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Ruling
Subject: the cost base of the property the market value of the property when ownership is transferred
Questions and answers:
1. Is the cost base of the property the market value of the property when ownership was transferred to you?
Yes.
2. Is the cost base of the property the market value of the property when you acquired the right to dispose of the property?
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You are an Australian resident for income tax purposes.
Your mother and father lived in country A.
After September 19XX your father entered into a contract to gift you his main residence situated in country A.
The gifting of his main residence to you was subject to a life interest for your father and mother.
Your mother passed away followed by your father.
The property that was gifted to you remained the main residence of your father until he passed away.
You sold the property a number of years later.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109-5.
Income Tax Assessment Act 1997 Subsection 109-5(2).
Income Tax Assessment Act 1936 Subsection 110-25(2).
Income Tax Assessment Act 1997 Subsection 110-55(2)
Income Tax Assessment Act 1936 SubsSection112-20(1)
Reasons for decision
The rules relating to the acquisition date for CGT assets is governed by section 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 109-5(1) of the ITAA 1997 provides that, in general, you acquire a CGT asset when you become its owner. However the table at subsection 109-5(2) of the ITAA 1997 sets out specific rules that apply when a CGT asset is acquired as a result of certain CGT event happening.
Your father entered into a contract to dispose of his main residence to you. Pursuant to the contract, your father nominated himself and his spouse as life tenants and you as the owner of the property.
You acquired your fathers residence as a result of a CGT event A1 (concerning disposals of CGT assets) happening to your father ownership interests. In this circumstance the table at subsection 109-5(2) of the ITAA 1997 provides that you are taken to have acquired the asset when the disposal contract was entered into. Therefore the contract date is the date that you acquired your father's residence for CGT purposes.
Effect of the determination of the life estate
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, discusses the Commissioners view on the consequences to a remainder owner when a life interest ends.
Paragraph 103 states:
103. The death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner, their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset (now a fee simple interest unencumbered by the life interest).
Paragraph 26 states:
26. If, as is generally the case, no money or property is given to acquire an equitable life or remainder interest, section 112-20 provides that the first element of the cost base and reduced cost base of the interest is its market value at the time it was acquired.
Market Substitution rule (Cost base)
Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it: subsections 110-25(2) and 110-55(2) of the ITAA 1997. The general rules may be modified if the market value substitution rule in section 112-20 of the ITAA 1997 applies.
The market value substitution rule will apply if you did not incur any expenditure to acquire a CGT asset 112-20(1)(a) of the ITAA 1997.
The first element of your cost base will be calculated using the market value substitution rule because the property was gifted to you (you did not incur any expenditure to acquire it).
Therefore, the first element of the cost base of the property will be the market value of the property at the time that you received ownership of the property.