Edited version of your private ruling

Authorisation Number: 1012561039396

Ruling

Subject: Joint tenants and capital gains tax

Question 1

Will capital gains tax (CGT) event A1 happen when the deceased's asset is transferred to person E?

Answer

Yes.

Question 2

Will you realise a capital gain or capital loss when you transfer the deceased's asset to your children?

Answer

Yes.

Question 3

Will the first element of the cost base of the deceased's asset be equal to the deceased's cost base on the day they died?

Answer

Yes.

Question 4

Will you be deemed to have received the market value of the deceased's asset as capital proceeds for the CGT event?

Answer

Yes.

Question 5

Will the deceased satisfy the basic conditions for the small business CGT concessions prior to their death?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

In 198X you started a business with X other people, including your spouse.

In 199X you entered into an arrangement to build commercial business premises for the business to operate from. You held a portion of this building in joint tenancy with your spouse.

You and your spouse later divorced and a property settlement followed. Your shareholding in the business was transferred to them. However, you remained joint tenants with them in the commercial building.

After the divorce, your ex-spouse changed their Will and bequeathed their estate to your children

In 201X your ex-spouse died

The deceased's interest in the commercial building passed directly to you under the joint tenancy arrangement and hence does not form part of their estate.

You have agreed with the children for the deceased's interest in the commercial building to be transferred to them.

Reasons for decision

Effect of death

The CGT provisions that deal with the effect of death are located in Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997).

When a person dies, their assets devolve (are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant, where the deceased owned those assets as joint tenant with another person. In effect, there is a change of ownership of the assets and, therefore, a CGT event (being a disposal) happens. However, any capital gain or capital loss from this CGT event is disregarded, as is any capital gain or loss that:

· the LPR makes when the asset passes to a beneficiary in the estate, or

· that is made as a result of the asset being acquired by a surviving joint tenant.

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

Subsection 128-50(3) of the ITAA 1997 explains modifications to the cost base of CGT assets for surviving joint tenants. It provides that if the deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

Section 116-10 of the ITAA 1997 explains modifications to the general rules surrounding capital proceeds. Subsection 116-10(3) of the ITAA 1997 includes that the market value substitution rule is relevant if you receive no capital proceeds from a CGT event or you did not deal at arm's length with another entity in connection with the event.

Death and the small business CGT concessions

Section 152-80 of the ITAA 1997 potentially extends the availability of the small business relief where a CGT event happens to an asset or interest within two years of an individual's death when certain conditions are met.

Specifically, the following conditions in section 152-80 of the ITAA 1997 must be met in regards to the death of a joint tenant:

· the interest in the asset is acquired by the surviving joint tenant, and

· the deceased would have been able to apply the small business concessions themselves immediately prior to their death, and

· a CGT event happens in relation to the CGT asset within two years of the deceased's death.

Therefore, provided these conditions are satisfied, the CGT small business concessions will be available to you as surviving joint tenant.

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all of the concessions. These are called the basic conditions.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1.

(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership

(iv) the special conditions for passively held assets in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

All of these basic conditions need to be satisfied for you to qualify for the small business CGT concessions.

The deceased satisfies conditions (a) and (b), however condition (c) requires further examination.

Passively held assets

This basic condition allows you to access the small business concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you. The following conditions must be satisfied in the income year:

· your affiliate, or entity connected with you, is a small business entity for the income year in which the CGT event happens to your CGT asset,

· you do not carry on a business in the income year (other than in a partnership),

· if you carry on a business in partnership, the CGT asset is not an interest in an asset of the partnership, and

· your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset that also meets the active asset test at that time.

Connected entity

An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity (section 328-125 of the ITAA 1997).

An entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own:

· interests in the company that give them the right to receive at least 40% (the control percentage) of any distribution of income or capital, or

· equity interests in the company that carry between them the right to exercise at least 40% (the control percentage) of the voting power in the company.

In your case, the deceased has only ever owned less than a 40% share in the company, therefore they are not considered to have been in direct control of the company. Consequently the deceased does not satisfy the special conditions for passively held assets; as such, they do not satisfy the basic conditions for the small business CGT concessions.

As the deceased does not satisfy the basic conditions, you are not able to apply any of the small business CGT concessions to the capital gain you may realise on disposal of the deceased's asset.

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