Edited version of your private ruling

Authorisation Number: 1012457333750

Ruling

Subject: Capital Gains Tax - Deceased Estate

Questions and answers

1. Will the main residence exemption apply to your house and Z hectares of your X acre block?

Yes.

2. Will the remaining land of your X acre block be subject to CGT?

Yes.

3. Will your Y acre block be subject to CGT?

Yes.

4. Can you include rates, water, valuation, legal and accounting costs associated with your blocks of land in the cost base?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The deceased inherited V blocks of land from their sibling a number of years ago after 19 September 1985.

The property was originally owned by the deceased's parent.

One block consists of X acres which has a home on it which was lived in by the deceased and their sibling.

The other block is Y acres in size.

The deceased passed away on a date.

The deceased never used the land for income producing purposes.

Both blocks have been sold within 2 years of the deceased's date of death.

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 110-25

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

Capital Gains Tax (CGT) and deceased estates

A person makes a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Generally, assets a person inherits through a deceased estate are acquired on the date of death (section 128-15 of the ITAA 1997). Therefore, the trustee and beneficiaries are taken to have acquired their share of the estate on a date.

In administering and winding up a deceased estate, a legal personal representative may need to dispose of some or all of the assets in the estate. Assets disposed of in this way are subject to the normal rules and any capital gain made on the disposal is subject to CGT. If a beneficiary sells an asset they have inherited, the normal CGT rules also apply.

There is no exemption to CGT which applies to the Y acre block as it exceeds the 2 hectares under the CGT provisions and there was not a main residence on the land. The CGT provisions will apply to the Y acre block.

Cost base of the main residence of the deceased

The first element of the cost base of an interest in a dwelling that was the main residence of the deceased just before their death, the dwelling was not used to produce assessable income and the land does not exceed 2 hectares is the market value of the dwelling on the deceased's date of death (section 128-15(4) of the ITAA 1997).

Disregarding the capital gain or capital loss

Subsection 118-195(1) of the ITAA 1997 allows a capital gain or loss to be disregarded in certain circumstances when a CGT event happens to a deceased person's main residence that a person acquired as a trustee or beneficiary of a deceased estate.

Where the deceased acquired the dwelling on or after 20 September 1985, the dwelling was the deceased's main residence just prior to their death and was not used to produce assessable income. The capital gain or capital loss can be disregarded if you are an individual and the ownership passed to you as a trustee or beneficiary of a deceased estate, and any of the following apply:

· a beneficiary or trustee disposes of their ownership interest in the dwelling within two years of the deceased's death, regardless of whether the dwelling is used as the beneficiary's main residence or to produce income; or

· from the date deceased's death until the beneficiary or trustee disposes of their ownership interest, the dwelling was not used to produce income and was the main residence of one or more of:

- The spouse of the deceased immediately before death (except a spouse who was living permanently separately and apart from the deceased);

- An individual who had the right to occupy the dwelling under the deceased's will; or

- An individual beneficiary to whom the ownership interest passed and that person disposed of the dwelling in their capacity as beneficiary.

As the deceased is taken to have acquired the property after 20 September 1985 (as they inherited it as per the market value on the day their sibling passed away), the trustee or beneficiaries can disregard any capital gain or capital loss they make when a CGT event happens to their ownership interests in the dwelling they inherited from the deceased estate because:

· from just before the deceased's death, the dwelling was not used to gain or produce income

· the ownership interest ended with 2 years of the deceased's death;

· just before the deceased's death, the dwelling was their main residence.

However, the provisions relating to the main residence are not satisfied in relation to the entire property.

The main residence exemption is extended to cover any land that is immediately under the dwelling (section 118-115 of the ITAA 1997). Also the land adjacent to the dwelling may be included as a part of the dwelling where:

· It was primarily used for private or domestic purposes;

· The total area of the land around the dwelling including the land on which it stands does not exceed 2 hectares (section 118-120 of the ITAA 1997).

In this situation, as the land on which the dwelling is located exceeds 2 hectares, an area of land which does not exceed 2 hectares will need to be selected to which the main residence exemption can be extended to. If the selected area of land can be separately valued, the capital gain or capital loss on the remainder of the land will need to be calculated by apportioning the capital proceeds and the cost base on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than the selected area of land.

If the selected area of land cannot be separately valued, any capital gain or capital loss on the remainder of the land may be calculated by apportioning the capital proceeds and cost base on an area basis. The amount of the capital gain or capital loss attributable to the remainder of the land must be reasonable in the circumstances (Taxation Determination TD 1999/67).

Please note that where the market value of an asset needs to be determined, a person can choose to obtain a detailed valuation from a qualified valuer or calculate their own valuation based on reasonably objective and supportable data.

In your case, as the land on which the dwelling is located exceeds 2 hectares, an area of land not exceeding 2 hectares will need to be selected to which the main residence exemption can be extended to. The remainder of the land will be subject to the CGT provisions.

Rates, water, valuation, legal and accounting costs and the Cost Base

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

In order to work out how much a taxpayer's capital gain or capital loss is, a taxpayer must first establish the cost base or reduced cost base of a taxpayer's ownership interest in the property.

Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements.

1. Money you paid for the asset.

2. Incidental costs of acquiring the blocks which includes fees paid to a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser (you can only include the cost of advice concerning the operation of the tax law as an incidental cost if the advice was provided by a recognised tax adviser)

You do not include costs if you have claimed a tax deduction for them in any year, or omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

3. Costs of owning the asset includes rates, land taxes, repairs and insurance premiums.

You do not include costs if you have claimed a tax deduction for them in any year, or omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

4. Capital costs to increase or preserve the value of your asset or install or move it.

5. Capital costs of preserving or defending your ownership of or rights to your asset. 

In your case, you are able to include the costs of rates, water, valuation and legal and accounting advice as part of the cost base when calculating your CGT liability.