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Edited version of private ruling
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Ruling
Subject: Capital gains tax
Question 1
Is capital gains tax is applicable on the disposal of property on the death of the taxpayer?
Answer:
Yes.
Question 2
Is capital gains tax is applicable when multiple allotments are sold and what would be the cost base?
Answer:
Yes, on any post CGT asset proceeds. Any pre-CGT interest will be exempt. Cost base will be the market value as at the relevant date.
Reasons for decision
All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).
There is a general rule that CGT applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 (pre-CGT).
Taxation ruling TR 2006/16 states at paragraph 104:
The transfer of a legal life interest or remainder to the owner of the other interest (commonly called a surrender or release) results in a CGT event A1 in section 104-10 of the ITAA 1997 happening. The market value substitution rule in section 116-30 may apply to determine the capital proceeds from that event. Also, the market value substitution rule in section 112-20 may apply to determine the cost base of the acquired interest.
In this case, CGT may be applicable on any gain arising to the estate of the taxpayer on the disposal of a their interest previously held by the taxpayer and the cost base will be the applicable market value at the acquisition date being X.
The capital gain may also be reduced by the 50% discount.
The taxpayer's original legal interest in their parent's estate when the taxpayer and another were made beneficiaries in the remainder of the life estate. This interest pre-dated the CGT provisions and this interest is CGT free.
The CGT treatment of the proceeds from the allotments will be according to their pre or post CGT status that is any interest acquired in 1955 will be free of CGT and any interest acquired as a result of death will be subject to CGT. The cost base will be the market value at the time of acquisition.
Relevant facts and circumstances
Land involved was originally purchased by the life tenant in two transactions the last being July XXXX. The land was used in a horticultural enterprise and comprised XX allotments.
The legal interest of the two remainder men commenced in XXX (pre-CGT). One of the remainder men (A) lived in the house as their principal place of residence and the other remainder men (B) used this to run sheep as part of his farming operations.
Starting in XXX remainder man B began a process of boundary re-alignment and division to overcome some encroachment issues and create some new allotments. This process is still not complete but will result in XX allotments in total.