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Edited version of your written advice
Authorisation Number: 1012981323224
Date of advice: 7 March 2016
Ruling
Subject: Capital Gains tax, acquisitions and cost base
Questions and answers:
1. Did you and your sibling acquire your commercial property on the date that your relative died?
Yes.
2. Is the first element of the cost base of your commercial property the market value of the property on the date of your relative's passing?
Yes.
3. Did CGT event A1 occur when you and your sibling disposed of your commercial property?
Yes.
4. Are you entitled to disregard any capital gain or loss that results from the disposal of your commercial property?
No.
5. Does the cost base of an asset acquired pre - 20 August 1991 include insurances and rates and taxes?
No.
6. Does the cost base of an asset include solicitor expenses incurred in relation to the capital expenditure to establish preserve or defend the title to the asset, or a right over the asset?
Yes.
7. Does the cost base of an asset include CGT legal advice?
No.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts
Your late relative purchased a property pre-20 September 1985.
Your late relative passed away, post-20 September 1985.
In their will your relative bequeathed a life interest in the property to their surviving spouse (in trust) to receive the income that was derived by the property during their lifetime.
The will also affirmed that upon the death the deceased's spouse, the property was to be bequeathed absolutely as tenants in common in equal shares to you and your sibling.
You relative's spouse passed away on a number of years later.
A number of months later, certificate of Title for the property, was transferred to you and your sibling.
The property was disposed of by you shorty after.
In the subsequent years after your relatives passing you have incurred the following expenses, legal fees (handling of the estate), legal fees (removal of separate caveats), rates and taxes, land titles office search fees, state revenue land tax, insurances, legal advice (obtaining taxation advice).
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 25-5
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 128-15(2)
Income Tax Assessment Act 1997 Section 128-15(4)
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can only make a capital gain or loss if a capital gains tax (CGT) event happens. The most common event is CGT event A1. Under section 104-5 of the ITAA 1997, CGT event A1 happens when you dispose of an asset.
Deceased estates
If you are a deceased person's legal personal representative or a beneficiary of a deceased estate, special CGT rules apply to the transfer of any CGT assets.
When a person dies, the assets that make up their estate can:
• pass directly to a beneficiary (or beneficiaries), or
• pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
A beneficiary is a person entitled to the assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when the person does not make a will).
Under subsection 128-15(2) of the ITAA 1997, the legal representative or beneficiary is taken to have acquired the asset on the day of the deceased's passing. Under subsection 128-15(4) an asset that the deceased acquired before 20 September 1985 is acquired by the legal representative or beneficiary for market value at the date of the deceased's death.
In some cases, an individual may, by will, give legal life and remainder interests in a dwelling that they owned when they died. An interest in a CGT asset is also a CGT asset.
Once the life interest has been relinquished, usually by the death of the person with the life interest or the surrender of their interest, the asset will pass to the remainderman of the estate.
Where an asset which formed part of a deceased person's estate passes to the remainderman on the subsequent death of a life tenant, the remainderman is taken to have acquired the asset on the day when the deceased owner passed away, not the day when the life tenant passed away.
Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests, discusses the implications of the creation of a life interest over a CGT asset.
Paragraph 102 and 103 of Tax Ruling TR 2006/14 state:
102. On the death of the life interest owner, CGT event C1 in section 104-20 happens. The Commissioner does not consider that CGT event C2 happens in this case because the legal life interest is not an intangible asset. If the life interest owner makes a capital gain or capital loss from CGT event C1 happening, it is disregarded under section 128-10.
103. The death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner, their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset……
In your case, a trust was created as a result of the death of your late relative, granting a life interest in a commercial property to your relative's spouse and granting you and your sibling a remainder interest. You and your sibling acquired your remainder interest in the asset at the date of your relative's death. As your relative acquired the property before 20 September 1985, you and your sibling acquired the dwelling for its market value on the day that they passed away.
Disposal of property
When you and your sibling disposed of the property that you inherited from the estate of your late relative, this triggered CGT event A1 under section 104-5 of the ITAA 1997.
Cost base
Under section 110-25 of the ITAA 1997 the cost base of a CGT asset is made up of five elements.
1. The first element of your cost base includes money or property given to acquire your asset.
2. The second element of your cost base includes incidental costs you incurred in acquiring the asset.
3. The third element of your cost base includes non-capital costs of your ownership of the CGT asset, which include (but only if the asset is acquired after 20 August 1991):
• Interest on money you borrowed to acquire the asset; and
• costs of repairing, maintaining or insuring it; and
• interest on money you borrowed to refinance the money you borrowed to
acquire the property; and
• interest on the money you borrowed to finance the capital expenditure you incurred to increase the assets value.
4. The fourth element is capital expenditure that you incurred to increase the assets value.
5. The fifth element is capital expenditure you incurred to establish preserve or defend your title to the asset, or a right over the asset.
Insurances, rates and taxes and state revenue land tax
The third element of the cost base of an asset includes insurances, rates and taxes. However this only applies where the property was acquired post 20 August 1991.
Solicitors fees and land tittles office search
The fifth element of the cost base of an asset includes capital expenditure incurred to establish preserve or defend your title to the asset, or a right over the asset. Solicitors and land title office search expenses incurred in transfer of the land, assignments of leases and removal of caveats are included in the fifth element of the cost base.
CGT Advice
Section 25-5 of the ITAA 1997 allows a deduction for expenditure in relation to managing your tax affairs and complying with an obligation imposed on you by a law in relation to your tax affairs or the tax affairs of any entity. A deduction is allowable in the year in which the expenditure is incurred.
You cannot include expenses that have been incurred if:
• you have a claimed a deduction for them in any income year; or
• omitted to claim a deduction but still claim it because the period for amending the relevant income tax assessment has not expired.
CGT legal advice is a deductible expense under section 25-5 of the ITAA 1997. If this expense is has been or is still is able to be claimed as a deduction it cannot be included in the cost base of an asset.
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