Edited version of private ruling

Authorisation Number: 1011737853714

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Ruling

Subject: Property

Question 1

Did you acquire Lot 1and Lot 2 on the deceased's date of death?

Answer

Yes.

Question 2

Are you entitled to the main residence exemption for Lot 2?

Answer

Yes.

Question 3

Are you required to pay CGT on Lot 1?

Answer

Yes.

Question 4

Are you entitled to use the discount method to calculate capital gain or loss?

Answer

Yes.

Question 5

Are you entitled to increase your cost base?

Answer

Yes.

Question 6

Are you entitled to increase you cost base with costs you incurred defending your entitlements under the Will?

Answer

Yes.

This ruling applies for the following period

1 July 2001 to 30 June 2011

Relevant facts and circumstances

In xx A and B purchased property, as joint tenants, containing lot 1 and lot 2.

Lot 1(contains a garage) and Lot 2 (house already built) measured 150ft x 42ft each.

The property was the A & B's main residence throughout their lives.

In xx A passed away. The properties estimated value, at the time of probate, was $xx.

In xx B became the sole registered proprietor of both lots by way of transmission application and beneficiary under A's Will.

In xx you commenced living at the property with B and the dwelling became your main residence.

In xx B passed away leaving her whole estate to you. You were also named as the executor of B's estate.

In xx the estimated market value of Lot 1 was $xx and Lot 2 $xx. The market appraisal of the 2 lots combined, by a real estate agency, was between $xx and $xx.

In xx probate was granted in your favour.

In xx proceedings challenging the validity of the Will were commenced by C.

In xx C obtained ex parte orders restraining you from carrying out any further administration in you capacity as B's executor.

In xx you moved out of the property and now reside overseas. You still elect the property to be your main residence.

In xx you and C enter into a Deed of Settlement.

In xx the court proceedings were dismissed.

In xx the property was transmitted into your name.

In xx Lot 1 and Lot 2 were issued separate titles.

From the time you moved overseas until the settlement of the sale of the lots the property was vacant.

It was not used for any income generating purposes and expenses relating to the dwelling have not been claimed by either you or C.

Prior to the sale of the property extensive and significant maintenance work was required because of the overgrowth and lack of maintenance to the property from date of death until sale.

In xx Lot 2 sold for $xx.

In xx Lot 1 sold for $xx.

Under the Deed of Settlement, after the lodgment of income tax returns and payment of any taxes, the proceeds of sale from the two lots are to be split between you and C each receiving 50%.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 subsection 118-195(2)(c)

Income Tax Assessment Act 1997 section 128-10

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

Income Tax Assessment Act 1997 subsection 128-20(1)

Reason for Decision

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.

CGT event

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) specifies that a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT assets if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Further, the capital gain or capital loss is made at the time of the event.

CGT Asset

A CGT asset is any kind of property (e.g. land and buildings) or a legal or equitable right that is not property (subsection 108-5(1) of the ITAA 1997).

Assets acquired through a deceased estate

Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative or to a beneficiary in a deceased estate.

Section 128-10 of the ITAA 1997 provides that when a person dies, that person disregards a capital gain or capital loss from a CGT event happening to a CGT asset the person owned just before their death.

Where the asset devolves to the legal personal representative of passes to a beneficiary of the deceased estate the legal personal representative or beneficiary is taken to have acquired the asset on the day the person died. Regardless of the actual date that legal title in the property passed (subsection 128-15(2)) of the ITAA 1997).

Subsection 128-20(1) of the ITAA 1997 provides that a CGT asset passes to a beneficiary in a deceased estate if the beneficiary becomes the owner of the asset and includes the following;

(a) under your will, or that will as varied by a court order; …

You have acquired two separate interests in the property. One interest belonged to B which was acquired in 1952 (pre-CGT) when B purchased the property with the spouse.

The second interest is the interest B acquired on 6 July 1993 (post CGT) when the spouse died.

Both interests were acquired under the deceased's Will and on the date of death.

