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Ruling
Subject: Decease estate
Question and answer
Does a pre-CGT asset which has been inherited, maintain its pre-CGT status when sold by you the beneficiary?
No
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
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.
Two properties were purchased before 20 September 1985
The owner passed away after 20 September 1985.
The properties were transferred to a deceased estate in trust for administration and distribution to the children (beneficiaries) of the deceased.
Whilst in trust, one of the properties was leased to a tenant, the rental income of which became income of the trust estate, and was distributed to the beneficiaries annually.
In the financial year ended 30 June 2011, both properties were sold at a capital gain.
Reasons for decision
You have presented an argument that Division 149 operates in such a way that the properties the deceased acquired pre-CGT should remain pre-CGT assets after they passed to the executor of the estate.
Overview of Div 149
Division 149 of the ITAA 1997 contains the rules which determine when an asset that has been acquired before 20 September 1985 (referred to as a pre-CGT asset), is considered to have been acquired after that date.
This happens when the 'majority underlying interests' in the asset were not held by the same 'ultimate owners' who held those interests in the asset immediately before
20 September 1985.
When an asset stops being a pre-CGT asset, the first element of its cost base and reduced cost base is its market value at the time when it becomes a post-CGT asset.
Subdivision 149A - Key concepts
The key concepts are explained in Subdivision 149-A of the ITAA 1997.
A CGT asset that an entity owns is a pre-CGT asset if, and only if:
(a) the entity last acquired the asset before 20 September 1985; and
(b) the entity was not, immediately before the start of the 1998-99 income year, taken (under subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision C of Division 20 of Part IIIA of the ITAA 1936 to have acquired the asset on or after 20 September 1985; and
(c) the asset has not stopped being a pre-CGT asset of the entity because of Division 149 of the ITAA 1997.
Majority underlying interests in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and in any ordinary income that may be derived from the asset.
An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.
An ultimate owner is:
(a) an individual; or
(b) a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or
(c) the Commonwealth, a State or a Territory; or
(d) a municipal corporation; or
(e) a local governing body; or
(f) the government of a foreign country, or of part of a foreign country.
An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:
(a) the other entity were to distribute any of its capital; and
(b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.
Subdivision 149B - When asset of non-public entity stops being a pre-CGT asset
The section also provides that Subdivision 149-B only applies to entities which are not public entities. ``Public entity'' is defined in sec 149-50 and includes public companies, publicly-traded unit trusts and mutual insurance organisations.
Non-public entities typically include non-listed companies limited by shares, discretionary trusts, and unit trusts which are not publicly-traded.
An ultimate owner is defined to indirectly have a beneficial interest in a CGT asset of another entity (that is not an ultimate owner).
1. The pre-CGT asset in question was directly owned the original ultimate owner who was an individual.
2. The asset was then inherited into the direct ownership of the beneficiary who is an individual.
Simply stated, the Division 149 provisions target an individual's interest in an asset which is held through shares, units or like fungible interests. An asset could be held by the likes of a company that would allow for the continuous legal ownership of an asset the direct owner (the company), with the interest in the company's shares, not the interest in the company's asset, passing on of the death of the ultimate owner to the beneficiary.
Direct ownership from an individual, to a deceased estate is excluded from consideration. Therefore, the provisions of Division 149 can not be applied to your circumstances as there is a change of legal ownership of the asset from an individual to a new entity.
Date of acquisition of a CGT asset
Where a deceased's date of death is after 19 September 1985, all assets are post-CGT assets as they are treated as being acquired on the date of death (section 128-15(2) of the ITAA 1997). Whether a capital gains tax liability results depends on the operation of the normal rules on calculation of a net capital gain.