Edited version of private ruling

Authorisation Number: 1011589108853

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Ruling

Subject: Capital gains tax (CGT) - Deceased Estate

1. Is any of the capital gain or capital loss on the disposal of properties A and B disregarded if the units are sold within two years of your parent's death?

No.

2. Is any of the capital gain or capital loss on the disposal of properties A and B disregarded if the units are not sold within two years of your parent's death?

No.

3. If the capital gain or capital loss is not disregarded is the first element of the cost base of properties A and B the market value of the units on the date of your parent's death?

No.

4. Is the capital gain or capital loss on the disposal of properties disregarded in full if the propertys are sold within two years of your parent's death?

No.

5. Is the capital gain or capital loss on the disposal of properties C and D disregarded in part if the propertys are sold within two years of your parent's death?

Yes.

6. Is any of the capital gain or capital loss on the disposal of properties C and D disregarded if the propertys are not sold within two years of your parent's death?

No.

7. If the capital gain or capital loss on the disposal of properties C and D is not disregarded is the first element of the cost base of the propertys the market value of the units on the date of your parent's death?

No.

8. Is the capital gain or capital loss on the disposal of property E disregarded in full if the property is sold within two years of your parent's death?

Yes.

9. Is any of the capital gain or capital loss on the disposal of property E disregarded if the property is not sold within two years of your parent's death?

Yes.

10. If the capital gain or capital loss on the disposal of property E is not disregarded is the first element of the cost base of the propertys the market value of the units on the date of your parent's death?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2008

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.

You parent and their spouse purchased properties C, D and E before 20 September 1985. They lived in the original house located on property C.

Before 20 September 1985 a new home was built on property D and the family moved in. The house on property C was rented out.

After 20 September 1985 a new house was built on property E and the family moved in. The houses on property C and property D were rented out.

After 20 September 1985, your parent and their spouse purchased properties A and B and have rented them ever since.

Your parent's spouse passed away after 20 September 1985.

Your parent passed away.

Property E was your parent's main residence until they passed away.

Properties C, D and E were as a farm until recently.

Your parent's probated Will passed an ownership interest in the properties to you.

You along with the other beneficiaries intend to sell the properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Subsection 128-15(4)

Income Tax Assessment Act 1997 Subsection 128-15(5)

Income Tax Assessment Act 1997 Subsection 128-20(1)

Income Tax Assessment Act 1997 Section 128-50

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-55(2)

Income Tax Assessment Act 1997 Section 109-55

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-55

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-195

Income Tax (Transitional Provisions) Act 1997 Section 118-195

Reasons for decision

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can make a capital gain or capital loss if and only if a CGT event happens to a CGT asset.

CGT asset

Section 108-5 of the ITAA 1997 provides that land and buildings are CGT assets.

Subsection 108-5(2) of the ITAA 1997 provides that a CGT asset also includes part of, or an interest in, a CGT asset (including land and buildings).

Subsection 108-55(2) of the ITAA 1997 provides that a building or structure that is constructed on land acquired before 20 September 1985 is taken to be a separate CGT asset from the land if:

· the contract for construction was entered into on or after 20 September 1985, or

· if there was no contract - construction started on or after 20 September 1985.

Acquisition of CGT Assets

Section 109-5 of the ITAA 1997 provides that you acquire a CGT asset when you become its owner. When an individual dies for CGT purposes there are two rules that must be considered when determining when a the new owner acquires the asset. These are:

If a CGT asset passes to a beneficiary in the estate of a deceased individual subsection 128-15(2) of the ITAA 1997 provides that the beneficiary acquired the asset at the time the individual died. Regardless of the actual date that legal title in the property passed, for CGT purposes the beneficiary is considered to have acquired asset in question on the date of the deceased's death.

Subsection 128-20(1) of the ITAA 1997 states that the asset will pass to the beneficiary for the purposes of subsection 128-15(2) of the ITAA 1997 if the beneficiary becomes the owner of the asset:

· under the deceased's Will, or that Will as varied by a court order; or

· by operation of an intestacy law, or such a law as varied by a court order; or

· because it is appropriated to the beneficiary by the executor in satisfaction of a pecuniary legacy or some other interest or share in the estate; or

· under a deed of arrangement if:

o the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate; and

o 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.

Subsection 128-50(2) of the ITAA 1997 provides that where a CGT asset is owned by joint tenants and one of them dies, the survivors are taken to have acquired (on the day the individual died) the individual's interest in the asset.

