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Edited version of private ruling
Authorisation Number: 1011600183210
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Ruling
Subject: Capital Gains Tax on Sale of Inherited Property
Questions
1. Is the sale of the property subject to capital gains tax?
Answer: Yes
2. If the property sale is subject to Capital Gains Tax, has a capital gain been made?
Answer: Yes
3. If the property sold by person X were subject to Capital Gains Tax, would the cost base of the property for person X be its sale price?
Answer: No
This ruling applies for the following period: 1 July 2008 to 30 June 2009
The scheme commenced on 1 July 2008.
Relevant facts and circumstances
The taxpayer acquired a vacant block of land from a deceased relative.
The deceased had acquired the land before 20 September 1985.
The value of the property at the time of the deceased death was $X.
The property was disposed of by the taxpayer for significantly more than $X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 115-10
Income Tax Assessment Act 1997 Subsection 128-15(4)
Question 1:
Is the sale of the property (title 4 on 74) subject to capital gains tax?
Summary
The sale of the property (title 4 on 74) is subject to capital gains tax?
Detailed reasoning
For the sale of the property to be subject to capital gains tax (CGT) there needs to be a CGT to which a CGT event applies. If this is the case one then has to determine if a capital gain or capital loss was made as a result of the happening of the CGT event. Each of the CGT events explain when a capital gain or capital loss has been made.
Once it has been determined that a capital gain or capital loss has been made, there may be provisions of the Income Tax Assessment Act 1997 (ITAA 1997) which either reduce the amount of the capital gain or exempt the capital gain or loss.
As stated the taxpayer must have a CGT asset to which a CGT event happens. The taxpayer has disposed of a property (a vacant block of land). In accordance with note 1 to section 108-5 of the ITAA 1997 land is a CGT asset. Hence you have a CGT asset.
Division 104 of the ITAA 1997 deals with CGT events. In this Division there are a wide range of CGT events, covering many different situations. However, the most common event, and the one that is applicable in your particular case is CGT event A1, which deals with the disposal of a CGT asset. In brief, this event happens when the ownership of a CGT asset transfers from you to another entity (section 104-10 of the ITAA 1997).
Subsection 104-10(4) states that you will make a capital if the sale price received on the disposal of the land exceeds its cost base.
Subsection 128-15(4) of the ITAA 1997 sets out the rules for establishing the cost base of an asset that you acquire through a deceased estate.
As the beneficiary of a deceased estate, the first element of your cost base where the asset was originally acquired by the deceased before 20 September 1985 is the market value of that asset on the day they passed away. The date of death is also the date you are taken to have acquired the asset for CGT purposes.
The taxpayer is then able to include any other costs that you may incur in relation to that asset, such as stamp duty, rates, improvements to the property and agents fees incurred in selling the property. However, if the taxpayer uses the land to produce assessable income, the taxpayer is unable to include any costs in your cost base that they have deducted, or have been able to deduct from your assessable income.
Once the taxpayer established the cost base of the asset, they subtract this amount from the proceeds that they receive as a result of the sale. This is your basic capital gain or capital loss.
All the land owned by the deceased at the time of their death had a value of $x. Hence the cost base of the land in question is an amount considerably less than $x plus other costs as explained earlier. As the taxpayer disposed of the property for significantly more than $X a capital gain has been made.
Conclusion:
As the taxpayer has a CGT asset to which a CGT event applied and they made a capital gain as a result of the happening of the CGT event, the CGT provisions apply to the sale of the property.
Question 2:
If the property sale is subject to Capital Gains Tax, has a capital gain been made?
Summary
The sale of the property has resulted in you making a capital gain.
Detailed reasoning
Contained within detailed reason for question 1.
Question 3:
If the property sold by person X were subject to Capital Gains Tax, would the cost base of the property for person X be its sale price?
Summary
The cost base of the property to person X is basically the market value of the property at the date of death of the deceased from whom she acquired it.
Detailed reasoning
Contained within detailed reason for question 1.