Edited version of private ruling

Authorisation Number: 1011711533162

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Subject: Capital Gains Tax- deceased estates

Questions and answers:

Are you liable to Capital Gains Tax (CGT) on the sale of your portion of the property?

Yes.

If you retain the property until you die and leave it to your beneficiaries, will they be subject to CGT?

Invalid. General advice provided

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commences on:

1 July 2010

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.

Your relative owned a property which they purchased in the 1950s.

Your relative died after 1985.

Under your relative's will a person gained a life interest in the property and yourself and another gained a share each as remaindermen.

The person with the life interest lived in the property until they died in.

The property has been left vacant since they died.

Your relatives will directed that on the death of the life interest holder the property was to be subdivided in half with you receiving the top portion of the property containing the house. This was not legally possible and after some time of negotiations an agreement was entered into between yourself and the other beneficiary as tenants in common, with you holding a 2/3 share and the other a 1/3 share.

You hold a 2/3 share in value as the dwelling is on your share, physically you hold a half share in the total land size.

The property is just under 4 hectares therefore your 2/3 share sits on just under 2 hectares.

The property was signed over to the beneficiaries in a recent year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

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.

You make a capital gain or a capital loss if and only if a CGT event occurs in relation to a CGT asset. A capital gain will be realised where the capital proceeds are greater than the cost base, and a capital loss will be realised where the reduced cost base is greater than the capital proceeds.

The most common CGT event happens when you dispose of an asset, CGT event A1. Land and buildings are CGT assets. Disposal of an asset occurs when there is a change of ownership. The time of the event is when the contract for the disposal is entered into, or, if there is no contract when the change of ownership occurs.

Exemption

However, under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) you can disregard any capital gain or capital loss that you make from the disposal of a dwelling that passed to you as beneficiary of a deceased estate provided certain conditions are satisfied. If the conditions of 118-195 are not met then a partial exemption may be available.

In your case, section 118-195 of the ITAA 1997 would allow you, as a beneficiary, to disregard any capital gain or capital loss in relation to the pre CGT (that is the house was acquired by him prior to 20 September 1985) residence if either of the following applied:

(1) the property was disposed of within two years of the deceased's death, or

(2) if the property was not disposed of within two years, the dwelling was, from the deceased's death until your ownership interest ends, the main residence of one or more of:

(a)   the deceased's spouse at the time of their death (except a spouse who was living permanently separately and apart from the deceased); or

(b)   an individual who had a right to occupy the dwelling under your father's will; or

(c)   if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

The property was not disposed of within 2 years of the deceased's death, therefore section 118-195(1) of the ITAA 1997 is not satisfied and you cannot disregard any gain or loss under this provision.

Although a person lived in the property under an ownership interest granted by the will, the property has been left vacant since their death and therefore the elements under subsection 118-195(2) of the ITAA 1997 are also not satisfied.

You are therefore not entitled to a full main exemption to any capital loss or gain made on the sale of your share of the property.

Partial exemption

Once it has been established that a capital gain or loss has been made and a full exemption is not available a partial exemption is then calculated using the following formula:

*Non-main residence days

If the deceased acquired the dwelling before 20 September 1985, non-main residence days are the number of days in the period from their death until settlement of the contract for sale of the dwelling when it was not the main residence of one of the following:

§ a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

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

§ a beneficiary, if they disposed of the dwelling as a beneficiary.

**Total Days

The total number of says between the original deceased's death and the settlement of the contract of sale.

The person holding the life interest lived in the dwelling from the death of the original deceased until they themselves died. Therefore non-main residence days will be those days from the date the life interest beneficiary died until the settlement of the contract of sale, and the total days are from the date the original property owner died until the settlement of the contract of sale.

Note: as you have held the property for greater than 12 months you are entitled to use the discount method in calculating your capital gain. Once you have established the gain on the property, apply the 50% discount and use this discounted figure in the partial exemption formula.

In addition, if the sale to your relative is not done at market value or at arms length, when calculating your CGT you will be taken to have received an amount equal to the property's market value.

General taxation advice:

The following information is provided as written guidance. A taxpayer who relies on guidance will remain liable for any tax shortfall if the guidance is incorrect or misleading and they make a mistake as a result (unless a time limit imposed by the law precludes the liability). However, they will be protected against the shortfall penalty and interest on the tax shortfall provided they relied on that guidance reasonably and in good faith.

You asked about the implications of leaving your property to your beneficiaries when you die, the following general advice is provided in response to this.

Inheriting a dwelling from someone who inherited it themselves

The formula for calculating the partial main residence exemption is adjusted if the deceased individual also acquired the interest in the dwelling on or after 20 September 1985 as a beneficiary (or trustee) of a deceased estate.

The main residence exemption is calculated having regard to the number of days the dwelling was the main residence of the current and the previous beneficiaries.

Example: Partial exemption for beneficiaries

Ahmed acquired a dwelling after 20 September 1985.

The dwelling was his main residence from the date of settlement of the contract for purchase until he died. The number of days Ahmed owned the dwelling was 3,700.

Under his will, Ahmed left the dwelling to his son, Fayez. Fayez was the sole beneficiary of Ahmed's estate. No other individual had a right to occupy the dwelling under Ahmed's will.

Some years later, Fayez died. He had owned the dwelling for 2,600 days and it wasn't his main residence at any time during this period.

The dwelling was left to Mardianah under Fayez's will.

Mardianah sold the dwelling in 2009-10 and made a capital gain of $100,000. She owned the dwelling for 750 days and it wasn't her main residence at any time during that period.

The taxable proportion of Mardianah's $100,000 capital gain is $47,518. This is worked out as follows: