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Edited version of private ruling
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Ruling
Subject: Capital gains tax - life and remainder interests
Question 1
Will the consideration paid for the legal life and remainder interests in the property merge to form the cost base of the CGT asset being the interest in the property, under subsection 112-25(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following periods:
2010-11 financial year
2011-12 financial year
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.
The rulee holds an equitable life interest in a trust, which was established under the will of a deceased person, to hold an asset for the benefit of certain life and remainder beneficiaries.
The rulee and the other life interest owners have the use and enjoyment of the property, and are responsible for expenses. Upon the happening of certain events, the asset is to be sold for its market value and the proceeds are to be distributed among the remainder beneficiaries.
The asset has not been used to derive income, and the trust has not derived any income. The rulee would now like to personally acquire ownership of the asset.
It is proposed that the other beneficiaries would dispose of their equitable life and remainder interests in consideration for legal life and remainder interests. Subsequently the legal life interests and the legal remainder interests would simultaneously be sold to the rulee for market value consideration.
Relevant legislative provisions
Income Tax Assessment Act 1997 112-25(4).
ATO view documents
TR 2006/14
Detailed reasoning
Subdivision 112-A of the ITAA 1997 contains the general modification rules for the cost base of CGT assets.
Section 112-25 of the ITAA contains the modification rules for split, changed or merged assets.
Where two or more CGT assets are merged into a single asset and the same person is the owner of both the original assets and the new asset, subsection 112-25(4) of the ITAA 1997 provides that each element of the cost base of the merged asset will be the sum of the corresponding elements of the cost base of each original asset.
Merged asset
The Commissioner's view of life and remainder interests is contained in Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests.
Legal life and remainder interests are discussed in paragraphs 86 to 94 of TR 2006/14 which are summarised below.
Bringing a legal life and remainder interest into existence involves a disposal of part of a CGT asset in a similar way to the disposal of a percentage interest in it. There would be a change in ownership of part of the original asset from the original owner to the life interest owner. The part that remains is the remainder interest, which can only be disposed of after the life interest is created.
In other words, the legal life and remainder interests are carved out of the existing fee simple.
For the purposes of the CGT provisions of the ITAA 1997, the rulee will acquire separate assets when the rulee purchases all of the legal life and legal remainder interests from the other interest owners. But these separate assets will merge into a single asset immediately after acquisition. This is because together, the legal life and remainder interests represent the entire freehold interest in the land.
Consequently, the rulee will be the owner of all of the separate assets (interests) just before they merge, and the rulee will also be the owner of the merged asset.
Therefore subsection 112-25(4) of the ITAA 1997 will apply so that each element of the cost base of the new asset, will be the sum of the corresponding elements of the cost bases of the original assets.