Edited version of your private ruling

Authorisation Number: 1012610658512

Ruling

Subject: Capital gains tax - deceased estate - disposal of holiday property

Question:

Is capital gains tax (CGT) payable on the disposal of deceased's holiday property?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased acquired a vacant block of land (the property) prior to 20 September 1985.

The deceased constructed a shed on the property of land prior to 20 September 1985.

After 20 September 1985, the deceased constructed a dwelling on the property and additions.

The property was the deceased's holiday property.

More than two years ago the deceased died.

In the deceased's will the property was bequeathed to their de facto, as a life interest and upon their death the property is to be disposed of.

The proceeds from the disposal are to be donated to a research organisation.

The deceased's de facto did not wish to use the property and it was disposed of approximately 12 months after the deceased's date of death.

Shortly after a trust was formed with the proceeds from the property's disposal to be invested by the trustees so that the deceased's de facto could have income for life.

On the death of the deceased's de facto the capital (corpus) will be donated to an entity or institution conducting research.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 118-195.

Income Tax Assessment Act 1997 Section 128-10.

Income Tax Assessment Act 1997 Section 128-15.

Reasons for decision

The most common CGT event (CGT event A1) happens if an individual disposes of a CGT asset to another entity. The time of the event is when the contract for the disposal is entered into, or if there is not contract, when the change of ownership occurs.

CGT event A1 occurred upon the disposal of the property. 

You make a capital gain if the capital proceeds are more than the cost base of the dwelling. You make a capital loss if the capital proceeds are less than the reduced cost base of the dwelling.

Buildings or structures constructed on or after 20 September 1985, on land acquired before that date are considered to be separate CGT assets from the original land.

Deceased estate

When a person dies, a capital gain or capital loss from a CGT event happening to a CGT asset owned by the deceased, just before death, is generally disregarded.

Where the asset devolves to the legal personal representative (the trustee or executor) or passes to a beneficiary of the deceased estate, the trustee or beneficiary is taken to have acquired the asset on the day the person died.  

Therefore, you as trustee acquired the property on the deceased's date of death.

If you inherit a deceased person's dwelling, you may be exempt or partially exempt when a CGT event happens to it.

To get a full or partial exemption the dwelling must have been the deceased's home during their ownership period.

In this case, the property was not the deceased's main residence. Therefore, you are not eligible for a full or partial exemption on the disposal of the property.

In the administration and winding up a deceased estate, the trustee may need to dispose of some or all of the assets of the estate.   Assets disposed of in this way are subject to the normal CGT rules and any capital gain made on the disposal is subject to CGT.

Assets acquired by the deceased person before 20 September 1985

If the deceased person acquired their asset before 20 September 1985, the first element of the trustee's cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died.

Where the market value of an asset needs to be determined an individual can obtain it by a number of means such as:

• a qualified valuer, or

• compute their own valuation based on reasonable objective and supportable data.

Note:  The Australian Taxation Office (ATO) may challenge valuations were appropriate.

The ATO has released a publication titled Market valuation for tax purposes, which is available on the website - www.ato.gov.au.

Assets acquired by the deceased person on or after 20 September 1985

If the deceased person acquired their asset on or after 20 September 1985, the first element of the trustee's cost base and reduced cost base is taken to be the cost base and reduced cost base of the asset on the day the person died.

In your case, you are taken to have acquired two separate assets in the property. The first asset you acquired is the land and shed which the deceased acquired prior to 20 September 1985. The first element of your cost base of this asset is its market value on the deceased's date of death.

The second asset you acquired is the dwelling and additions as these were constructed on the property after 20 September 1985. The first element of your cost base of this asset is the deceased's cost base.

You can use the discount method to calculate your capital gain as you meet the relevant criteria.

The discount percentage is 50% for individuals and trusts.

Further information is available on our website - www.ato.gov.au.