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Ruling

Subject: Capital gains tax

Questions and answers:

1. Does the estate have a capital gains tax liability as a result of the sale of the property in the 2009-10 income year?

Yes

2. Will section 170 of the Income Tax Assessment Act 1936 apply to deny the amendment of the 2007-08 income tax return in respect of the transfer of half of the property to the children of Mr X where the property continued to be held as joint tenants after divorce?

Yes

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2010

The scheme commences on:

1 July 2007

Relevant facts and circumstances

Mr and Mrs X acquired a property prior to 20 September 1985 as joint tenants.

Several years later, still prior to 20 September 1985, Mr and Mrs X began divorce proceedings.

A court order was made on date A, prior to September 1985, by the Family Court ordering the property to be sold within 90 days of the date of the Court Order, and that the proceeds from the sale of the property were to be divided equally between Mr and Mrs X.

Mrs X failed to vacate the property.

After 20 September 1985, a subsequent Court Order was made by the Family Court of Australia compelling Mrs X to vacate the property.

Mrs X failed to comply with the Court Order and continued to live in the property.

The property was not sold as required by the original Court Order.

On date B in the 1996-97 income year, Mrs X died intestate.

The property was rented out between 1997 and 2009.

Mr X and Mrs X remained registered on the Certificate of title as joint proprietors even though it was the understanding of Mr X and the children that the property was held as tenants in common from the time the Court Order was made on date A.

On date C in the 2007-08 income year Letters of Administration for the estate of Mrs X were granted to the children. The Letter of Administration included Mrs X's 50% interest in the property.

On date D in the 2007-08 income year, the solicitor acting for the estate of Mrs X was instructed by the Registrar of Titles to prepare a survivorship application and a subsequent transfer of Mrs X's 50% interest in the property to the children. The survivorship application and transfer of the 50% interest were effected simultaneously.

No capital gain was included in Mr X's 2007-08 income tax return in relation to the transfer of Mrs X's 50% interest in the property.

Mr X's 2007-08 notice of assessment issued on date E in the 2008-09 income year.

The property was sold in the 2009-10 income year for a gain.

No capital gain was included in Mr X's 2019-10 income tax return in relation to the disposal of his 50% interest in the property as it was considered his interest was a pre CGT asset.

Mr X's 2009-10 notice of assessment issued on date F in the 20XX-XXincome year.

Mr X did not carry on a business, was not a partner in a partnership, did not receive any trust distributions and did not enter into or carry out any scheme for the sole or dominant purpose of obtaining a scheme benefit.

Mr X died in the 20XX-XXincome year.

The trustee for Mr X's estate is of the opinion that there was no fraud or evasion as a result of not declaring any capital gain in Mr X's 2007-08 tax return as a result of the transfer of a 50% interest in the property as;

· Mr X and the children always thought that as a result of the Court order on date A, the joint tenancy was severed and the property was owned by Mr X and Mrs X as tenants in common and not as joint tenants.

· The solicitor acting for Mrs X's estate firmly believed that the 50% disposal to the children on date D in the 2007-08 income year was their mother's 50% interest which was thought to be a pre CGT asset. This was also the belief held by Mr X and the children.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section .128-15.

Income Tax Assessment Act 1997 Section 128-50.

Income Tax Assessment Act 1936 Subsection 170(1).

Reasons for decision

1. Does the estate have a liability as a result of the sale of the property?

You can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

A capital gain or capital loss is disregarded if you acquire an asset before 20 September 1985.

CGT event A1 happens when you dispose of a CGT asset to someone else (section 104-10 of the ITAA 1997). Land and buildings are CGT assets. An interest in an asset is also treated as a CGT asset

Ownership interest

You have an ownership interest in a property if:

· you have a legal or equitable interest in the land which the dwelling is erected upon; and

· you have a right or licence to occupy the dwelling.

Joint tenants

For CGT purposes, if you are a joint tenant, you are treated as if you are a tenant in common owning equal shares in the asset.

Mr X and Mrs X purchased a property (dwelling) as joint tenants prior to 20 September 1985. Thus they each had a 50% interest in the dwelling. Each interest is a separate asset.

