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Ruling

Subject: Capital gains tax - sale of property inherited from a deceased estate

Question

Will the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in relation to the sale of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your parent purchased a property consisting of a residential suburban block, before 20 September 1985.

Your parent died after 20 September 1985 and before 21 September 1999, bequeathing the property to you and another beneficiary as equal beneficiaries.

Prior to death, your parent had remarried and as a result their new spouse was given life tenancy after their death under some conditions. She voluntarily relinquished the life tenancy a number of years later.

After the ensuing legal process, you and your sister were finally granted the property, unencumbered.

During the period between relinquishment and completion of the legal process, the property remained empty and you and the other beneficiary were liable for insurance, rates and maintenance.

The property was subsequently sold.

The property was your parent's main and only residence for the whole period from purchase until their death. The property was not used to produce any income during this period. The property was also not used to produce income for the period following your parent's death to the relinquishment of the life tenancy.

You have not, or believe that you are entitled to claim a deduction for the rates and insurance which you paid in relation to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 128-15

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

The sale of your interest in the property will be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997. Your interest in the property will be the relevant CGT asset in this case.

A capital gain or capital loss can only arise if a CGT event happens. CGT is the tax you pay on any capital gain you include on your income tax return.

A beneficiary of a deceased estate will be the relevant taxpayer if a CGT event happens to an asset after it has passed to the beneficiary under the will of the deceased. In your case, your interest in the property passed to you under your parent's will. You will therefore be the relevant taxpayer if a CGT event happens to your interest in the property after this time.

CGT event A1

In your case, CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened when your interest in the property was sold. The time of the event is:

· when you entered into the contract for the disposal or

· if there was no contract - when the change of ownership occurred.

You will make a capital gain if the capital proceeds from the disposal of your interest are more than the cost base of the interest. You will make a capital loss if those capital proceeds are less than the reduced cost base of the interest.

In your case, as your parent acquired the property before 20 September 1985, the first element of your cost base or reduced cost base (that is, the amount taken to have been paid for your interest in the property) will be the market value of your interest in the property on the day that your parent died.

The third element of the cost base relating to the costs of owning your interest in the property will include the proportion of the rates and insurance premiums which relate to your interest in the property. You can not index these costs or use them to work out a capital loss.

Main residence exemption

If you inherit a deceased person's dwelling, you may be exempt or partially exempt under the main residence exemption when a CGT event happens to it.

As your parent died on or after 20 September 1985, and acquired the dwelling before 20 September 1985, you will be able to disregard any capital gain or capital loss in your case from the disposal of your interest in the dwelling if, from the day that your parent died until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of your parent's new spouse. The dwelling can be the main residence of your parent's new spouse even though she stopped living in it if she chose to treat it as her main residence after that time.

In your case, you do not appear to qualify for a full exemption from CGT for the dwelling for the period from when your parent's new spouse stopped living in the dwelling to the time of the disposal of your ownership interest in the dwelling.

You will therefore calculate your capital gain or capital loss as follows:

Capital gain or x non-main residence days

capital loss amount total days

'Non-main residence days' is the number of days that the dwelling was not the main residence of your parent's new spouse in the period from the death of your parent until settlement of your contract for sale of the dwelling.

'Total days' is the number of days from the death of your parent until you disposed of your ownership interest.

Calculating your net capital gain

You will need to calculate your net capital gain as follows:

Your total capital gains for the year (including any capital gain remaining from the disposal of your interest in the property after applying any main residence exemption)

less

Your total capital losses for the year and any unapplied net capital losses from earlier income years

less

Any CGT discount* to which you are entitled

*As you acquired your interest in the property at least 12 months before the CGT event (you are taken to have acquired your interest in the property on the day your parent died), the CGT discount allows you to reduce the capital gain by a discount percentage of 50%. As your parent died before 21 September 1999, you can also use the indexation method to calculate your capital gain.

You will need to include any net capital gain in your income tax return for the income year. You will be taxed on your net capital gain at your marginal tax rate as CGT.

Note

Further information in relation to CGT can be obtained from our publication Guide to Capital Gains Tax 2010-11 which is available on our website at www.ato.gov.au