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Edited version of your written advice
Authorisation Number: 1051453952756
Date of advice: 14 November 2018
Ruling
Subject: Capital gains tax
Question 1
Did a capital gain tax (CGT) event occur on the disposal of the property?
Answer
Yes.
Question 2
Is the first element of the property’s cost base your share of the market value on the date of death of your relation?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2018
The scheme commenced on
1 July 2017
Relevant facts
Your relation purchased a home (the property) before 20 September 1985.
Your relation passed away some years ago.
The property was never used for income producing purposes.
The terms of your relation’s Will states:
I give devise and bequest any property I may own at my death to my Trustee Upon Trust to permit entity A to reside there for their lifetime subject to payment by them thereout of all rates, taxes and outgoings on the subject property or until such time as they indicate in writing to my Trustee that they desire to vacate the property.
Upon the death of entity A then I direct my Trustee to transfer the subject property to entity B in equal shares as tenants in common.
Entity A remained in the property, which they occupied as private residence and never used the property for income producing purposes. They vacated the property a few years ago.
The property title was then transferred to entity B.
Later entity B disposed of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 128-10
Income Tax Assessment Act 1997 Section 128-15
Detailed reasoning
Capital gains tax
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).
Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.
When a property is transferred from an individual to their deceased estate, no capital gains tax applies. That is, any capital gain or loss made by the deceased is disregarded under section 128-10 of the ITAA 1997.
Subsection 128-15(2) of the ITAA 1997 provides that the legal personal representative, or beneficiary, is taken to have acquired the asset on the date of death.
Subsection 128-15(3) of the ITAA 1997 provides special rules for legal personal representatives and states that any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary of the deceased estate is disregarded.
It should be noted that the trustee of a testamentary trust is treated in the same way as a legal personal representative (Practice Statement PS LA 2003/12 Capital gains tax treatment of the trustee of a testamentary trust).
Generally, if you are a beneficiary, you are taken to have acquired the asset on the day the person died, but CGT does not apply when you acquire the asset. However a subsequent sale by the beneficiary may be subject to capital gains tax.
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 is not specifically relevant in your circumstances, as it is considered that entity A had a lifetime right to reside in the property and is not considered to have held a life interest.
You acquired your ownership in the property on the date of death of your relation. Although the property was not transferred to you until later, you were a beneficial owner in the property from your relation’s death. The principles in Taxation Determination TD 2017/11 Income tax: who should be assessed to interest on bank accounts? confirms this.
A change in the legal ownership of an asset without a change in the beneficial ownership will not constitute a disposal for CGT purposes (subsection 104-10(2) of the ITAA 1997).
Subsection 128-15(4) of the ITAA 1997 contains a table that sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary. Specifically it sets out that for a CGT asset, the first element of the cost base or reduced cost base is the market value of the asset on the date of death, for a CGT asset the deceased acquired before 20 September 1985.
In your case, the original share of the property was acquired by the deceased before 20 September 1985. Therefore, the first element of the cost base for the property is the market value of the asset on the date of death of your relation. As you are a part owner, your cost base is the relevant portion.
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