Edited version of private ruling

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Ruling

Subject: Capital Gains Tax - cost base of CGT asset - deceased estate

Question 1

For the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997), where I receive a CGT asset as a result of a deceased estate and that asset was acquired by the deceased prior to 20 September 1985, can I use the 'market value' as at the date of death of the original owner in calculating the first element of the cost base of that CGT asset under subsection 110-25(2) of the ITAA 1997?

Answer

Yes

Question 2

For the purposes of Part 3-1 of the ITAA 1997, where I receive a CGT asset as a result of a deceased estate and that asset was acquired by the deceased on or after 20 September 1985 and I cannot identify the deceased's cost base for that asset, can I adopt 'market value' as at the date of death of the original owner as the amount to include in calculating the first element of the cost base of that CGT asset under subsection 110-25(2) of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

Your relative passed away leaving the residual, made up of a portfolio of shares, to you and you're your siblings. However the residual was subject to a life interest held by your relative's spouse.

The portfolio of shares and other investments values were listed in the probate document.

The life tenant was also the nominated trustee of the estate and he had the shares transferred to his name. The trustee appears to have treated the shares as though they were his own and over the past years provided very few reports as to how the trust account shares were invested.

The life tenant has now passed away and you have received your share of the portfolio of shares previously held on trust. Those shares formed part of the life tenant's probate documents, however, the share holdings identified show little obvious relationship to the shares that were listed as part of your relative's estate. You believe that some of those shares listed have been subject to demergers.

Consequently you find it difficult to determine what cost base to assign to the portfolio of shares for the purpose of capital gains tax provisions. Further, you are unable to obtain relevant information from the life tenant's estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-5.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Division 110

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subdivision 112-B

Income Tax Assessment Act 1997 Section 121-10

Income Tax Assessment Act 1997 Section 121-20.

Income Tax Assessment Act 1997 Subsection 121-20(5)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Subsection 128-15(1)

Income Tax Assessment Act 1997 Subsection 128-15(2)

Income Tax Assessment Act 1997 Subsection 128-15(3)

Income Tax Assessment Act 1997 Subsection 128-15(4).

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.

All references are to the Income Tax Assessment Act 1997, unless otherwise stated.

Question 1

Detailed reasoning

General discussion of the law

Part 3-1 contains the capital gains and capital loss provisions commonly referred to as Capital Gains Tax (CGT).

Part 3-1 contains provisions that outline that a capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). It sets out how to work out whether you have made a net capital gain or loss for the income year and provides that a net capital gain is included in your assessable income.

Division 104 contains possible CGT events that occur under particular circumstances. This division also provides how you work out whether you have made a capital gain, or capital loss, using certain aspects of the cost of the CGT asset (the cost base or reduced cost base) and the amount involved in the transaction (the capital proceeds) that resulted in a CGT event occurring. In certain circumstances the amount of the cost base, reduced cost base or capital proceeds may be modified or replaced by the market value.

Division 121 contains the record keeping provisions for capital gains and losses. Generally, you must keep records of matters that affect the capital gains or losses that you make. In particular, section 121-10 states that you must retain the records for five years after the last relevant CGT event, that is, disposal of your shares.

Section 121-20 provides that you must keep records of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether you have made a capital gain or loss from a CGT event.

Subsection 121-20(5) states that if the necessary records of an act, transaction, event or circumstances do not already exist, you must reconstruct them or have someone else reconstruct them.

The Commissioner has no official view on alternative cost base figures for a taxpayer that has no records of acquisition of a CGT asset. You are advised to take every step possible to either acquire the original documentation or reconstruct the cost base as accurately as possible. This may include contacting share registries or obtaining commercially available share data relating to your share holding and making a reasonable calculation based on that data.

Failing any success at reconstructing or acquiring the records any other way, the Commissioner may concede that if you provide your reasonably known ownership period for the shares, the cost base of each bundle of shares must be at least the lowest value the shares ever traded at during this period.

Cost base

Division 110 identifies the cost base or reduced cost base of a CGT asset that you may apply in calculating your capital gain or capital loss resulting from a CGT event. The cost base of a CGT asset is generally the cost of the asset when it was acquired, however it may also include certain other costs associated with acquiring, holding and disposing of the asset.

Section 110-25 outlines the five elements that make up the cost base or reduced cost base of a CGT asset, these elements are:

· money paid for or the market value of property given in exchange for the asset

· incidental costs incurred in acquiring the asset

· costs incurred in owning the asset

· capital expenditure incurred in increasing the value of the asset; and

· capital costs of preserving or defending your ownership of or rights to your asset.

Subdivision 112-B provides special rules that apply to the elements of the cost base or reduced cost base in certain circumstances. In particular, section 112-55 outlines the effect of a taxpayer dying and refers to Division 128.

Subsection 128-15(1) sets out what happens if a CGT asset you owned just before dying:

(a) devolves to your legal personal representative; or

(b) passes to a beneficiary in your estate.

Subsection 128-15(2) provides that the legal personal representative, or beneficiary, is taken to have acquired the asset on the date of death.

Subsection 128-15(3) 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 in your estate is disregarded.

Subsection 128-15(4) 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:

· for a CGT asset the deceased acquired on or after 20 September 1985, the deceased's cost base or reduced cost base of the asset on the date of death

· for a CGT asset the deceased acquired before 20 September 1985, the market value of the asset on the date of death.

For example, if a share the deceased acquired prior to 20 September 1985 passes to their beneficiary, the first element of the cost base for the beneficiary is the market value of the share on the date of the deceased's death. If the deceased acquired the share on or after 20 September 1985, the first element of the cost base for the beneficiary is the deceased's cost base of the shares on the date of their death.

The Division 128 exception does not apply to a testamentary trust that arises out of the administration of the deceased estate.

For example, if an asset is acquired by an executor subsequent to the deceased's death (so that Division 128 does not apply to the asset), and subject to a life interest, that asset is held by the trustee of a trust which is not a deceased estate.

In contrast, if an asset owned by the deceased at the time of death is subject to a life interest under the deceased's will, the asset passes to the remainderman as a beneficiary of the estate, and Division 128 applies.

Market value

The Commissioner's view on obtaining valuations includes that, where the market value of an asset needs to be determined, taxpayers can choose to obtain a detailed valuation from a qualified valuer, or compute their own valuation based on reasonable, objective, and supportable data.

If a qualified valuer is not engaged, the data relied upon by taxpayers must be in a credible form and be supportive of the valuation adopted.

The Commissioner may challenge valuations where appropriate.

Application of the law

You have received CGT assets as the result of a deceased estate, in particular, CGT assets that were held in trust by a person that possessed a life interest over those assets.

Where those assets were acquired by the deceased prior to 20 September 1985, section 128-15 sets out that the cost base or reduced cost base is the 'market value' of those assets at the date of death.

Therefore, for the purposes of Part 3-1, where you receive a CGT asset as a result of a deceased estate and that asset was acquired by the deceased prior to 20 September 1985, the 'market value' as at the date of death can be used in calculating the first element of the cost base of that CGT asset under subsection 110-25(2).

Question 2

Application of the law

While you have indicated that you are having difficulty obtaining the original cost base information of your shares, you may still be able to reconstruct the cost base if the shares were acquired on or after 20 September 1985, as required under subsection 121-20(5).

Therefore, for the purposes of Part 3-1, where you receive a CGT asset as a result of a deceased estate and that asset was acquired by the deceased on or after 20 September 1985 and you cannot identify the deceased's cost base for that asset, you can not adopt 'market value' as at the date of death as the amount to include in calculating the first element of the cost base of that CGT asset under subsection 110-25(2).