CGT event

A CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Further, the capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

Subsection 104-10(3) of the ITAA 1997 provides that CGT event A1 happens when you enter into the contract for the disposal, or if there is no contract - when the change of ownership occurs.

Disregarding the capital gain or capital loss

The capital gain or capital loss you make may be disregarded if certain conditions are met. The three CGT exemptions that may apply in your circumstances are:

· the CGT asset was acquired before 20 September 1985,

· the CGT asset was a main residence, or

· small business relief applies.

Pre-CGT asset

Subsection 104-10(5) of the ITAA 1997 provides that where CGT event A1 happens the capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

Main Residence - Full Exemption

Section 118-195 of the ITAA 1997 provides that where a dwelling passed to you as a beneficiary in a deceased estate, the capital gain or capital loss that happens in relation to a dwelling in which you have an ownership interest may be disregarded in full.

Where the dwelling was acquired by the deceased before 20 September 1985 if one of the following conditions is met the beneficiary will be entitled to a full exemption.

Conditions for full exemption:

· the beneficiaries ownership interest ends within two years of the deceased's death, or

· the dwelling was, from the deceased's death until the beneficiaries ownership interest ends the main residence of one or more of:

o the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

o an individual who had a right to occupy the dwelling under the deceased's Will, or

o the beneficiary and they disposed of the dwelling in their capacity as beneficiary.

Where the dwelling was acquired after 19 September 1985 the beneficiary will be entitled to a full exemption if the following conditions are met:

· the dwelling was the deceased's main residence just before their death and the deceased did not use any part of the dwelling to produce assessable income just before their death, and

Either

· the beneficiaries ownership interest ends within two years of the deceased's death, or

· the dwelling was, from the deceased's death until the beneficiaries ownership interest ends the main residence of one or more of:

o the spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased)

o an individual who had a right to occupy the dwelling under the deceased's Will, or

o the beneficiary and they disposed of the dwelling in their capacity as beneficiary.

Section 118-115 of the ITAA 1997 defines a dwelling as including a unit of accommodation that is a building or is contained in a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation. The definition of dwelling is extended by section 118-120 of the ITAA 1997 to include up to two hectares of land that is adjacent to the dwelling to the extent that the land is primarily for private or domestic purposes in association with the dwelling.

Main Residence - Partial Exemption

Section 118-200 of the ITAA 1997 provides for a partial exemption (or no exemption) if you have an ownership interest in a dwelling as the beneficiary of a deceased estate and you are not entitled to the full exemption.

You calculate the capital gain or capital loss on the dwelling as follows:

non-main residence days

Capital gain or capital loss x Divided by

total days

Where the deceased acquired their ownership interest before 20 September 1985.

Non-main residence days are the total number of days from the death of the deceased until the beneficiaries ownership interest ends when the dwelling was not the main residence of one of the following:

· the spouse of the deceased at time of death (other than a spouse living permanently separately and apart form the deceased), or

· an individual who had the right to occupy the dwelling under the deceased's Will, or

· a beneficiary who brought about the CGT event.

Total days are the number of days in the period from the deceased's death until the legal personal representatives ownership interest ends.

Where the deceased acquired their ownership interest after 19 September 1985

Non-main residence days is the sum of:

· the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence, and

· the number of days in the period from the death until the beneficiaries ownership interest ends when the dwelling was not the main residence of one of the following:

o the spouse of the deceased at time of death (other than a spouse living permanently separately and apart form the deceased), or

o an individual who had the right to occupy the dwelling under the deceased's Will, or

o a beneficiary who brought about the CGT event.

Total days is the number of days in the period from the acquisition of the dwelling by the deceased until the beneficiaries ownership interest ends.

Small business relief

Section 152-10 of the ITAA 1997 contains the basic conditions for relief. One of the conditions is contained in paragraph 152-10(1)(d) which provides that the CGT asset must satisfy the active asset test.

Section 152-35 of the ITAA 1997 contains the active asset test. Generally, a CGT asset satisfies the active asset test if the asset was an active asset of the taxpayer and for at least half of the period beginning when the taxpayer acquired the asset and ending just before the CGT event. There are modified rules if the taxpayer's business ceased before the CGT event happens or the asset was owned for more than 15 years.

In the case where a CGT asset a person owned just before dying passes to a beneficiary in their estate, the beneficiary is taken to have acquired the asset on the day the person died (subsection 128-15(2) of the ITAA 1997).

