Edited version of your written advice

Authorisation Number: 1012689607558

Ruling

Subject: Capital gains tax

Questions and answers

1. Will the property transfer to the beneficiary under Division 128 of the Income Tax Assessment Act 1997?

No

2. Will CGT event A1 occur on the transfer of the property to the beneficiary?

Yes.

3. Will the capital proceeds for the A1 event be the market value of the property at date of transfer?

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

The deceased died a number of years ago.

The property was purchased by the deceased and their deceased spouse before 20 September 1985 as joint tenants.

The deceased lived in the property as their main residence until his/her death.

The deceased left a will naming a number of beneficiaries.

The estate is to be divided equally between the beneficiaries.

Each beneficiary is expected to get $X.

The value of the property at the date of death of the deceased was $X.

The current valuation of the property is $X.

One of the beneficiaries intends to obtain the property from the estate.

The valuation of the property exceeds the beneficiary's distribution and the executor is willing to accept a cash payment from the beneficiary.to make up the difference in price.

Relevant legislative provisions:

Income tax Assessment Act 1997 Section102-20

Income tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Reasons for decision

You make a capital gain or capital loss if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset) that you own. The most common CGT event is CGT event A1, the disposal of an asset. However, there are a number of exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part.

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) operates when a capital gains tax (CGT) asset owned by a person just before death passes to the deceased's legal personal representative (trustee) or to a beneficiary in the deceased's estate (section 128-15 of the ITAA 1997).  

Any capital gain or loss made by the trustee when the asset passes to a beneficiary of the deceased estate is disregarded under section 128-15(3) of the ITAA 1997. 

Section 128-20(1) of the ITAA 1997 explains that a CGT asset passes to a beneficiary in the estate of a deceased person if the beneficiary becomes the

owner of the asset in any of the following ways: 

(a) under a Will of the deceased, or that will as varied by a court order;

(b) by operation of an intestacy law, or such a law as varied by a court order;

(c) because it is appropriated to the beneficiary by the deceased's legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the deceased's estate; or

(d) under a deed of arrangement if:

(i) the beneficiary entered into the deed to settle a claim to participate in the distribution of the deceased's estate; and

(ii) any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the deceased's estate (section 128-20(1) of the ITAA 1997). 

It does not matter whether the asset is transmitted directly to the beneficiary or is transferred to the beneficiary by the deceased's legal personal representative.

In this particular case the property will not be passing to the beneficiary under the will.

The beneficiary will receive a distribution of approximately $X. The valuation of the property currently is $X.

As the distribution to the beneficiary is less than the valuation of the property, the executor will accept a payment from the beneficiary.

The payment will enable a correction of distributions to the remaining beneficiaries.

The cash payment to the estate will result in a capital gains event A1 arising for the estate and as a result capital gains will be payable on the disposal of the property to the beneficiary.

Market value substitution rule:

Under the market value substitution rule, the capital proceeds are taken to be the market value of the CGT asset at the time of the CGT event. Overall, the market value substitution rule applies where:

(a) there are no capital proceeds from the CGT event for example, if you give the CGT asset away as a gift

(b) some or all of the capital proceeds cannot be valued, or

(c) the capital proceeds are either more or less than the market value of the asset and either:

(i) the taxpayer and the entity that acquired the asset from the taxpayer did not deal with each other at arm's length in connection with the event, or

(ii) the CGT event is the redemption, release, abandonment, surrender, forfeiture or cancellation of the CGT asset.

In this case the market value of the property at the date of death was $X and the proceeds received by the estate will be $X and dealings in relation to the transfer of the property to the beneficiary are not at arm's length.

The capital proceeds from a CGT event are the total of:

• the money you have received or are entitled to receive or, in respect of the CGT event happening, and

• the market value of any other property you have received or are entitled to receive, in respect of the event happening(worked out at the time of the event).

In this case, the market value substitution rule will apply and the first element of the cost base when calculating the capital gain will be the market value of the property the date it is transferred to the beneficiary.