Edited version of private ruling

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Ruling

Subject: CGT cost base

Is the first element of the cost base of land held in the estate, the market value of the land as at the date of death in accordance with section 128-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

The ruling applies for the following period

Year ending 30 June 2007

The scheme commenced on

2 February 2007

Relevant facts

X passed away and under the will you were appointed executor. The deceased's children are the beneficiaries of the estate. Probate has been granted. The estate has not been fully administered.

The estate includes land which was originally owned by the deceased's grandparent. The land was purchased by them prior to 20 September 1985.

Pursuant to the deceased's grandparent's will, their grandchildren were remainder-men and accordingly held an interest in the land after they passed away.

A Deed of Family Arrangement was entered into prior to 20 September 1985, which provided that the deceased would be absolutely entitled to all of the land less a portion assigned to their sibling. The sibling would be absolutely entitled to the agreed portion.

The effect of the Deed was to change the expected entitlements from the remainder interests of an equal tenancy in common over the entire land left to them by their grandparent in their will to absolute interests over agreed portions of the land. The division agreed to was not equal.

Under the Deed, the deceased also had a right from the date of the family arrangement to enter all of the land (other than the siblings land) and make improvements at their own cost.

The Deed was acted upon by the deceased by taking possession of the land and making improvements as they were permitted by the Deed in advance of the life tenant's death.

Title to the land was transferred to the deceased after September 1985.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 128-20

Does Part IVA apply to their ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

Taxation ruling 2006/14 deals with the consequences of creating life and remainder interests in property and of later events affecting those interests primarily for post CGT as any capital gain or loss arising from pre capital gains tax (CGT) assets is usually disregarded.

In their case pre CGT land had been bequeathed from the deceased's grandparent to their son as life tenant and with the deceased and their sibling as remainder-men. Had there been no Deed of Family Arrangement, the deceased and their sibling would have acquired their interest in the land at the date of their death, in accordance with their will.

There was a Deed of Family Arrangement entered into prior to 20 September 1985, as such the deceased and their sibling acquired their interest in the land prior to 20 September 1985.

Upon the life tenant's death there would have been no CGT consequences for the deceased as they were already deemed to own the asset, their ownership rights were merely enhanced.

Division 128 sets out what happens when you die and a CGT asset you owned just before dying devolves to your legal personal representative or passes to a beneficiary in your estate.

Subsection 128-15(4) states for an asset acquired by the deceased prior to 20 September 1985, the first element of the asset's cost base for the beneficiary or legal personal representative is the market value of the asset as at the date of death of the deceased.

In your case, as the deceased acquired the land prior to 20 September 1985 (as per Taxation Ruling 2006/14), and according to section 128-15(4), you as legal personal representative would acquire the relevant property as at the date of their death and the property's cost base would be the market value of the land at that time.