Edited version of your private ruling

Authorisation Number: 1012069916821

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Ruling

Subject: Capital gains tax - main residence

Questions and answers:

1. Are you entitled to disregard in full any capital gain or capital loss that occurs on transferring your ownership interest of your main residence to your spouse?

No.

2. Are you entitled to disregard in part any capital gain or capital loss that occurs on transferring your ownership interest of your main residence to your spouse?

Yes.

3. At a later date if your spouse transfers the property back to you is it subject to capital gains tax?

Question withdrawn by client.

4. As there will not be any money changing hands when the transfer takes place will it be deemed to be at the market value?

Yes.

5. Does the ATO require evidence of how you determined the market value?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

The deceased died after 20 September 1985.

The deceased owned a property acquired prior to September 1985 as a beneficiary of another deceased estate.

The property was valued at the date of their death.

It was stated in the will that life tenants were to have joint use of the property for their lifetimes.

The life tenants did not live in the property but stayed there occasionally.

On the death of the last life tenant the property was to be divided in varying proportions between the deceased's relatives alive at that time.

There were several beneficiaries including minors who were all residents of Australia.

You were a beneficiary and trustee of the deceased estate in which you acquired multiple shares in the property.

You and your spouse lived in the property for a number of years prior to the death of the deceased.

You were not living in the property when the deceased died; you moved out prior to the deceased's death and moved back in sometime after the death of the deceased,

Neither you nor your spouse elected to continue to call the property your main residence for the period you had moved out.

You subsequently acquired the balance of the interest in the property from the other beneficiaries.

You and your spouse currently hold the property as joint tenants. The joint tenancy began when you acquired the balance of the interests from the other beneficiaries.

You have not used the property to derive income in any way.

You and your spouse share ownership interests in other properties that you have acquired from other deceased estates.

Both you and your spouse will nominate this property as your main residence from when you moved back in after the deceased's death.

The total area of the property is less than 2 hectares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 116-10
Income Tax Assessment Act 1997 Section 118-110
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

Capital gains tax

Section 102-20 advises that you can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the event.

The most common CGT event is event A1.  Section 104-10 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else, whether by sale, by gift or by another form of disposal.

CGT event A1 will occur when you transfer your share of the property to your spouse. Unless an exemption applies, you will not be able to disregard any capital gain or capital loss that may result from this CGT event.

Main residence exemption
Division 118 contains various exemptions for many capital gains and capital losses. The exemption that applies to an individual's main residence begins at section 118-110.

Overall, the exemptions advise that if you are an individual you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To obtain the full exemption from CGT:

· you must be an individual;

· you must have moved in to the dwelling as soon as practicable after acquiring it;

· the dwelling must have been your home for the whole period you owned it;

· the size of the land on which the dwelling is situated must not exceed 2 hectares;

· you must not have used the dwelling to produce assessable income; and

· the interest must not have passed to you as a beneficiary in, and you must not have acquired it is a trustee of, the estate of a deceased person.

You acquired multiple shares of the property as a beneficiary of a deceased estate. Therefore, we need to determine if there are any exemptions available for these shares of the property under the CGT provisions that deal with assets acquired under deceased estates.

The balance of your interest in the property which you acquired from the other beneficiaries will be fully exempt as the requirements for the main residence exemption have been fulfilled:

- you are an individual

- the dwelling was your home at the time you acquired the balance and continues to be your home;

- you have not used the property to produce assessable income;

- the size of the land on which the dwelling is situated does not exceed 2 hectares;

- you did not acquire this portion of the property as a beneficiary in, and you did not acquire it is a trustee of, the estate of a deceased person.

Interests in dwellings acquired from deceased estates

Date of acquisition
Section 128-15 explains that the legal personal representative, or beneficiary, is taken to have acquired their interest in the asset on the date of death of the deceased. Therefore the date of acquisition for your inherited interests in the dwelling is the date of death of the deceased.

As you acquired the balance of the dwelling separately, you have two separate ownership interests in the property:

· the first is the shares in the property you acquired as a beneficiary under the deceased's will as at the date of death; and

- the second is your interest in the balance of the property which you acquired from the other beneficiaries.

Shares of the property acquired as a beneficiary
Section 118-195 says you can disregard a capital gain or capital loss you make from a CGT event that happens in relation to your ownership interest in a dwelling acquired from a deceased estate if:

(a)  you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

(b)  your ownership interest ends within 2 years of the deceased's death; or

(c) if the dwelling was from the deceased's death until your ownership interest ends, the main residence of one or more of:

(i) the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

(ii) an individual who had a right to occupy the dwelling under the deceased's will; or

(iii) if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary, that individual.