Section 152-40 of the ITAA 1997 defines an active asset as:

· you own the asset, and

· you use it, or hold it ready for use, in the course or carrying on a business, or

· It is used, or held ready for use, in the course of carrying on a business by your affiliate, or by another entity that is connected with you.

Cost base

Section 110-25 of the ITAA 1997 contain the general rules about cost base and states that the cost base of a CGT asset consists of five elements. The five elements are:

· First element the money a person paid to acquire the asset

· Second element incidental costs of the CGT event or of acquiring the CGT asset (for example, brokerage fees, consultant or legal advisor)

· Third element non capital costs associated with owning the asset (for example, insurance premiums, non deductible interest on borrowings used to acquire the property)

· Fourth element capital expenditure incurred to preserve or increase the assets value (for example, landscaping on an income producing property), and

· Fifth element capital expenditure incurred in establishing, preserving or defending a persons title to an asset or right over an asset. This element only applies once you have acquired the asset.

Section 128-15 of the ITAA 1997 provides that the first element of the cost base of a CGT asset that passes to a beneficiary is changed to:

If the deceased individual acquired their interest before 20 September 1985:

Market value of the interest of the individual who died (worked out on the day the individual died).

If the deceased acquired their interest after 19 September 1985, the CGT asset was the deceased's main residence just before they died, and was not being used for the purposes of producing assessable income:

Market value of the dwelling (worked out on the day the individual died).

Other CGT assets the deceased individual acquired after 19 September 1985:

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

Section 128-50 of the ITAA 1997 provides that if a joint tenant dies, the first element of the cost base of the interest of each survivor is either:

If the deceased individual acquired their interest after 19 September 1985:

o Cost base of the interest of the individual who died (worked out on the day the individual died)

o Divided by

o Number of survivors

If the deceased individual acquired their interest before 20 September 1985:

o Market value of the interest of the individual who died (worked out on the day the individual died)

o Divided by

o Number of survivors

Application to your circumstances

As a beneficiary you are taken to have acquired your ownership interest in the properties after on 19 September 1985. Therefore, none of the properties are pre-CGT assets in your hands.

Properties A and B

These were acquired by your parent and their spouse after 19 September 1985, and full ownership passed to your parent as joint tenant on the death of their spouse. Therefore, they are CGT assets acquired by your parent after 19 September 1985.

As they were acquired by your parent after 19 September 1985 they need to be her main residence just before they died in order for the dwelling acquired from a deceased estate two year period to apply. As they have been rented since they were purchased they are not their main residence and the main residence exemption rules do not apply. Nor are they active assets so small business relief will not apply.

Therefore, when CGT even A1 happens any capital gain or capital loss will not be disregarded.

Your cost base will be will include:

· your parent's cost base for their original share

· as surviving joint tenant their spouses cost base worked out on the day they died

· any other cost that can be included in the general cost base rules since their spouses death, and

· any other cost that can be included in the general cost base rules since your parent's death.

Property C

Your parent and their spouse acquired property C as joint tenants before 20 September 1985, the property consisted of land and a home. When your parent's spouse died they are taken to have acquired their share at this time. Therefore, for your parent the property would consist of a pre-CGT and a post-CGT asset, half the land and building being pre-CGT and half post-CGT.

As property C is not an active asset small business relief will not apply.

As your parent acquired half of property C before 20 September 1985, should you dispose of this property within two years of their death, half of the capital gain would be disregarded. However, as the property was not your parent's main residence just before their death, the other half would not be exempt.

If the property is sold after two years, the capital gain or capital loss would not be exempt as property C is not the main residence of any of the following:

· your parent's spouse, or

· an individual who had the right to occupy the dwelling under their Will, or

· a beneficiary who brought about the CGT event.

Your cost base will include:

· For the half acquired by your parent before 20 September 1985:

o half the market value of property C on the date of death, and

o half of any other cost that can be included in the general cost base rules since their death.

· For the half acquired by your parents after 19 September 1985:

o half the market value of the property on the date of their spouses death

o any other cost that can be included in the general cost base rules since their spouses death, and

o half of any other cost that can be included in the general cost base rules since their death.

Property D

Your parent and their spouse acquired properties D as joint tenants before 20 September 1985, the property consisted of land. Before 20 September 1985 your parent and their spouse built a new home on the property. When their spouse died she is taken to have acquired his share of property D at this time. Therefore, for your parent, the property would consist of a pre-CGT and a post-CGT asset, half the land and building being pre-CGT and half post-CGT.

