Edited version of your private ruling

Authorisation Number: 1011937634237

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital gains tax

Question 1

Do any of the subsequent dealings in relation to property A since it was acquired by the deceased change the status of the property from being a pre-CGT asset?

Answer

Yes.

Question 2

Will the first elements of the cost bases of the capital gains tax (CGT) assets comprising properties A and B be determined under subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Are there any CGT implications, apart from the cost base implications for the persons who will be acquiring the real property, arising from the proposed payment of monies under the beneficiary distribution proposal contained in the proposed deed of arrangement (deed)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The deceased died after 20 September 1985.

The deceased's will divides the estate equally among their surviving adult children.

The estate's real estate comprises properties A and B.

The deceased's home where they resided was within property A.

The properties were operated by the deceased as a single business until shortly before their death, when they moved to a nursing home.

The business continued to be operated by several of the deceased's children after they ceased operating it themself, and these children paid an annual rental for this purpose.

The following is the background concerning property A:

· This property was acquired by the deceased before 20 September 1985.

· After its acquisition, the following relevant dealings occurred after 20 September 1985:

o The deceased constructed their home on this property and then resided in that home as their main residence.

o The deceased transferred the property from their sole name to them and their spouse as joint tenants.

o The spouse died and the property was transmitted by notice of death back to the sole name of the deceased.

o The property was subdivided into several lots. One lot was transferred to one of the children.

o Following the grant of probate, the property was transmitted to the executors.

o The property was further subdivided. This subdivision was undertaken to facilitate the proposed distribution of the estate referred to below.

The following is the background concerning property B:

· This property was acquired by the deceased after 20 September 1985.

· Other than the transmission of the property to the executors following the grant of probate, there have been no dealings with this property.

· Although the will provides for an equal distribution amongst the adult children of the deceased, those children have agreed to effect a distribution under which each of them receives different proportions of the real estate and public company shares of the estate, with appropriate cash adjustments so that all receive an equal share.

· The proposed distribution is set out in the deed of arrangement, which you have forwarded with your application.

· The estate has been liquidated with the exception of the real estate and public company shares. The estate is not fully administered.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 112-30(1)

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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 of the ITAA 1936 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

Question 1

Under subsection 128-15(2) of the ITAA 1997, assets that formed part of the estate of a deceased person are taken to have been acquired by the legal personal representative (LPR) or beneficiary at the date of the person's death.

In your case, the deceased died after 20 September 1985 and as a result the LPR of the estate and the beneficiaries are taken to have acquired the CGT assets which form property A post-CGT.

Question 2

The table in subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT assets in the hands of the LPR or beneficiary.

We will consider the application of subsection 128-15(4) of the ITAA 1997 to the specific CGT assets referred to by you in your application.

(a) Dwelling on property A

Property A was acquired by the deceased before 20 September 1985 (pre-CGT) and the deceased constructed their dwelling on the property after 20 September 1985 (post-CGT).

Under item 3 of the table in subsection 128-15(4) of the ITAA 1997, a dwelling that was the deceased's main residence just before the date of death and was not being used for the purpose of producing assessable income, will be taken to have been acquired by the LPR or a beneficiary for its market value on the day the deceased died. If the deceased was not living in the dwelling at the date of their death, they or their trustee may choose to continue to treat is as their main residence.

Therefore, provided that the deceased or their trustee chose to continue to treat the dwelling on this property as the main residence of the deceased, and the dwelling was not being used for the purpose of producing assessable income, the first element of the cost base or reduced cost base of the dwelling for the LPR or a beneficiary will be the market value of the dwelling on the day the deceased died.

If the above requirements are not satisfied, the acquisition cost of the dwelling is the deceased's cost base and reduced cost base on the day the deceased died (item 1 of the table in subsection 128-15(4) of the ITAA 1997).

(b) Land within property A acquired before 20 September 1985 (pre-CGT)

Part of the land within property A which is currently held by the estate was acquired by the deceased before 20 September 1985. This pre-CGT land consists of the land within the property at the time of death of the deceased, excluding the interest in the property transmitted to the deceased by the notice of death.

