Edited version of private advice

Authorisation Number: 1012633198513

Ruling

Subject: Capital gains tax

Questions and answers:

1. Is the first element of the cost base of the property in the hands of the Executor the equivalent of the cost base of the property in the hands of the deceased at the deceased's date of death?

Yes.

2. Does the cost base of the property in the hands of the deceased at the date of death include:

a. the purchase price,

b. stamp duty and legal costs incurred in respect of the purchase, and

c. legal costs incurred by the deceased to defend her ownership of the title to the property?

Yes.

3. Does the cost base of the property in the hands of the deceased at the date of death include Council rates, water rates and other statutory charges, and insurance costs from the date of acquisition until the date of death?

No.

4. Does the cost base of the property in the hands of the Executor include:

a. agent's commission and legal costs associated with the sale of the property, and

b. Council rates, water rates and other statutory charges, and insurance costs from the date of death to the date of sale.

Yes.

5. Does the cost base of the property in the hands of the Executor include the X% of the balance of the sale proceeds that is to be distributed to a third party as per terms of settlement between the deceased and that third party?

No.

This ruling applies for the following period:

1 July 2013 to 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts and circumstances:

The deceased acquired ownership of real estate after 20 September 1985.

The deceased was the sole owner of the property until their death recently.

The deceased never occupied the property as their main residence.

Prior to their death, there was a dispute over ownership of the property between the deceased and a third party.

The deceased incurred legal costs protection their ownership of the property.

Ownership of the property remained in the hands of the deceased.

Ownership of the property is now in the hands of the Executor of the deceased's estate.

The Executor of the deceased's estate wishes to dispose of the property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 109-55.

Income Tax Assessment Act 1997 Section 110-25.

Income Tax Assessment Act 1997 Section 110-55.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Subdivision 118-B.

Income tax Assessment Act 1997 Section 128-15.

Reasons for decision

Real estate, capital gains tax and deceased estates - general

Real estate is a capital gains tax asset (CGT) asset and the CGT provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to any real estate acquired on or after 20 September 1985.

For CGT purposes, if you acquire real estate as the Executor of a deceased estate, you are taken to have acquired the real estate on the day the deceased person died.

Generally, if you dispose of real estate acquired on or after 20 September 1985, any assessable gain or loss made from that disposal will be included in your assessable income under the provisions of section 102-5 of the ITAA 1997. The gain or loss is made at the time of the CGT event giving rise to the gain or loss.

When you dispose of real estate, CGT event A1 happens. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

You will make a capital gain from the disposal of real estate if the capital proceeds from the disposal are more that the cost base of the property. A capital loss results if the capital proceeds are less than the reduced cost base of the property.

In the case of the disposal of real estate, the capital proceeds is the amount of money you receive or are entitled to receive for the disposal of the property.

In some cases, when real estate that has been acquired by the Executor of a deceased estate is disposed of as part of the administration of the estate, an exemption may apply that allows the Executor to disregard (and therefore not include in their assessable income) any assessable gain or loss made from the disposal.

With regard to real estate that was initially acquired by a deceased person after 20 September 1985, a full or partial CGT exemption may be available under the main residence exemption when the property is later disposed of by the Executor of the deceased's estate. This exemption (either in full or in part) is only available if the property was the deceased person's main residence just before they passed away.

The deceased acquired the property after 20 September 1985. Because the deceased never occupied the property the Executor of the deceased estate cannot disregard (either in part or in full) any assessable gain or loss made from the disposal of the property. To determine whether or not the Executor will make an assessable gain or loss from the disposal, the cost base/reduced cost base of the property in the hands of the Executor needs to be determined.

Calculating the cost base/reduced cost base of real estate - general

The basic rules for determining the cost base/reduced cost base of any CGT asset are the same but some additional rules apply in relation to real estate.

In most cases the cost base of a CGT asset is comprised of costs that can be attributed to one of the five elements described below:

• The first element: money or property given for the asset.

• The second element: incidental costs of acquiring the asset or that relate to the CGT event.

• The third element: costs of owning the asset.

• The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

• The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.

The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element. The third element of the reduced cost base relates to balancing adjustments for certain depreciating assets and does not generally apply to residential real estate.

With respect to real estate, third element costs (costs of owning the asset) cannot be included in the cost base of property acquired before 20 August 1991. Nor can such costs be included in the reduced cost base of property, regardless of the acquisition date. Typically, third element costs in respect of real estate would include costs of rates, insurance, land tax, maintenance and interest on money borrowed to buy a property or finance improvements to it.

Determining the cost base/reduced cost base of real estate acquired by the Executor of a deceased estate

The rules for determining the first element of the cost base/reduced cost base of real estate that passes to an Executor of a deceased estate are modified, depending on the date the deceased person acquired the property.

For real estate acquired by a deceased person on or after 20 September 1985, the first element of the cost base/reduced cost base in the hands of the Executor is taken to be the cost base/reduced cost base of the property on the day the person died (Note: the tax law provides some exceptions to this rule however none of those exceptions apply in this case and they are not discussed in this ruling).

Considering the above, the first element of the cost base/reduced cost base of the property in the hands of the Executor will be the cost base/reduced cost base of the property in the hands of the deceased at the date of death. In simple terms, this means that that for the Executor to calculate their cost base/reduced cost base for the property, they must first determine the cost base of the property in the hands of the deceased at the date of death.

Cost base of the property in the hand of the deceased at the date of death

In terms of determining the cost base/reduced cost base of the property in the hands of the deceased at the date of death, the following costs can be included:

• The purchase price of the property. First element cost.

• Stamp duty and legal costs incurred in respect of the purchase. Second element costs.

• Legal costs incurred by the deceased to defend her ownership of the title to the property. Fifth element costs.

Because the property was acquired by the deceased prior to 20 August 1991, no third element costs (including Council rates, water rates, other statutory charges, and insurance costs) that were incurred between the date of acquisition and the date of death can be included in the cost base of the property. Nor can those costs be included in the reduced cost base.

Cost base of the property in the hands of the Executor of the deceased estate

The cost base/reduced cost base of the property in the hands of the Executor of the deceased's estate will include:

• The cost base/reduced cost base of the property at the date of death. First element cost.

• Agent's commission and legal costs associated with the sale of the property. Second element costs.

The Executor can also include in his cost base (as third element costs) the cost of Council rates, water rates, statutory charges and insurance costs that are incurred between the date of death (the time the Executor is taken to have acquired ownership of the property for CGT purposes) and the date of sale. These costs cannot be included in the reduced cost base of the property.

There are no provisions in the tax law that would allow the Executor to include any distribution of the net proceeds from the disposal of the property in either the cost base or the reduced cost base of the property. Such a distribution is not a cost that can be related to any of the five elements that comprise the cost base/reduced cost base of a CGT asset. Any such distribution is simply an arrangement between the Executor and another party about how the proceeds from the disposal should be dealt with.