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Edited version of your written advice
Authorisation Number: 1012698088821
Ruling
Subject: Capital gains tax
Questions and answers
1. Does the capital gains legislation apply to a non-resident estate?
Yes.
2. Are costs associated with the Australian property able to be included in the cost base when calculating a capital gain or loss?
Yes.
3. Does the 50% discount apply to a non-resident deceased estate?
No.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
The deceased died recently.
The deceased was a non-resident of Australia for taxation purposes at the date of their death.
The deceased purchased a rental property in Australia a number of years ago.
The property was rented out for a number of years and then the deceased's parent lived in the property rent free until the deceased died.
The property has been sold.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 110-45.
Income Tax Assessment Act 1997 Section 115-110.
Income Tax Assessment Act 1997 Subsection 118-195(1).
Reasons for decision
A non-resident of Australia makes an Australian capital gain or capital loss where a capital gains tax event happens to an asset that has the necessary connection with Australia (section 136-25 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Generally, these assets are:
• land in Australia
• a share in a private Australian company
• a share in a public company where a taxpayer and their associates own more than 10% in the company
• a unit in a unit trust where a taxpayer and their associates own more than 10% in the unit trust
• an option or a right to acquire one of the above assets.
A taxpayer makes a capital gain if their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.
A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.
The property has the relevant connection with Australia and the CGT provisions will apply to the sale of the property.
Generally, assets a person inherits through a deceased estate are acquired on the date of death (section 128-15 of the ITAA 1997). Therefore, the beneficiary is taken to have acquired their share of the estate on the date of deceased's death.
The property was used to produce rental income for a period of time and was then used by their parent to live in rent free until their death.
There are no provisions that allow for an exemption of CGT on the property as the deceased did not live in the property as their main residence.
The cost base of a CGT asset is generally the cost of the asset when a taxpayer bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.
Holding costs
Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.
The third element allows for costs associated with owning a property to form part of the cost base when calculating a capital gain or loss.
The costs which can be included in the third element of the cost base include things such as rates, land taxes and insurance premiums.
Under section 110-45(1B) of the ITAA 1997 the costs which are able to form part of the second and third element of the cost base are excluded from the calculation to the extent you have deducted or it can be deducted.
In your case for the period the property was being rented out the costs associated with owning the property qualified as a deduction and therefore cannot form part of the calculation of the cost base.
For the period after the property ceased being rented out these costs can form part of the calculation of the cost base.
50% discount method
The Government has introduced legislation to remove the availability of the CGT discount for non-resident and temporary resident individuals.
This measure was originally announced as part of the Federal Budget on 8 May 2012 and the relevant legislation received Royal Assent on 29 June 2013.
Income Tax Assessment Act 1997 Subdivision 115-B.
If you were a non-resident on 8 May 2012 and you had acquired an asset prior to 9 May 2012 you are eligible to apply the CGT discount if you obtain a market valuation of your asset as at 8 May 2012. This enables you to still claim the CGT discount for the period prior to the announcement of the new measure.
The estate did not acquire the asset prior to 9 May 2012. The asset was acquired by the estate on the date of the deceased's death.
You are therefore not eligible to use the 50% discount to reduce the capital gain made on the sale of the property.
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