Under item 4 of the table in subsection 128-15(4) of the ITAA 1997, the first element of the cost base or reduced cost base of the pre-CGT land within property A for the LPR or a beneficiary will be the market value of this land on the day the deceased died.

(c) Land within property A acquired after 19 September 1985 (post-CGT)

The post-CGT land consists of the interest in the land transmitted to the deceased by the notice of death.

Under item 1 of the table in subsection 128-15(4) of the ITAA 1997, the first element of the cost base or reduced cost base of the post-CGT land within property A for the LPR or a beneficiary will be the cost base or reduced cost base respectively of the land on the day the deceased died.

(d) Land within property B

This land was acquired by the deceased after 20 September 1985. Accordingly, under item 1 of the table in subsection 128-15(4) of the ITAA 1997, the first element of the cost base or reduced cost base of the land within property B for the LPR or a beneficiary will be the cost base or reduced cost base respectively of the land on the day the deceased died.

Effect of the deed on the cost bases and reduced cost bases

Under the deed the will of the deceased is to be varied, and several beneficiaries will acquire certain assets of the estate other than those to which they are entitled under the will.

In return for these assets, these beneficiaries will surrender other assets to which they are entitled to under the will, and make payments to the estate as provided for in the deed. It is considered that this obligation creates a 'testamentary option' or a right to purchase the property that forms part of the estate.

The donee of a testamentary option to purchase an interest in the property takes, on the testator's death, an immediate equitable interest in that property. By exercising the option they becomes obliged to perform the condition upon which, under the will, they becomes entitled to the property. The obligation is not contractual but equitable. By exercising the option they becomes absolutely entitled to acquire the property except insofar as the will makes payment of the price an essential condition.

The grant of the testamentary option and the subsequent purchase transaction are deemed to be a single transaction.

Exercise of this option by the beneficiaries and the transfer of the interests in the assets from the executor to the beneficiaries will constitute a change of ownership as discussed below for question 3.

The beneficiaries will be deemed to have acquired the interests in the assets from the executor of the estate under the testamentary options for their market values on the date that the deed is entered into.

Question 3

A CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the owner of the asset under the will of the deceased person or in one of the other ways outlined in section 128-20 of the ITAA 1997. If the CGT asset passes to a beneficiary in one of these ways, any capital gain or capital loss the LPR makes is disregarded under subsection 128-15(3) of the ITAA 1997.

In your case, the deed provides that several beneficiaries will receive certain CGT assets other than under the will of the deceased. These assets will also not pass to these beneficiaries under any of the other ways outlined in section 128-20 of the ITAA 1997. In particular, the deed of arrangement is not one where any consideration given by the beneficiaries for the assets consists only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

These beneficiaries will therefore receive any CGT assets, other than those received under the will of the deceased, as purchasers and not in the capacity of beneficiaries. CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen on the date that the deed is entered into in relation to each CGT asset acquired as purchaser by the beneficiaries.

As the deceased died on or after 20 September 1985, a capital gain may accrue to, or a capital loss may be incurred by:

(a) the LPR on disposing of the assets to the beneficiaries and

(b) the beneficiaries on any later disposal of the assets by the beneficiaries.

These beneficiaries will have two acquisition dates in relation to the assets that they will receive from the estate, being the date of death of the deceased for the assets which pass to these beneficiaries under the will, and the date on which the deed is entered into for the assets which do not pass to these beneficiaries under the will but which are disposed of to these beneficiaries under the deed.

CGT event C2

CGT event C2 under section 104-25 of the ITAA 1997 happens if your ownership of an intangible asset ends by the asset, among other things, being released, discharged or satisfied.

In your case, the result of the deed is the variation of the will of the deceased and does not result in the ending of any rights held by these beneficiaries, such as any rights to take action under family provision legislation.

CGT event C2 under section 104-25 of the ITAA 1997 will therefore not happen as a result of the deed.

Note

The main residence exemption and the small business CGT concessions might also apply in your circumstances. Further information in relation to these can be obtained from our website at www.ato.gov.au