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Subject: capital gains tax - deceased estate - disposal of inherited vacant land - disposal of ownership interest in inherited dwelling

Question 1: Will the capital gains tax provisions apply to any capital gain or capital loss made when you and the other beneficiaries dispose of your ownership interests in Property A?

Answer: Yes.

Question 2: Will the beneficiaries disposing of their ownership interest in Property B to the other beneficiary be liable for any capital gains tax?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your relative acquired some land prior to 20 September 1985, which was used for family holidays and hobby farming.

A number of years later, your relatives moved onto the land, and it became their main residence.

Your relative built a dwelling on the land for their child, being your parent, in which your family resided.

Your relative passed away prior to 20 September 1985 and bequeathed the land to your parent, Parent A.

A number of years later, Parent A subdivided the land and sold the majority of it over the following couple of decades, but retained Property A and Property B, which had the dwelling located on it.

Parent A passed away after 20 September 1985 and bequeathed Property A and Property B to your other parent, Parent B.

Parent B passed away a number of years later.

You and your siblings were named as the beneficiaries and trustees of Parent B's estate.

Parent B's will provided the following:

· Property A was bequeathed in equal shares to all of the beneficiaries;

· The majority of the land and dwelling of Property B was bequeathed to one beneficiary;

· The remaining land of Property B was bequeathed in equal shares to the remaining beneficiaries.

· Probate on Parent B's will has been granted.

The beneficiaries intend disposing of Property A, and following its disposal, the beneficiaries with the ownership in the portion of Property B will dispose of their ownership interests to the other beneficiary, resulting in that beneficiary having 100% ownership interest in Property B.

The beneficiary with the majority ownership interest in Property B has resided in the dwelling since prior to 20 September 1985, and continues to reside there until the present time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Disposal of ownership interests in Property A

Capital gains tax (CGT) is the tax you pay when a CGT event happens to a CGT asset such as property. The most common CGT event is CGT event A1, which occurs when the ownership interest in a CGT asset is disposed of to another entity.  

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. You make a capital loss if your reduced cost base is less than the capital proceeds received from the disposal of the CGT asset.

As a beneficiary, when you sell an inherited property, the normal CGT rules apply. You are taken to have acquired the property on the date of death of the deceased. If the deceased person acquired the property on or after 20 September 1985, the first element of your cost base and reduced cost base will be the deceased person's cost base and reduced cost base on the day the person passes away.

In this situation, you and your siblings inherited equal shares as beneficiaries in Property A in accordance with Parent B's will. Parent B had acquired their ownership interest in Property A when your other parent, Parent A, had passed away. Therefore, the first element of the cost base for each of the ownership interests held by you and your siblings in Property A will be the apportionment of Parent B's cost base of Property A on the date they passed between all of the beneficiaries.

You and the other beneficiaries intend disposing of your interests in Property A. Each beneficiary will make a capital gain if their share of the capital proceeds is greater than their share of the cost base. Each beneficiary will make a capital loss if their share of the reduced cost base is less than their share of the capital proceeds received for the disposal of their interest in Property A.

Disposal of ownership interests in Property B

A beneficiary of a deceased estate can disregard a capital gain or capital loss when a capital gains tax (CGT) event happens to a dwelling acquired by the deceased person on or after 20 September 1985, that was the deceased's main residence just before they died, and was not being used for income producing purposes, if the ownership interest of the beneficiary ends within two years of the deceased's death.

Alternatively, the exemption is available if the dwelling was, from the time of death until the ownership interest of the beneficiary ends, the main residence of:

· The spouse of the deceased at the time of the death; or

· Someone entitled to occupy the dwelling under the will.

If the full exemption for the beneficiaries of deceased estates does not apply, the beneficiaries may be entitled to a partial exemption.

The partial exemption is available if the taxpayer is an individual and the ownership in the dwelling has passed to the taxpayer as a beneficiary of a deceased estate.

Generally, the partial exemption is calculated by working out the number of non-residence days as compared to the total ownership days that are relevant for main residence exemption purposes.

The following formula is used to calculate the capital gain or capital loss:

Capital gain or      X   Non-main residence days

Capital loss Total days

In this situation, a number of Parent B's beneficiaries were bequeathed equal shares in a portion of the land associated with Property B, with the majority of the land and dwelling of Property B being bequeathed to one beneficiary. Following the disposal of Property A by all of the beneficiaries, it is the intention of the beneficiaries with the ownership interests in the smaller portion of Property B to dispose of those interests to the beneficiary with the majority ownership interest in Property B.

In this case, Parent B acquired Property B after 20 September 1985. The dwelling was Parent B's main residence before they passed away, and was not being used for income production. However, the ownership interests held by the beneficiaries in the smaller portion of Property B will not be disposed of within two years from the date Parent B passed away.

An individual would be considered to occupy a dwelling under the deceased's will if it was in accordance with the terms of the will. Given the facts, Parent B did not specify their will that the beneficiary residing in Property B, or any of the other beneficiaries, had a right to occupy Property B.

Therefore, as this situation does not meet the conditions outlined above, the beneficiaries disposing of the interest in Property B will not be entitled to a full exemption on any capital gain or capital loss made from the disposal of their ownership interests. However, the beneficiaries will be eligible for a partial exemption on the disposal of their ownership interest in Property B.

When applying the above formula to this situation to calculate any capital gain or capital loss made on the disposal of the beneficiaries share in Property B, the non-main residence days and the total days will be calculated as follows:

Non-main residence days are the number of days from the death of Parent B, until the settlement occurs on the disposal of the ownership interests in Property B.

Total days are the number of days from the date Property B acquired their ownership interest in Property B, being the date on which Parent A passed away, and the date the ownership interests in Property B ends.

Note: In calculating any capital gain or capital loss, the beneficiaries are taken to have acquired their ownership interest in Property B for their portion of the property's market value on the date Parent B passed away.