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Edited version of your private ruling
Authorisation Number: 1012441605278
Ruling
Subject: Capital gains tax
Question 1
Will the Commissioner exercise his discretion under subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow an extension of time to the two year period to 30 June 2013?
Answer
Yes.
Question 2
Is the acquisition date of the property considered to be the date of the deceased's death?
Answer
Yes.
Question 3
Is the first element of the cost base of the property considered to be the market value of the property at the date of the deceased's death?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
The deceased died in 20XX.
Probate was granted in 20XX.
The deceased and their spouse purchased a property prior to 20 September 1985.
The property was the principal place of residence of the deceased and their spouse.
Under the will the deceased's spouse was granted a life interest to occupy the dwelling until their death.
The spouse died in 20YY.
The property has been advertised for sale since early 20ZZ. However due to lack of interested buyers, the property was let to tenants. The property is still on the market.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10.
Income Tax Assessment Act 1997 Section 104-20.
Income Tax Assessment Act 1997 Section 110-25.
Income Tax Assessment Act 1997 Section 110-55.
Income Tax Assessment Act 1997 Section 112-15.
Income Tax Assessment Act 1997 Section 118-195.
Income Tax Assessment Act 1997 Section 128-10.
Income Tax Assessment Act 1997 Subsection 128-15(4).
Reasons for decision
As per subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain or capital loss you make from a capital gains tax (CGT) event that happens in relation to a dwelling, or your ownership interest in it, is disregarded 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) at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied.
Beneficiary or trustee of deceased estate acquiring interest | |||
Item |
One of these items is satisfied |
And also one of these items | |
1 |
the deceased *acquired the *ownership interest on or after 20 September 1985 and the *dwelling was the deceased's main residence just before the deceased's death and was not then being used for the *purpose of producing assessable income |
your *ownership interest ends within 2 years of the deceased's death, or within a longer period allowed by the Commissioner | |
........... | |||
2 |
the deceased *acquired the *ownership interest before 20 September 1985 |
the *dwelling was, from the deceased's death until your *ownership interest ends, the main residence of one or more of: | |
|
|
(a) |
the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or |
|
|
(b) |
an individual who had a right to occupy the dwelling under the deceased's will; or |
|
|
(c) |
if the *CGT event was brought about by the individual to whom the *ownership interest *passed as a beneficiary - that individual |
In this case the deceased acquired the property prior to 20 September 1985. The deceased died in 20XX and the property passed to the life interest holder until their death in 20YY. The property was the deceased's and their spouse's main residence prior to their deaths. The property is currently on the market.
As the deceased died in 20XX, the property will sell outside the two year period outlined in subsection 118-195(1) of the ITAA 1997. Therefore, you will only be able to disregard the capital gain from the sale of the property if the Commissioner grants an extension to the 2 year time limit.
The following is a non-exhaustive list of situations in which the Commissioner would be expected to exercise the discretion:
· the ownership of a dwelling or a will is challenged,
· the complexity of a deceased estate delays the completion of administration of the estate,
· a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (e.g. the taxpayer or a family member has a severe illness or injury), or
· settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for reasons outside the beneficiary or trustee's control.
In determining whether or not to grant an extension the Commissioner is expected to consider whether, and to what extent, the dwelling is used to produce assessable income and how long the trustee or beneficiary held it.
In this case, the delay is caused by the complexity of the deceased's estate. The administration of the deceased's estate could not be finalised until the expiration of the life estate's interest which did not occur until 20YY. This prevented the trustee from disposing of the property within the two year time limit.
Having considered the relevant facts, the Commissioner is able to apply his discretion under subsection 118-195(1) of the ITAA 1997 and allow an extension to the two year time limit to 30 June 2013.
As a result of extending the two year time limit, you will satisfy all of the conditions contained in section 118-195 of the ITAA 1997. Although the property has not sold, an extension to the two year time limit has been granted to allow you additional time to sell. Accordingly, you can disregard any capital gain or loss that arises as a result of the disposal of the property if it sells prior to 30 June 2013.
Life interest
The deceased granted a life tenancy of the property to his/her spouse.
Under Taxation Ruling TR 2006/14, paragraphs 102 and 103 state;
· On the death of the life interest owner, CGT C1 in section 104-20 of the ITAA 1997 happens and it is disregarded under section 128-10 of the ITAA 1997.
· The death of the life owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner.
Consequently, for the purpose of calculating a capital gain or a capital loss, the cost base is not changed.
Cost base
You make a capital gain if your capital proceeds are more than the assets cost base. You make a capital loss if your capital proceeds are less than the assets reduced cost base.
Capital proceeds is the term used to describe the amount of money that you receive, or are entitled to receive when a CGT event happens.
Under sections 110-25 and 110-55 of the ITAA 1997, the cost base and reduced cost base of an asset is made up of 5 elements. Briefly these are;
1. Money or property given for the asset.
2. Incidental costs of acquiring, selling the asset or that relate to the CGT event.
3. Costs of owning the asset
4. Capital costs to increase or preserve the value of your asset or to install or move it.
5. Capital costs to preserving or defending your ownership of or rights to your asset.
The first element is the money or property given for the asset and as beneficiaries of the estate did not pay anything for the asset we need to consider whether there are any modifications which may be relevant.
Under section 112-15 of the ITAA 1997 if a cost base modification replaces an element of the cost of a CGT asset with an amount it is as if you have paid that amount.
Therefore; under section 128-15(4) of the ITAA 1997 if the deceased person acquired their asset before 20 September 1985, the first element of the beneficiaries cost base or reduced cost base is the market value of the asset on the day the person died.
In this case, the first element of the cost base will be the market value of the property when the deceased died in 20XX. Although the property has not sold, it is on the market.