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Ruling

Subject: Capital gains tax - disposal

Question and answer:

Are you liable to pay capital gains tax on the transfer of your 50% share in a property to your sibling?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You, your sibling and your parent purchased a house after 20 September 1985.

You and your parent held a 50% share as joint tenants in the property and your sibling and parent held a 50% share as joint tenants in the property with both groups being tenants in common.

Your parent died in the 2005-06 income year.

Your parent's 50% share reverted equally to you and your sibling giving you both a 50% share in the property.

You sold your 50% share to your sibling in the 2010-11 income year.

Your sibling sought valuations on the property and then determined the price you were paid.

You never lived in the property and the property was never your parent's main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 section 118-195(1)

Income Tax Assessment Act 1997 section 128-50(2)

Reasons for decision

You make a capital gain or capital loss if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset) that you own. The most common CGT event is CGT event A1: the disposal of an asset. However, there are a number of exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part.

Sale of inherited dwelling

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a deceased acquired a dwelling on or after 20 September 1985 and the dwelling passed to a beneficiary after 20 August 1996, a capital gain or capital loss can be disregarded if, just before the deceased died, the dwelling was their main residence and was not used to produce income, and either:

· a beneficiary or trustee disposes of their ownership interest in the dwelling within two years of the deceased's death, regardless of whether the dwelling is used as the beneficiary's main residence or to produce income; or

· from the date deceased's death until the beneficiary or trustee disposes of their ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

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

(b) an individual who had the right to occupy the dwelling under the deceased's will; or

(c) an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.

The ownership period of a beneficiary or trustee commences from the deceased's date of death and ends on the date of disposal of the dwelling.

The house was purchased by you, your sibling and your parent after 20 September 1985.

Your parent died in the 2005-06 income year giving you 25% of their 50% share in the property, and you sold your share of the property to your sibling in the 2010-11 income year.

The house was a post-CGT asset and was never your parent's main residence.

Therefore section 118-195 does not apply to disregard any capital gain and you must include this in your tax return.

Surviving joint tenant

In accordance with section 128-50(2) (ITAA 1997), your and your sibling are taken to have acquired your parent's 50% interest in the property on the date of his death, in equal shares (i.e. ½ share each of your fathers 50%).

Section 128-50(3) (ITAA 1997) states that 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

For 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.

Your 25% purchased on the original purchase date

Your sibling sought a valuation of the property and a price was decided upon.

The time of the event is when the contract is entered into for the disposal or if there is no contract, when the change of ownership occurs (section 104-10 of the ITAA 1997).

The time of the event was in the 2010-11 income year.

How do you calculate the capital gain, and how is the tax calculated on that gain?

A capital gain (or loss) is the difference between your "capital proceeds" and your "cost base". Capital proceeds are the sum of money that you receive upon the sale of the asset.

To calculate your capital gain, you first need to work out the "cost base" of the asset.

The "cost base" consists of five elements, as set out in section 110-25 (ITAA 1997). Briefly, these are:

1. Money paid or required to be paid for the asset

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event, e.g. stamp duty, legal fees, accountant's advice, etc.

3. Non-capital costs you incur in connection with your ownership, e.g. interest, rates, land tax, repairs and insurance premiums (provided that you have not, or could not have claimed these costs as a "deduction"). You can include non-capital costs of ownership only in the cost base of assets acquired after 20 August 1991.

4. Capital expenditure you incur to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5. Capital expenditure you incur to preserve or defend your title or rights to the asset.

You are required to do two calculations to determine your capital gain or loss on the two interests you had in the property.

The first calculation for the 25% interest you inherited from your parent will include your parent's cost base on the day he died as element 1 of the cost base.

The second calculation is for the 25% you purchased and the first element of the cost base is what you paid for that 25% on the original purchase date.

You have held the interests in the asset for at least 12 months; you are able to use the 50% discount method to calculate your capital gain.

50% discount method

Using the CGT discount method, you calculate your capital gain as follows:-

1. Sale proceeds less cost base = total capital gain

2. You then apply any capital losses (current and/or prior year) against the capital gain before applying the 50% discount.

3. (Capital gain capital losses) x 50% = net capital gain.

The 50% discount amount is added to your normal income and will be taxed at your marginal tax rate.

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