- Your ownership interest did not end within 2 years of the deceased's death.

- There was no spouse or any other individual living in the dwelling at the time of the deceased's death.

- The CGT event will be brought about by you when you transfer your ownership interest to your spouse however, the dwelling was not your main residence at the time of death of the deceased.

Therefore the exemption available under section 118-195 does not apply to the shares you acquired as a beneficiary.

Partial exemption for deceased estate dwellings
Section 118-200 offers a partial exemption in these cases where you are an individual and you acquire an ownership interest in a dwelling as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate and section 118-195 does not apply. It explains that you calculate your capital gain or capital loss using the following formula:

Where:

Capital gain or capital loss amount is the capital gain or capital loss you would have made from the CGT event apart from this Subdivision.

non-main residence days is the sum of the number of days from the death of the deceased until your ownership interest ends when the dwelling was not the main residence of an individual referred to under section 118-195 as outlined above.

total days is the number of days in the period from the death until your ownership interest ends.

Your non-main residence days for the shares of the property acquired under the deceased's will would therefore be the number of days that you were not living in the house from date of death until you moved back in to the property. (That is, if you continue to live in the property until the CGT event occurs when you transfer your ownership of these two shares of the property to your spouse.)

Your total days for the shares of the property acquired under the deceased's will would be the number of days from the date of death until the CGT event occurs when you transfer your ownership of these two shares to your spouse.

Calculating the cost base for these two shares
Subsection 128-15(4) explains how the cost base is calculated for assets acquired from a deceased estate.

Item 4 in the table says that if the deceased acquired the asset prior to 20 September 1985, the first element of the asset's cost base in the hands of the beneficiary will be the market value of the asset on the date of death of the deceased.

The market value of the property was determined at the date of death. You were one of a number of beneficiaries and you acquired multiple shares of the property. You will need to ascertain the value of your shares by dividing the total value between the total amount of shares by which the property was bequeathed to the beneficiaries.

This will be the first element of your cost base for the shares acquired under the will of the deceased.

Capital proceeds and market value substitution
Division 116 explains how to work out your capital proceeds resulting from a CGT event taking place. The capital proceeds received as the result of a CGT event taking place are included the first element of the cost base for that asset.

Section 116-10 contains the modification rules relating to capital proceeds in the event that:

(a) you receive no capital proceeds from a CGT event; or

(b) some or all of the capital proceeds cannot be valued; or

(c) you did not deal at arm's length with another entity in connection with the event.

Parties are generally at arm's length if they are unrelated and neither party is effectively controlled by the other. In an arm's length situation, each party normally stands upon its rights and conducts the business in a formal manner without trusting the other's control or overmastering influence.

Because you will not be receiving any capital proceeds from the transfer of your ownership interest in the property to your spouse, you will need to determine the market value as at the date of transfer to be your capital proceeds resulting from the CGT event.

The concept of market value is not defined in the CGT provisions, or elsewhere in the ITAA 1997. In this regard the Commissioner concurs with the principles used by business valuers in Australia, who define market value as:

the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length.

In determining the market value of an asset, a market valuation may be undertaken by a:

- registered valuer member of a recognised professional valuation body

- director, for balance sheet purposes, or

- person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data.

For example, you may carry out your own valuation but you must be able to provide adequate records to explain the basis of that market value. These records should contain sufficient detail to enable the valuation process to be replicated. You may approach several real estate agents that deal with property in the area in which your property is located. They may provide their opinion on the value of the property at that time.

To provide guidance on the ATO's expectations in relation to valuations for tax purposes, we have released a publication titled Market valuation for tax purposes. This is available on our website www.ato.gov.au.

Conclusion

You have two separate ownership interests in the property: the shares inherited from the deceased estate and the balance of the property acquired from the other beneficiaries.

The shares you inherited will be partially exempt from any capital gain or capital loss you make when you transfer your ownership interest of the property to your spouse.

You will need to use the formula contained in section 118-200 to calculate this partial exemption.

As you will not be receiving any capital proceeds from the transfer, you will need to determine the market value of the property at the date of transfer to include in the first element of your cost base.

You are able to disregard any capital gain or capital loss made from the transfer of your ownership interest to your spouse on the balance of the property that you acquired from the remaining beneficiaries.