In absence to the contrary, property is considered to be owned by person(s) registered on the title.

Mr X and Mrs X began divorce proceedings. On date A which was before 20 September 1985, a Court Order was made by the Family Court ordering the property be sold and the proceeds be divided equally between Mr X and Mrs X.

As the sale of the property did not go ahead, the title of the property remained unchanged. The property continued to be held by Mr X and Mrs X as joint tenants until Mrs X's death on date B.

Death of a joint tenant

If a CGT asset is owned by joint tenants and one of them dies the survivor is taken to have acquired (on the day the individual died) the individual's interest in the asset under subsection 128-50(1) of the ITAA 1997.

Regardless of the actual date that legal title in the asset passes to the survivor, for CGT purposes the survivor is considered to have acquired the property in question on the date of the deceased's death (section 128-15 of the ITAA 1997).

As Mrs X died on date B which was after 20 September 1985, Mr X was taken to have acquired her 50% ownership interest on that date. As the death occurred after 20 September 1985, Mr X acquired a post CGT asset and thus held two interests in the property, a 50% pre CGT interest and a 50% post CGT interest. He owned 100% of the property which consisted of a pre CGT component and a post CGT component.

Transfer to children of 50% interest

On date D in the 2007-08 income year Mr X transferred a 50% interest in the property to the children. CGT event A1 happened on that date as Mr X made a disposal. As he owned 100% of the property prior to transfer consisting of 50% pre CGT interest and 50% post CGT interest, the 50% share which he transferred also consisted of a 50% pre CGT interest and a 50% post CGT interest. Thus Mr X made a capital gain or capital loss at the time of transfer to be included in his 2007-08 income tax return.

Sale of property

The property was sold in the 2009-10 income year. On the date of sale Mr X disposed of his 50% interest in the property which consisted of a pre CGT and a post CGT component. A capital gain resulted from the sale.

As Mr X died in the 20XX-XXincome year, his estate will have the liability as a result of amending Mr X's 2009-10 tax return to include the capital gain. His 2009-10 notice of assessment issued on date F and thus the amendment will be within the specified 2 year time limit (explained below).

2.Will section 170 of the Income Tax Assessment Act 1936 apply to deny the amendment of the 2008 income tax return?

The Commissioner has extensive powers to amend assessments under subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936). There is generally a two-year limit on amending assessments for most taxpayers Item 1 of subsection 170(1) of the ITAA 1936). Where there has been fraud or evasion, the Commissioner may amend an assessment at any time (Item 5 of subsection 170(1) of the ITAA 1936).

Item 1 of subsection 170(1) of the ITAA 1936 provides a two year limit for the Commissioner to amend the assessment of an individual where the individual has not carried on a business, was not a partner in a partnership, did not receive trust distributions, or has not entered into or carried out any scheme for the sole or dominant purpose of obtaining a scheme benefit. The two year period starts from the date of issue of the notice of assessment.

In Mr X's case, he did not carry on a business, was not a partner in a partnership, did not receive any trust distributions and did not enter into or carry out any scheme for the sole or dominant purpose of obtaining a scheme benefit. Thus the two year amendment limit applies to him. As Mr X's 2007-08 notice of assessment issued on date E, the two year time limit to amend his 2007-08 return has expired and thus the Commissioner cannot amend the 2008 return under Item 1 of subsection 170(1) of the ITAA 1936.

We also need to consider if there has been fraud or evasion. As mentioned above, where there has been fraud or evasion, no time limit applies for when the Commissioner may amend an assessment. In this case it is considered that there has not been any fraud or evasion as:

· Mr X and the children always thought that as a result of the Court order on date A which was before 20 September 1985, the joint tenancy was severed and the property was owned by Mr X and Mrs X as tenants in common and not as joint tenants.

· The solicitor acting for Mrs X's estate firmly believed that the 50% disposal to the children on date D in the 2007-08 income year was their mother's 50% interest which was thought to be a pre CGT asset. This was also the belief held by Mr X and the children.

As there has been no fraud or evasion and Mr X satisfies the requirements to amend only within a two year time limit, the Commissioner cannot amend Mr X's 2007-08 return to include the capital gain made on the transfer of the 50% interest in the property to the children.