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Ruling

Subject: Capital gains tax implications on sale of property

Question 1

Are you entitled to disregard any capital gain made on disposal of the dwelling (and adjacent 2 hectares of land) located on the property, up until the date of the deceased's spouse's death, due to the main residence capital gains tax (CGT) exemption?

Answer:

Yes

Question 2

Are you entitled to disregard any capital gain made on disposal of the dwelling (and adjacent 2 hectares of land) located on the farming property, from the date of the deceased's spouse's death until the date the property was sold, due to the main residence CGT exemption?

Answer:

No

Question 3

Are you entitled to fully disregard the capital gain made on disposal of the remaining property by utilising the CGT small business 15-year exemption concession?

Answer:

No

Question 4

Are you entitled to reduce the capital gain made on the sale of the remaining property by utilising the CGT small business 50% active asset reduction concession?

Answer:

No

Question 5

Are you entitled to reduce any capital gain made on disposal of the remaining property by utilising the 50% CGT discount?

Answer:

Yes

Question 6

Is the first element of the cost base of the remaining property the market value of the property at the date of the deceased's death?

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

The deceased purchased a property prior to 1985.

The deceased passed away in the 1980's.

The title of the property devolved to the deceased's estate, of which the children of the deceased are all beneficiaries. The estate was the owner of the property until it was sold.

The estate did not use the property in a business, instead the property was leased to an unrelated 3^rd party, and the trust earned leasing income from the arrangement.

There was a dwelling on the property that has been the main residence of the deceased and their spouse since it was acquired. On the death of the deceased, their spouse continued to live in the dwelling until moving into a nursing home. The spouse passed away in the 2000's.

The dwelling, and the 2 hectares surrounding the dwelling, was never used to produce income.

There was no significant individual or the trust for the period of the ownership of the property. The remaining beneficiaries of the trust are not over 55, and the disposal of the property did not happen in connection with their retirement.

The estate sold the property in the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 118-200

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-120

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Subsection 152-10(1A)

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Subsection 128-15(4)

Reasons for decision

Detailed reasoning

Death and the main residence exemption

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if the deceased died on or after 20 September 1985 but, had acquired the dwelling before 20 September 1985 and you have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate, or you have owned it as trustee of a deceased estate, you disregard any capital gain or capital loss you make from a capital gains tax (CGT) event that happens to the dwelling if either of the following applies:

You disposed of your ownership interest within two years of the person's death, or

From the deceased's death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

· a person who was the spouse of the deceased immediately before the deceased's death (but not a spouse who was permanently separated from the deceased)

· an individual who had a right to occupy the home under the deceased's will

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

Section 118-200 of the ITAA 1997 provides that if you do not qualify for a full exemption from CGT for the home, you may be entitled to a part exemption.

For a partial exemption, you calculate your capital gain or capital loss as follows:

'Non-main residence days' is the number of days that the dwelling was not the main residence.

If the deceased acquired the dwelling before 20 September 1985, non-main residence days are the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not the main residence of one of the following:

· a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)

· an individual who had a right to occupy the dwelling under the deceased's will, or

· you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

'Total days' (if the deceased acquired their ownership interest before 20 September 1985) is the number of days from their death until you disposed of your ownership interest.

Section 118-145 of the ITAA 1997 provides that the main residence of an individual can continue to be regarded as the main residence of the individual despite the fact that the individual no longer lives in it. If the dwelling is not used to produce income (for example, you leave it vacant, or use it as a holiday home) you can treat the dwelling as the main residence for an unlimited period. If the dwelling is used to produce income (for example, you rent it out or it is available for rent) you can choose to treat it as your main residence for up to six years after you cease living in it.

Section 118-120 of the ITAA 1997 provides that the land adjacent to a dwelling is also exempt if:

· during the period you owned it, the land is used mainly for private and domestic purposes in association with the dwelling, and

· the total area of the land around the dwelling, including the land on which it stands, is not greater than 2 hectares. If the land used for private purposes is greater than 2 hectares, you can choose which 2 hectares are exempt but the land you choose must include the land on which the dwelling is built.

Any part of the land around a dwelling used to produce income is not exempt, even if the total land is less than 2 hectares. However, the dwelling and any buildings and other land used in association with it remain exempt if you do not use them to produce income.