As property D is not an active asset small business relief will not apply.

As your parent acquired half of property D3 before 20 September 1985, should you dispose of property D within two years of their death, half of the capital gain would be disregarded. However, as the property was not your parent's main residence just before their death, the other half would not be exempt.

If the property is sold after two years, the capital gain or capital loss would not be exempt as property D is not the main residence of any of the following:

· your parent's spouse, or

· an individual who had the right to occupy the dwelling under their Will, or

· a beneficiary who brought about the CGT event.

Your cost base will include:

For the half acquired by your parent before 20 September 1985:

· half the market value of the property on the date of their death, and

· half of any other cost that can be included in the general cost base rules since their death.

For the half acquired by your parent after 19 September 1985:

· half the market value of the property on the date of their spouses

· any other cost that can be included in the general cost base rules since their spouses death, and

· half of any other cost that can be included in the general cost base rules since their death.

Property E

Your parent and her spouse acquired property E as joint tenants before 20 September 1985, the property consisted of land. After 20 September 1985 your parent and their spouse built a new home on the property. When your parent's spouse died they are taken to have acquired their share of property E at this time. Therefore, for your parent the property would consist of three CGT assets, pre and post-CGT land (half the land being pre and half post), and a post-CGT building.

As you are taken to have acquired property E on the date of your parent's death and the farm has not been operating on property E since before this, property E is not an active asset and the small business relief does not apply to property E.

As your parent acquired part of property E's land before 20 September 1985, should you dispose of property E within two years of their death, this part of the capital gain or capital loss would be disregarded. As the dwelling on property E was your parent's main residence just before they died and was then not being used to produce assessable income, the capital gain or loss on the disposal of the dwelling on property E will be disregarded if it is sold within two years of your parent's death. This exemption extends to land adjacent to the dwelling if that land was used primarily for private and domestic purposes in association with the dwelling; the maximum land area for this purpose (including the area of land under the dwelling) is two hectares. This area may include land in properties C and D if it was used for private and domestic purposes in association with the dwelling on property E.

If property E is sold after two years, the capital gain or capital loss would not be exempt as property E is not the main residence of any of the following:

· your parent's spouse, or

· an individual who had the right to occupy the dwelling under their Will, or

· a beneficiary who brought about the CGT event.

However, a partial exemption would be available as follows:

Pre-CGT land -

Capital gain or capital loss multiplied by non-main residence days from date of your parent's death until property E is sold divided by days from your parent's death until property E is sold.

No exemption would apply as the property was not a main residence of the relevant people since your parent's death.

Post-CGT building and land acquired as joint tenant -

Capital gain or capital loss multiplied by non-main residence days from date of your parent's spouse's death until property E is sold divided by days from your parent's spouse's death until property E is sold.

A partial exemption would apply as the property was your parent's main residence before their death but not a main residence of the relevant people since their death.

Post-CGT building acquired at construction -

Capital gain or capital loss multiplied by non-main residence days from the date your parent acquired the building until property E is sold divided by days from the date they acquired the building until property E is sold.

A partial exemption would apply as the property was your parent's main residence before their death but not a main residence of the relevant people since their death.

Your cost base will include:

· For the half of the land acquired by your parent before 20 September 1985:

o half the market value of the land on the date of their death, and

o any other cost that relate to this land that are included in the general cost base rules since their death that relate to the land.

· For the half of the land acquired by you parent after 19 September 1985:

o half the market value of the land on the date of their spouses death

o any other cost relating to the this land that can be included in the general cost base rules since their spouses death, and

o any other cost that relate to this land than are included in the general cost base rules since their death.

· For the dwelling acquired by your parent after 19 September 1985:

o their cost base for the construction of the building

o as surviving joint tenant her spouses cost base for the dwelling worked out on the day they died

o any other cost relating to the dwelling that can be included in the general cost base rules since their spouses death, and

o any other cost that relate to the dwelling that are included in the general cost base rules since their death.

Summary

Properties A and B: any capital gain or capital loss will not be disregarded.

Properties C and D: any capital gain or loss made on the parts that are pre-CGT assets are disregarded if the properties are sold within two years of your parent's death. Any capital gain or capital loss on pre-CGT assets will not be disregarded if the properties are sold outside two years of your parent's death. Any capital gain or capital loss on the post-CGT assets are not disregarded.

Property E: any capital gain or capital loss will be disregarded if the property is sold within two years of your parent's death. If sold outside two years any capital gain or capital loss will be partially disregarded.

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