Sale of deceased's property

In xx you separated the titles to Lot 1 and 2, which you fully owned and sold them independently of each other. Lot 2 was sold in xx and Lot 1 was sold in xx.

Sale of Lot 2

Under section 118-195 of the ITAA 1997 for property acquired by the deceased after 20 September 1985 which was the deceased's main residence just before they died and, at that time was not being used for the purpose of producing assessable income, a full exemption will be available if;

1. the ownership interest ends within two years of the deceased's death or

2. the property was, from the deceased's death until the ownership interest ends the main residence of one or more of:

1. the spouse of the deceased immediately before death (except a

spouse who was living permanently separately and apart from the

deceased),

2. an individual who had a right to occupy the property under the

deceased's Will, or

3. an individual beneficiary to whom the ownership interest passed and

that person disposed of the dwelling in their capacity as beneficiary.

From the information provided by your representative, their letter dated xx xx xx, you would meet the main residence exemption under paragraph 118-195(2)(c) for Lot 2.

Land sold separately to dwelling - Lot 1

If adjacent land is sold separately from the dwelling (either at a different time or to a different purchaser) the main residence exemption will not apply to the disposal of the adjacent land (section 118-165 of the ITAA 1997).  

As such, you will be required to pay tax on the capital gain you made on the sale of Lot 1.

Cost base of an asset for the beneficiary

The cost base of the asset is determined by when the deceased person acquired the asset.

Lot 1 has two interests, one pre and one post CGT, therefore the cost base will comprise of a pre and post CGT calculation.

Calculation of Cost Base

Section 110-25 of the ITAA 1997 sets out the elements that form part of the cost base. The cost base is made up of five elements:

1.   The first element is made up of money paid or required to be paid to acquire the CGT asset.

2.    The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event.

3.   The third element consists of non-capital costs incurred in connection with your ownership of a CGT asset.

4.   The fourth element includes capital expenditure you incur to increase the value of the CGT asset if the expenditure is reflected in the state or nature of the asset at the time of the CGT event.

5.    This includes capital expenditure you incur to preserve or defend your title or rights to the asset.

When a taxpayer's beneficiary acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the beneficiary are modified.

B's cost base

There are special rules for determining the cost base where a surviving joint tenant acquires the interest of a deceased joint tenant in an asset. Section 128-50 of the ITAA 1997 provides that for a pre-CGT interest of the deceased taxpayer, the market value at the time of death is equally divided between the surviving tenants.

B purchased a property jointly with a spouse in xx. When the spouse passed away in xx, B inherited the spouse's interest in the property.

B inherited from the spouse a 50% interest at the market value of the property at the time of the spouse's death. At this point B held both a pre and post CGT interest in the property.

You advised the property at this time was valued at $xx.

Should B have chosen to sell the property at this time the cost base of the half interest that was inherited from the spouse (a post-CGT interest) would be $xx. The other half (a pre-CGT interest) would have been disregarded and any capital gains made would have not been included in the assessable income.

Calculating your cost base

Where an asset is a pre-CGT (before 20 September 1985) asset in the hands of the deceased, the first element of the cost base to the beneficiary at the time of acquisition is the market value of the asset on the day of the taxpayer's death.

Where an asset is a post-CGT (on or after 20 September 1985) asset in the hands of the deceased taxpayer, the general rule is that the first element of the cost base to the beneficiary at the time of acquisition is the deceased taxpayers cost base on the day of death.

If the asset includes a dwelling that was the deceased taxpayer's main residence before he/she died and was not used for income-producing purposes at the time, the cost base to the beneficiary is the market value of the dwelling on the day of the taxpayer's death.

The definition of dwelling is defined in section 995-1 of the ITAA 1997 as the meaning given in section 118-115 of the ITAA 1997. In conjunction with section 118-120 of the ITAA 1997, the definition of dwelling includes a building and the land which is adjacent to the dwelling up to a maximum of 2 hectares, including the land on which the dwelling is situated.