In your case, on the death of the deceased, the title of the property (and main residence) devolved to their estate. The deceased's spouse continued to reside in the main residence until they moved to a retirement home and subsequently passed away. Therefore, the dwelling (and up to 2 hectares of adjacent land not used to produce assessable income) is considered the main residence of deceased's spouse from the date of the deceased's death until the date of the deceased's spouse's death.

Beneficiary and the main residence exemption

In this situation, a beneficiary can not utilise the main residence exemption from the date of the deceased's spouse's death until the date the property was sold as the beneficiary was not the owner of the property and did not dispose of the dwelling as a beneficiary. The dwelling was disposed of by the trust.

Accordingly, the main residence exemption will only be available up until the date of the deceased's spouse's death. You will be entitled to a partial exemption on any capital gain made on disposal of the dwelling (and up to 2 hectares of adjacent land not used to produce assessable income) as calculated above.

Death and the small business CGT concessions for the remaining property

The legal personal representative (LPR) or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

· the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), and

· the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death.

Provided these conditions are satisfied, the CGT small concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant.

However, if the asset in question is not disposed of within the two-year time limit, the conditions for the small business concessions must be satisfied by the new owner.

If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee in relation to any capital gain made on a sale of the assets after the two-year time limit (or such further time that the Commissioner allows). This means that if the transferee does not continue to carry on the deceased's business, or use the asset in another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.

In your case, the asset was not disposed of within two years of the date of the deceased's death. Accordingly, the trust will need to satisfy the conditions necessary to access the small business CGT concessions.

Small business CGT concession eligibility and the active asset test

Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:

· a CGT event happens in relation to a CGT asset in an income year.

· the event would have resulted in the gain

· at least one of the following applies:

· you are a small business entity for the income year

· you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

· you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

· the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

· the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. However, an asset whose main use is to derive rent, can not be an active asset.

In your case, the property devolved to the estate on the date of the deceased's death. The property was leased to an unrelated 3^rd party to use in a business until it was sold.

Accordingly, as the main use of the property was to derive rent (or lease income), the property can not be an active asset. Therefore, you do not meet the basic conditions necessary to access the small business CGT concessions and you are not entitled to apply the 50% active asset reduction concession to the remainder of the property (that part that is not included in the main residence exemption).

15-year exemption

As the asset was not disposed of within two years of the date of death of deceased, the trust will need to satisfy the conditions necessary to access the 15-year exemption.

Section 152-110 of the ITAA 1997 provides that a trust can disregard any capital gain made on the disposal of an asset if all of the following conditions are satisfied:

· you satisfy the basic conditions

· you continuously owned the CGT asset for the 15-year period ending just before the CGT event

· you had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and

· the individual who was a significant individual just before the CGT event was

· at least 55 years old at that time and the event happened in connection with their retirement, or

· permanently incapacitated at that time.

In your case, as you do not satisfy the basic conditions necessary to access the small business CGT concessions, you do not meet the necessary conditions to access the small business CGT 15-year exemption concession. Accordingly, you are not entitled to fully disregard any capital gain made on disposal of the remainder of the property.

50% CGT discount

Section 115-10 of the ITAA 1997 provides that a discount capital gain can be made by a trust. A 50% discount may be applied to a discount capital gain realised by a trust where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

In your case, the trust has held the asset for longer than 12 months, accordingly, you may be entitled to apply the 50% discount to the capital gain made on the sale of the remainder of the property.

Death and the cost base of a CGT asset

In situations where a beneficiary (or LPR) of a deceased estate does not dispose of their ownership interest in the CGT asset within two years of the date of death, the beneficiary (or LPR) will be assessed on any capital gain made on the disposal of the CGT asset.

You make a capital gain from the disposal of an asset if the amount of money you received on the disposal was more than the cost base of the asset.

Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base;

· money paid, or market value of property given, to acquire the asset

· incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset

· certain non-capital costs of ownership

· capital expenditure on improvements

· capital expenditure in respect of title or right to the asset

Section 110-35 of the ITAA 1997 provides that incidental costs include remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser.

Subsection 128-15(4) of the ITAA 1997 explains modifications to the cost base of CGT assets for LPR's or beneficiaries of deceased estates. It provides that if the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the person died. However, if a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died.

Accordingly, as the deceased acquired the property in question prior to 20 September 1985, the first element of the cost base of the asset is the market value of the asset on the date of the deceased's death.