Edited version of private ruling

Authorisation Number: 1011606900586

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax (CGT) - Deceased estate - Does the asset pass to you

1. Do you make a capital gain or a capital loss due to the transfer of a one-half interest in Lot 1 to you?

No.

2. Will any capital gain or capital loss you make on the subsequent disposal of Lot 1 be disregarded?

No.

3. Will the cost base of your interest in Lot 1 be based on its market value when the Executor transfers it to you?

No.

This ruling applies for the following period<s>:

2010-11 income year

2011-12 income year

The scheme commences on:

1 July 2005

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased was the sole registered proprietor of a property that was their main residence.

The property comprises less than two hectares of land upon which is erected a residential home.

The deceased died some five years ago and probate of their Will was granted to their spouse.

Pursuant to this Will, the deceased granted to their spouse a life interest in the property and upon the spouse's death the property was to be transferred to children (including you) equally as the remaindermen.

The spouse continues to reside in the property and has done so since their marriage to the deceased.

The spouse and the children have negotiated to end the life tenancy on conditions that will see the property subdivided into two Lots. Lot 1 would comprise the existing dwelling and some land. Lot 2 would be the remaining land on which a new dwelling is to be constructed.

You have negotiated this agreement (which is evidenced in a Deed of Family Arrangement) within the time that a court would be likely to entertain an application for family provision, or an extension of time in which to make such an application.

The Executor will transfer Lot 1 to the children as tenants in common.

The Executor will transfer Lot 2 to the spouse in their individual capacity.

The spouse will pay a specified amount by bank cheque to the children.

The spouse will be allowed to continue to reside in the existing dwelling until the new dwelling on Lot 2 is constructed.

The spouse will construct a new dwelling on Lot 2 in accordance with the proposed Deed of Family Arrangement. They will then commence to reside in this new dwelling.

The children will then sell Lot 1 within the next year.

Certain documents are to be read with and form part of the description of the scheme for the purpose of this ruling. They include:

· the grant of probate

· the Will of the deceased

· the proposed Deed of Family Arrangement.

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 118-145

Income Tax Assessment Act 1997 Section 118-150

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

You do not make a capital gain or a capital loss due to the transfer of a one-half interest in Lot 1 to you.

Detailed reasoning

You can only make a capital gain or a capital loss if a CGT event happens. The gain or loss is made at the time of the event.

CGT event A1 happens when the Executor transfers a one-half interest in Lot 1 to you, but the event applies to the Executor, not you.

You do not make a capital gain or capital loss as recipient of an asset under CGT event A1.

Note 1: CGT events E5 to E8 will not happen due to the transfer of a one-half interest in Lot 1 to you because it was owned by the deceased when he died and it is a transfer from the Estate.

Question 2

Summary

Any capital gain or capital loss you make on the subsequent disposal of Lot 1 will not be disregarded, although you may be entitled to claim a partial main residence exemption.

Detailed reasoning

CGT event A1 will happen when you sell your one-half interest in Lot 1.

You will make a capital gain if the capital proceeds exceed the cost base of your interest. You will make a capital loss if those proceeds are less than its reduced cost base.

Note 2: there are some differences in how the cost base and reduced cost base are calculated, but they are often the same amount.

Any capital gain or capital loss you make due to the event is disregarded if an exemption applies to the event. The only relevant exemption is the main residence exemption.

The specific calculation that applies to your situation is determined by the way that you acquire your ownership interest in Lot 1. Either the general rule or the inheritance rule will apply.

The inheritance rule applies if your interest in Lot 1 is passed to you by the deceased estate. That means that the Executor transfers it to you:

· under a power of transfer granted by the will of the deceased or that will as varied by a court order

· by operation of an intestacy law, or such a law as varied by a court order

· in satisfaction of a pecuniary legacy or some other interest or share in the estate, or

· under a deed of arrangement if:

o you entered into the deed to settle a claim to participate in the distribution of the estate, and

o the only consideration given by you was a variation or waiver of a claim to one or more assets that formed part of the estate.

We accept that the proposed Deed of Family Arrangement meets the conditions outlined in paragraphs 33 to 37 and 209 to 223 of Taxation Ruling TR 2006/14.

As the only consideration you will give is the waiver under the Deed of Family Arrangement, we accept that the one-half interest in Lot 1 will pass to you as a beneficiary of the deceased's estate.

The full main residence exemption will apply if the dwelling on Lot 1 is the main residence of one of the following for the whole of the period from the date the deceased died until your ownership interest ends:

· the spouse of the deceased immediately before the death

· an individual who had a right to occupy the dwelling under the deceased's Will, or

· you as beneficiary.

Lot 1 will cease to be the spouse's main residence before you sell your interest in it, therefore, it will not be their main residence for the whole of the required period and you will not be entitled to the full main residence exemption.

However, a partial main residence exemption will apply to reduce your capital gain or capital loss as the dwelling on Lot 1 has been the spouse's main residence for part of your ownership period.

Note 3: The spouse is able to choose to alter the period that this dwelling is considered to be their main residence by using choices. They can extend the period using the absence choice or possibly reduce it by extending the period that Lot 2 is their main residence (if available given their circumstances).

Question 3

Summary

The cost base of your interest in Lot 1 will not be based on its market value when the Executor transfers it to you.

Detailed reasoning

Your one-half interest in Lot 1 will pass to you from the Executor for the reasons outlined above. This is a roll-over for capital gains purposes.

The effect of this roll-over for you is that you inherit the Executor's cost base and reduced cost base as well as its acquisition date - that is, you acquire your one-half interest in Lot 1 on the date that the deceased died.