The first element of the cost base of the part that was B's pre-CGT interest in the property is the market value on the day of B's death.

For the part that was B's post-CGT interest in the property (the amount inherited from the spouse) the first element of the cost base would be the cost base of the interest on the day that B died.

Second element: incidental costs of acquiring the CGT asset or of the CGT event

There are nine incidental costs you may have incurred in acquiring the asset or in relation to the CGT event that happens to it (including its disposal). They are:

· remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can include the cost of advice on the operation of the tax law as an incidental cost only if the advice was provided by a recognised tax adviser and you incurred the cost after 30 June 1989)

· costs of transfer

· stamp duty or other similar duty

· costs of advertising or marketing (but not entertainment) to find a seller or buyer

· costs relating to the making of any valuation or apportionment to determine your capital gain or capital loss

· search fees relating to an asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable for purchase)

· the cost of a conveyancing kit (or a similar cost)

· borrowing expenses (such as loan application fees and mortgage discharge fees), and

· expenditure that:

o is incurred by the head company of a consolidated group to an entity that is not a member of the group, and

o reasonably relates to a CGT asset held by the head company, and

o is incurred because of a transaction that is between members of the group.

You do not include costs if you:

· have claimed a tax deduction for them in any year, or

· did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

Further more, you would apportion any expenditure you incurred for both lots between the two.

Third element: costs of owning the CGT asset

The costs of owning an asset include rates, land taxes, repairs and insurance premiums. Non-deductible interest on borrowings to finance a loan used to acquire a CGT asset and on loans used to finance capital expenditure you incur to increase an asset's value are also third element costs.

You do not include such costs if you acquired the asset before 21 August 1991.

Also, you do not include them if you:

· have claimed a tax deduction for them in any year, or

· did not claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not ended.

You cannot include them at all in the cost base of collectables or personal use assets.

You cannot index these costs or use them to work out a capital loss.

Fourth element: capital costs to increase or preserve the value of your asset or to install or move it

The fourth element is capital costs you incurred for the purpose, or the expected effect, of increasing or preserving the asset's value - for example, costs incurred in applying (successfully or unsuccessfully) for zoning changes. It also includes capital costs you incurred that relate to installing or moving an asset. However, it does not include capital expenditure incurred in relation to goodwill, which may be deductible as a business related cost.

Fifth element: capital costs of preserving or defending your title or rights to your CGT asset.

This element includes capital expenditure you spend to preserve or defend your ownership of, or rights to, the asset.

As a beneficiary, you can include in your cost base (and reduced cost base) any expenditure the legal personal representative (for example, the executor) would have been able to include in their cost base if they had sold the asset instead of distributing it to you (e.g. costs incurred by defending your entitlement under the Will). You can include the expenditure on the date you incurred it.

Methods of calculating capital gains or loss

There are three methods that are used to calculate a capital gain; the indexation method, the discount method and the 'other" method.

Discount Method

As B passed away after 21 September 1999 you cannot use the indexation method to work out the capital gain or loss. You will be able to use the discount method to calculate any capital gain on the dwelling as you have disposed of the property 12 months or more after the day that B passed away in xx (subsection 115-30 Item 6 of the ITAA 1997).

Under section 115-5 of the ITAA 1997, you can use the discount method to calculate your capital gain if:

· you are an individual, a trust or a complying superannuation entity

· a CGT event happens to an asset you own

· the CGT event happened after 11:45am (by legal time in the ACT) on 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

 In determining whether you acquired the CGT asset at least 12 months before the CGT event, you exclude both the day of acquisition and the day of the CGT event.

Using the CGT discount method, you calculate your capital gain as follows:-

Capital proceeds cost base = capital gain

You then apply any capital losses (current and/or prior year) against the capital gain before applying the 50% discount.

(Capital gain capital losses) x 50% = net capital gain.

Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

You will be entitled to apply the discount method to the area of land that has not been disregarded by the main residence exemption.