summary

The market value of your interest in the house and two hectares of adjacent land (including the land under the house) as at the date the deceased died cannot be used when working out the cost base of this part of the property.

Detailed reasoning

The capital gains provisions generally don't subject a deceased person to tax due to them dying. Instead, their liability to CGT is passed to their estate and then onto the beneficiary of their estate that inherits a particular asset that the deceased owned just before they died.

For most assets, the liability to CGT is passed on by the estate or beneficiary inheriting the cost base and reduced cost base of the asset as well as inheriting the asset.

However, for a property that could have qualified for a main residence exemption because it was the deceased's main residence just before they died, the estate or beneficiary inherits a cost base and reduced cost base equal to the market value of the interest that they inherit.

As stated above, the main residence exemption can only apply to the house and two hectares of adjacent land (including the land under the house). However, the property was not the deceased's main residence just before they died.

Consequently, the first element of the cost base of the house and two hectares of adjacent land (including the land under the house) is the deceased's cost base and reduced cost base calculated as at the date they died.

Note: The cost base and reduced cost base of the deceased's interests in the property would be based variously on the market values of the property when the deceased's parent or sibling one died depending upon which interest was being considered.

Question 3

Summary

The market value of the property as at the date the deceased's parent died is used when working out the cost base of the remainder of the property.

Detailed reasoning

The capital gains provisions generally don't subject a deceased person to tax due to them dying. Instead, their liability to CGT is passed to their estate and then onto the beneficiary of their estate that inherits a particular asset that the deceased owned just before they died.

For most assets, the liability to CGT is passed on by the estate or beneficiary inheriting the cost base and reduced cost base of the asset as well as inheriting the asset.

However, the deceased would not have a CGT liability if they acquired the property before 20 September 1985. In such cases, the estate or beneficiary inherits a cost base and reduced cost base equal to the market value of the interest that they inherit.

The deceased's parent acquired the property before 20 September 1985. Consequently, the first element of the cost base of the remainder of the property is its market value calculated as at the date that the deceased's parent died.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).