Edited version of your private ruling

Authorisation Number: 1012371647357

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Subject: Capital gains tax - deceased estate - family arrangement - intangible asset

Question 1:

Does the payment of the 'settlement sum' result in a capital gain tax (CGT) event happening?

Answer:

Yes.

Question 2:

Is the 'settlement date' the time of the CGT event?

Answer:

Yes.

Question 3:

Is the first element of the cost base of your contractual right, one third of the market value of the holiday house on the day you entered into the family deed?

Answer:

No.

Question 4:

Are the rates, water and sewage service charges, catchment tariff, household insurance and expenses involved in repairs and maintenance included in the cost base?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts:

Your late parents owned a property which they used as a holiday house.

Your parents decided to transfer ownership of the holiday house to your two siblings after 20 September 1985.

Prior to this a family agreement was entered into between you, your parents and siblings.

Under the terms of the deed, your siblings are required to pay you one third of the value of the holiday house at the 'settlement date'.

You have supplied a number of documents, which form part of and should be read in conjunction with this private ruling:

You parents have passed away.

You have not obtained a recent valuation for the house.

Subject to no variation to the family agreement, the 'settlement payment' as provided for in the family agreement will happen on that date.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision:

A capital gain or capital loss is made if certain events or transactions, called capital gains tax (CGT) events, happen.

The definition of a CGT asset specifically includes a legal or equitable right within the definition of a CGT asset.

Section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. On entering into the deed you acquired contractual rights. The contractual rights are intangible CGT assets.

As you acquired your rights when CGT event D1 occurred, you are not taken to have acquired the rights for their market value, being one third the value of the house.

A CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset being redeemed, satisfied or surrendered. The payment that you receive from your siblings' satisfies your contractual rights under the deed and accordingly your contractual rights have been satisfied.

The cost base of a CGT asset is generally the cost of the asset when you acquired it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base is made up of the following five elements:

· money or property given for the asset

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

· costs of owning the asset

· capital costs to increase or preserve the value of the CGT asset, or to install or move it; and

· capital costs of preserving or defending your ownership of, or your rights to the asset.

The amount that you receive under the terms of the family agreement will be the capital proceeds. Any incidental costs that you have incurred in relation to the house will form part of the cost base of the asset.

In calculating any capital gain, you can use either of the indexation method or discount method, which has the effect of reducing any capital gain by 50%. A capital gain can be reduced only after all the capital losses for the year and any unapplied net capital losses from earlier years have been applied.

The Indexation Method

 The indexation method can be used to calculate a capital gain if a CGT event happens to an asset that is acquired before 11.45am (by legal time in the ACT) on 21 September 1999, and the asset is owned for 12 months or more. Under this method, each amount included in an element of the cost base (other than those in the third element non-capital costs of ownership) is increased by an indexation factor based on increases in the consumer price index (CPI) up to September 1999.

The Discount Method

The discount method can be used to calculate a capital gain by an individual, to a CGT event that happens to an asset that is owned provided the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 and the asset was acquired at least 12 months before the CGT event, and; there was no election to use the indexation method.

Where the conditions of the indexation and discount method are satisfied, a choice needs to be made as to which method to use. The choice made usually depends on which method gives the best result.