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Edited version of your private ruling
Authorisation Number: 1011977015201
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Ruling
Subject: Capital gains tax on deceased estate
1. Is capital gains tax payable on the disposal of property by the estate of the deceased?
No.
2. Is capital gains tax payable on the disposal of property by the beneficiaries of the deceased
Yes.
3. Is the cost base of the property, for calculating the capital gains tax, the value of the property on the day of the deceased death?
Yes.
This ruling applies for the following period
1 July 2011 to 30 June 2012
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.
Prior 20 September 1985 the deceased (a non-resident of Australia) purchased a property in Australia.
On xx xx xx settlement of purchase occurred on the property.
The deceased never lived in the property and purchased it for the sole purpose of providing a residence for certain relatives who resided in Australia.
On xx xx xx the deceased granted a life tenancy of the property to their relatives.
On xx xx xx the deceased passed away.
On xx xx xx the deceased's relative passed away.
On xx xx xx the deceased's other relative passed away.
The beneficiaries of the property were children of the deceased and who are non-residents of Australia.
More than 2 years after the deceased's death the property was sold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 110-55
Income Tax Assessment Act 1997 Section 112-15
Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 subsection 128-15(4)
Reason for Decision
A capital gain or capital loss is made if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset is any kind of property, or legal or equitable right that is not property.
Exemptions
The most common CGT event is CGT event A1, the disposal of an asset. However, there are a number of exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss made as a result of a CGT event is disregarded, either in full or in part.
One such exemption relates to the passing of the asset from the legal personal representative to the beneficiaries. A second relates to the disposal of a dwelling acquired due to being a beneficiary of a deceased estate.
Section 118-195 of the ITAA 1997 outlines the conditions under which a capital gain or capital loss can be disregarded in this situation.
Where a deceased acquired a dwelling before 20 September 1985, section 118-195 of the ITAA 1997 provides that a capital gain or capital loss can be disregarded when:
(1) you disposed of your ownership interest within two years of the
deceased's death, or
(2) if you did not dispose of your ownership interest within two years, the
dwelling was, from the deceased's death until your ownership interest
ended, the main residence of one or more of:
(a) The deceased's spouse at the time of their death (except a spouse who was living permanently separately and apart from the deceased); or
(b) an individual who had a right to occupy the dwelling under the deceased's will.
(c) an individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.
Application to the circumstances
On xx xx xx the deceased passed away and on xx xx xx the property was sold by the beneficiaries; option 1 has not been met because the property was not sold within two years of the deceased passing.
The deceased and spouse were non-residents of Australia; option 2 point (a) has not been met because from the deceased's death until the beneficiary's ownership interest ended the property was not the main residence of the deceased's spouse.
On xx xx xx the deceased signed a deed providing the relatives life tenancy of the property. The deceased did not make provision for the life tenancy in their Will and therefore point (b) has not been met.
The deceased's beneficiaries are non-residents of Australia; point (c) has not been met the property was not the main residence of any of the beneficiaries.
Therefore; the beneficiaries will be liable for any capital gain or loss made when the property was sold.
Life interest
On xx xx xx the deceased granted a life tenancy of the property to the relatives.
Under Taxation Ruling TR 2006/14, paragraphs 102 and 103;
On the death of the life interest owner, CGT C1 in section 104-20 of the ITAA 1997 happens and it is disregarded under section 128-10 of the ITAA 1997.
The death of the life owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner.
Consequently, for the purpose of calculating a capital gain or a capital loss, the cost base is not changed.
Cost base
Under sections 110-25 and 110-55 of the ITAA 1997, the cost base and reduced cost base of an asset is made up of 5 elements. Briefly these are;
1. Money or property given for the asset.
2. Incidental costs of acquiring, selling the asset or that relate to the CGT event.
3. Costs of owning the asset
4. Capital costs to increase or preserve the value of your asset or to install or move it.
5. Capital costs to preserving or defending your ownership of or rights to your asset.
The first element is the money or property given for the asset and as beneficiaries, of the estate, did not pay anything for the asset we need to consider whether there are any modifications which may be relevant.
Under section 112-15 if a cost base modification replaces an element of the cost of a CGT asset with an amount it is as if you have paid that amount.
Therefore; under section 128-15(4) if the deceased person acquired their asset before
20 September 1985, the first element of the beneficiaries cost base or reduced cost base is the market value of the asset on the day the person died.