Edited version of your private ruling

Authorisation Number: 1012502041803

Ruling

Subject: Deceased estate: pre-CGT assets and post-CGT development approval

Questions and Answers:

1. Will you, the legal personal representative of the estate, acquire the pre-capital gains tax (CGT) properties at their market value, as of the date of death?

Yes.

2. If you, the legal personal representative of the estate, dispose of the pre-CGT properties, will the beneficiaries of the estate be liable to bear tax in their personal income tax returns on any net capital gain made?

Yes.

3. Is any development approval obtained, allowing development of the pre-CGT land: (i) a separate CGT asset from the pre-CGT land; and (ii) a post-CGT asset?

Yes.

4. Will any development approval obtained, allowing development of the pre-CGT land: (i) have a separate CGT cost base and; (ii) be a separate disposal, if and when disposal occurs?

Yes.

5. In other words, will any realised increase in value of the pre-CGT land (upon disposal), which results from a development approval obtained, not form part of the capital proceeds from the disposal of pre-CGT land but, instead, form part of the capital proceeds from the disposal of a separate post-CGT asset, namely, the right to develop the relevant land?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The deceased passed away during the relevant year. At the time of their death, they owned parcels of property, namely: (i) a pre-CGT primary residence, which they resided in; (ii) a pre-CGT holiday property; and (iii) pre-CGT land.

The parcel of land had/has been leased to a company, which has operated a business for many years. The deceased commenced development approval (DA) with the Local Council some years ago, with the intention of selling the parcel of land to a prospective developer with an approved DA. The DA approval is still progressing and, once approved, may increase the value of the property significantly.

The solicitor for the Estate has advised the assets will be sold by the executors on behalf of the Estate and not transferred to the beneficiaries.

The Will contained no remainder beneficiaries. The trustees of the Estate are individuals.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-25

Income Tax Assessment Act 1997 Section 118-195 

Income Tax Assessment Act 1997 Section 128-15 

Reasons for decision

Effect of death

Section 128-15 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what happens if a CGT asset a deceased person owned just before dying: (a) devolves to their legal personal representative; or (b) passes to a beneficiary in their estate.

Subsection 128-15(2) provides the legal personal representative, or beneficiary, is taken to have acquired the asset on the day the deceased person died.

Item 1 of subsection 128-15(4) provides if a deceased person acquired an asset on or after 20 September 1985, the legal personal representative, or beneficiary, who inherits that asset is taken to have acquired it at the cost base of the asset on the day of the deceased person's death.

Item 3 of subsection 128-15(4) provides if a dwelling that was the main residence of the deceased person just before they died and was not then being used for the purpose of producing assessable income, the legal personal representative, or beneficiary, who acquires that asset is taken to have acquired it at market value on the day the deceased person died.

Item 4 of subsection 128-15(4) provides if a deceased person acquired an asset before 20 September 1985, the legal personal representative, or beneficiary, who acquires that asset is taken to have acquired it at market value on the day the deceased person died.

Section 118-195 of the ITAA 1997 provides an exemption from CGT when when a trustee of a deceased estate (who is an individual) disposes of the dwelling if either of the following conditions applies:

§ Condition 1 (disposal within two years)

Disposed of the dwelling within two years of the person's death. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two-year period.

§ Condition 2 (main residence)

From the deceased's death until disposing of the dwelling, it 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.

Present entitlement of estate beneficiary

Section 97 of the Income Tax Assessment Act 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

The net income of the trust eased estate (and whether any beneficiary is presently entitled) is determined on the last day of each income year (30 June). This means that, on the last day of the income year, a beneficiary who is presently entitled will be assessed on their share of the net income for the whole of the income year.

Taxation Ruling IT 2622 is about present entitlement during the stages of administration of deceased estates. It explains: (i) beneficiaries cannot enjoy present entitlement to income derived by a deceased estate until the administration of the estate is complete; and (ii) the administration of a deceased estate is complete or fully administered:

....by payment or provision for the payment of funeral and testamentary expenses, death duties, debts, annuities and legacies and the amount of the residue thereby ascertained….

Taxation Ruling IT 2622 explains, where the administration of a deceased estate is completed during the course of an income year, the beneficiaries (who are not under any legal disability) will be presently entitled during that income year and should bear tax on their shares of the net income of the trust estate for that income year.

For example, if the net income of a trust estate includes net capital gains, on the sale of property, of $100,000, each of four equal beneficiaries must include $25,000 in net capital gains in their income tax return, which will be taxed at their respective marginal tax rates.

Rights connected to property

Section 108-5 of the ITAA 1997 is about CGT assets and states a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property.

A development approval is an example of a right that is a CGT asset.

In the Full Federal Court case of Naval, Military & Airforce Club of South Australia (Inc) v Federal Commissioner of Taxation (1994) 28 ATR 161; 94 ATC 4310, the court held that no part of the original purchase price of land acquired in 1957 was referable to the Club's right to apply for development approval. In that case, the cost base of the right, which derived its existence from the City of Adelaide Development Control Act 1976 (SA), was zero. This outcome supports the view that, where rights are created which are within the definition of 'CGT asset' and which relate to an asset that was acquired previously, no part of the consideration paid for the original asset will generally be included in the first element of the cost base of the rights.

In defining the existence of a right, the House of Lords case of National Provincial Bank Ltd v. Ainsworth [1965] AC 1175, it was said:

Before a right or an interest can be admitted into the category of property or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.

Post-CGT assets related to pre-CGT assets

Taxation Determination TD 93/182 confirms when a post-CGT asset is merged with a pre-CGT asset, each asset will be treated as a separate asset and the post-CGT asset will retain its post-CGT status.

Also, Taxation Determination TD 93/183 confirms when a post-CGT asset is merged with a pre-CGT asset, the cost base of the pre-asset and the post-CGT asset is apportioned under section 112-25 of the ITAA 1997.

Application of law in your case

In your case, you, the executor/trustee of the deceased estate, will acquire the pre-CGT property at its market value at the date of death. Any profit made on the sale of the property is to be included in the tax returns of the individual beneficiaries, according to their respective profit shares.

However, where any of the conditions under section 118-195 of the ITAA 1997 are satisfied, any profit made from the disposal of the pre-CGT primary residence will be exempted from CGT.

Any development approval granted by the local council will be a separate CGT asset and a post-CGT asset. The asset will come into existence when it is granted by the local council.

If you dispose of the pre-CGT land and the post-CGT DA approval, each asset will have a separate CGT cost base.

Any realised increase in value to the land (upon disposal) that results from a development approval obtained will not form part of the capital proceeds from the disposal of pre-CGT land.

Instead, any realised increase in value to the land (upon disposal) that results from a development approval obtained will be capital proceeds from the disposal of a separate, post-CGT, asset, namely, the right to develop the relevant land.