Edited version of private advice

Authorisation Number: 1012612459968

Ruling

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

Question:

Is capital gains tax (CGT) payable on the disposal of the property?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

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 property prior to 20 September 1985, which was their main residence until their death approximately X months ago.

You are a beneficiary and an executor of the deceased estate.

The options considered for the disposal of the property is by auction or by tender as a development site.

The property has a certain value if it is disposed of as a residence but it would realise substantially more if it is disposed of as a development site.

A real estate agent has approached you as they have a builder who will pay the development value for the site if you get a development application approved.

To undertake this development application to seek approval it will take you time and money.

This process involves detailed plans, amalgamation of two sites and getting council approval.

You will get the development application approval and then dispose of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 104-10

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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The most common CGT event CGT event A1 happens if you dispose of a CGT asset to someone else. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.

CGT event A1 will occur when the property is disposed of. 

Deceased estate

If you acquire an asset owned by a deceased person as an executor or beneficiary you are taken to have acquired the asset on the day the person died.

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

Where the deceased acquired the property before the 20 September 1985, and it is disposed of the property within two years of the deceased date of death, the capital gain or capital loss made on its disposal is disregarded when a CGT event, such as a disposal happens to the property.

Amalgamation

The amalgamation of adjacent land does not result in a CGT event occurring.

Therefore CGT does not apply when the amalgamation of the land occurs, as the land involved will not have a change in ownership. The two blocks of land that are amalgamated will retain their original acquisition date.

Isolated transaction

Taxation Ruling TR 92/3 discusses profits on isolated transactions. This ruling states that profits on isolated transactions may be income.

Profit from an isolated transaction will be ordinary income when:

• the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain and

• the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction.

Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are:

(a) the nature of the entity undertaking the operation or transaction

(b) the nature and scale of other activities undertaken by the taxpayer

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d) the nature, scale and complexity of the operation or transaction

(e) the manner in which the operation or transaction was entered into or carried out

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h) the timing of the transaction or the various steps in the transaction.

Profits on the disposal of a property can be income according to ordinary concepts, or as a profit making undertaking or plan, if the individual's activities have become a separate business operation or commercial transaction, or an isolated profit making venture.

In your case, the activities involved in the amalgamation of two sites, obtaining a development application approval and subsequent disposal of the property as a development site does not amount to carrying on a business. The transactions do not have the character of business operations or commercial transactions. There is no indication that the activities that will be undertaken have become a separate business operation or commercial transaction, or that you were carrying on, or carrying out a profit-making undertaking or plan.

As the property will be disposed of within two years of the deceased's date of death any capital gain or capital loss made is disregarded.