Edited version of private ruling

Authorisation Number: 1011704987149

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Ruling

Subject: Capital gains tax - deceased estate - option

Question

Will there be capital gains tax (CGT) consequences if an option to purchase primary production land and dwelling is varied?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer (the Grantor) entered into an option deed on with the Grantee.

The agreement was for an option to purchase primary production property.

The option was for a fixed period on the terms and conditions contained in the deed (the initial option period) and thereafter for the period of either the Grantor's natural life or at such earlier time as determined by either the Grantor or Grantee at market value (the subsequent option period).

The Grantor was to pay an annual option fee. The Grantor gave the Grantee a right to cultivate a portion of the property.

The option fee was non-refundable.

The option could be exercised at any time during the initial and subsequent option periods, by:

· During the initial option period, the Grantee delivering to the Grantor's solicitor the signed sales contract and a deposit of the purchase price.

· During the subsequent option period, the Grantee delivering to the Grantor the signed sales contract and a deposit of the purchase price, or by the Grantor delivering to the Grantee written notification of an intention to sell the property.

Upon the exercise of the option, the Grantor was to be bound by the terms and conditions of the sale contract as if the counterparts of the sale contract had been duly exercised by the Grantor and then exchanged on the date the option was exercised.

Upon the death of the Grantor, the Grantor's successors, executors, heirs and beneficiaries were to be bound by the terms of the option deed.

The option deed could only be amended or supplemented in writing, executed by the parties.

The Grantor died during the initial option period. The Grantor's spouse is one of the executors of the estate.

The Grantee is now ready to commit to the option of purchase. However, the Grantor's spouse wishes to remain in the family home and has asked that a new agreement be negotiated, so that only the primary production property is sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-40

Reasons for decision

Summary

There will be no capital gains tax (CGT) consequences if an option to purchase primary production land and dwelling is varied.

Detailed reasoning

Options

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made if a CGT event happens.

Under section 104-40 of the ITAA 1997, CGT event D2 occurs if you grant an option to a person or an entity, or renew or extend an option that you had granted. The amount of capital gain or loss is the difference between what you receive for granting the right and any expenditure you incurred in relation to it. The CGT discount does not apply.

If an option you granted is later exercised, CGT even A1 occurs under section 104-10 of the ITAA 1997. The amount of capital gain or loss is the difference between the capital proceeds from the disposal and the asset's cost base (for a gain) or reduced cost base (for a loss).

Any capital gain or loss you previously made from the grant or renewal of the grant is disregarded (you may need to amend your income tax assessments from earlier years). Instead, these amounts are included in the proceeds from the exercise of the option.

The date of disposal of the asset is the date of the transaction entered into as a result of the exercise of the option.

Deceased estate

Any capital gain or capital loss made on a post-CGT asset is disregarded if, when a person dies, the asset they owned passes to their legal personal representative or a beneficiary, or from their legal personal representative to a beneficiary.

However, when a legal personal representative disposes of an asset of the estate in the process of administering and winding up the estate, the normal CGT rules apply. The CGT rules also apply if a beneficiary sells an asset they have inherited.

Your case

The Grantor granted an option to purchase primary production land and property on 24 February 2009. The option was for a period of two years on the terms and conditions contained in the deed (the initial option period). The Grantee was to pay an annual option fee.

CGT event D2 happened when the option was granted.

Under the deed, the option may be varied by the parties. The option deed states that the Grantor's executor or beneficiary is bound by the terms of the option deed. Therefore, the executor of the estate and the Grantee may choose to renegotiate the option to exclude the house and surroundings.

For CGT purposes, there must be both a CGT asset and a CGT event. In this case, there is a CGT asset (the option), but varying the terms of the option will not result in a CGT event. Therefore, there are no CGT consequences specifically from renegotiating the agreement.

When the option is exercised and the primary production land is sold, event A1 will occur. The amounts previously received from granting the option must be added to the sale proceeds.