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Ruling
Subject: Cost base of property for capital gains tax purposes
Question:
Is the cost base of the property its market value on the death of the legal life tenant?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
Some time after 20 September 1985, your parent advised their children, including you, that they wished to transfer ownership of their home (herein referred to as the property) to them to protect the asset from any possible future legal proceedings.
The condition of the transfer of the title was that they retained the right to live in the property for the remainder of their life and that no rent was payable for the entire period of their life tenancy.
A contract to transfer ownership to the children was drawn up and a caveat was lodged to protect your parent's life tenancy interest.
Your parent retained responsibility for payment of all utilities associated with the property with the exception of council rates and water charges. Your parent was also responsible for the general maintenance and upkeep of the property for the period of their life tenancy.
Your parent continued to reside in the property until their death some years later.
The property was sold by the children in the 2010-11 income year.
Over the time of your parent's life tenancy, none of the parties listed as owners on the title deed had the right to occupy, sell or otherwise enjoy and of the benefits usually associated with ownership of a property.
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 112-30,
Income Tax Assessment Act 1997 Subsection 112-30(2),
Income Tax Assessment Act 1997 Subsection 112-30(3) ,
Income Tax Assessment Act 1997 Subsection 112-30(4) and
Income Tax Assessment Act 1997 Section 116-30.
Reasons for decision
Taxation Ruling TR 2006/14 considers the taxation consequences of creating life and remainder interests in property and of later events affecting those interests.
Paragraph 85 of TR 2006/14 states that bringing a legal life interest into existence involves a disposal of part of an existing capital gains tax (CGT) asset in a similar way to the disposal of a percentage interest in it. The part of the original asset that is not disposed of to the life interest owner is the legal remainder interest.
In other words, when the owners of a property grant a legal life tenancy, they are effectively disposing of part of the property.
This means that the cost base of the property is required to be apportioned between the legal life tenancy and the legal remainder interest in accordance with subsections 112-30 (2), (3) and (4) of the Income Tax Assessment Act 1997 (ITAA 1997).
Where a property is transferred for no consideration, or in a non arms length transaction, the first element of the cost base, or reduced cost base, of the property is its market value at the time of transfer.
Paragraph 103 of TR 2006/14 states that the death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner, their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset (now a fee simple interest encumbered by the life interest).
In your situation, you acquired a remainder interest in the property and your parent acquired a legal life interest in the property when the property was transferred to you. The first element of the cost base, or reduced cost base, is the market value of the property. However the market value needs to be apportioned on a reasonable basis and attributed between the life interest and your remainder interest.
When your parent passed away, your remainder interest was enhanced however the cost base of the property remains the portion of the market value when it was transferred to you that was attributed to your remainder interest.