Edited version of your written advice

Authorisation Number: 1012918171427

Date of advice: 25 November 2015

Ruling

Subject: Pre CGT Capital Asset and Trading Stock

Question 1

Were the two apartments (Units), trading stock prior to the cessation of the building business that you operated with the deceased?

Answer

Yes

Question 2

Did the Units stop being trading stock and become capital assets after the cessation of the building business that you operated with the deceased?

Answer

Yes

Question 3

Will the sale price of the Units be included as assessable income under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 4

Are you liable to pay capital gains tax on Unit A that was sold in the 20XX financial year?

Answer

No

Question 5

Will Unit B be subject to capital gains tax?

Answer

Yes

This ruling applies for the following periods:

30 June 2014

30 June 2015

30 June 2016

30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You arrived in Australia from Country Z in the 60s. Your late spouse arrived in the 50s.

The deceased worked in the building industry in partnership with you (Partnership). You and The deceased started building houses in the 1960's. The Partnership was not formalised.

S apartments was one of several walk-up apartment blocks built and then sold by the Partnership. This apartment block was commenced in the late 1970's and completed in 1980. Some of the apartments were sold early off the plan. A number of apartments were retained.

S apartments were the last block built before work started on T apartments, built as a motel in a business to be carried on by the family.

After completing the T apartments, the building business ceased and the sole business activity for the family became the conduct of the motel business from the T apartments.

T apartments were operated as a motel in the early 1980's until it was sold in 2004. This motel building was in joint names.

The T apartments had a manager's unit in which you and the deceased lived with your children.

The Units were used as storage and were never let to outsiders. None of the expenses associated with the Units were ever claimed as tax deductions by you and the deceased.

A Unit was used by your child and their spouse for a period of approximately two and a half years in in the period after they were first married.

The Units were used by you and the deceased as your principal place of residence after the motel business was sold in 20YY. This period of residence was for less than five years. You and the deceased bought a home in 20ZZ.

After the home in a particular suburb was purchased the Units reverted to being storage areas for you and the deceased.

The deceased died on 20VV.

Unit A was sold in the 20XX.

You anticipate Unit B to be sold before 30 June 20WW.

Relevant legislative provisions

Section 70-10 of the Income Tax Assessment Act 1997

Section 70-110 of the Income Tax Assessment Act 1997

Subsection 6-5(2) of the Income Tax Assessment Act 1997

Subsection 6-10(2) of the Income Tax Assessment Act 1997

Subsection 104-10(1) of the Income Tax Assessment Act 1997

Subsection 104-10(2) of the Income Tax Assessment Act 1997

Subsection 104-10(3) of the Income Tax Assessment Act 1997

Reasons for decision

Trading Stock

Currently section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) defines trading stock to include anything produced, manufactured or acquired that is held for the purposes of sale or exchange in the ordinary course of a business.

The test in relation to the definition of 'trading stock' in section 70-10 of the ITAA 1997 is determined according to an asset's current use, and is not a test based on when an asset is acquired.

When you stop holding an item as trading stock, and you still own that item, section 70-110 of the ITAA 1997 will operate to treat you as having sold that item, in the ordinary course of business, at its cost. At the same time, the item is taken to have been immediately reacquired at cost.

The units were constructed in the early 1980s and the business ceased in soon after meaning that the income tax law that applied at the time, sections 28 to 37 of the Income Tax Assessment Act 1936 (ITAA 1936) which gave a similar outcome as the current law to the acquisition of the units. The important point is that the Units became capital assets held by you and the deceased prior to 20 September 1985.

Assessable Income

Subsection 6-5(2) of ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are examples of ordinary income.

Assessable income also includes some amounts that are not ordinary income. This is called statutory income. An amount is statutory income if the amount is not ordinary income and is included in assessable income by a specific provision of the ITAA 1997 or the (ITAA 1936) (subsection 6-10(2) of the ITAA 1997).

In your case the sale price of the units is not assessable income under ordinary concepts because it ceased being trading stock in the early 1980's and is not part of a profit making scheme, therefore not assessable under section 15-15 of ITAA 1997.

CGT

A CGT event A1 under subsection 104-10(1) of the ITAA 1997 happens if a taxpayer disposes of a CGT asset. A CGT asset includes any kind of property (paragraph 108-5(1)(a) of the ITAA 1997). The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law (subsection 104-10(2) of the ITAA 1997). The time of the event is when the entity enters into a contract for the disposal of the asset or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

Generally, an individual can disregard any capital gain or capital loss they make on an asset they acquired prior to 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997).

In your case the Units stopped being trading stock and became capital assets from the date the partnership ceased. You and the deceased became joint owners of the Units prior to 20 September 1985. The Units are a pre-CGT asset.

Deceased Estate

A taxpayer who acquires a dwelling as a surviving joint tenant is treated as acquiring the dwelling as a beneficiary of a deceased estate under section 118-195 of ITAA 1997. A capital gains or loss from a CGT event that happens in relation to a pre-CGT dwelling is ignored if one of the following occurs:

• the beneficiaries or the trustee of the estate sell the dwelling within two years.

• from the deceased's death until the beneficiaries or trustee dispose of their ownership interest, the dwelling was not used to produce income. For this period the dwelling must also have been the main residence of one or more of.

• the surviving spouse

• a person who had a right to occupy the dwelling under the deceased's will,

• a beneficiary (if there is more than one beneficiary only the one that actually occupies the house as their main residence will be eligible to disregard any capital gain or loss).

In your case when the deceased died you acquired his share of the ownership of Unit B and 10.

Unit A

You sold Unit A within 2 years, from the date of the deceased's death. As this is a pre-CGT asset, any capital gains or loss that occurred will be disregarded on both your original interest and the interest acquired on the deceased's death.

Unit B

You anticipate that Unit B will be sold by the end of 20WW. As your original interest in the Unit is a pre-CGT asset, any capital gains or loss that may occur with regards to your interest will be disregarded. There will be CGT consequences with regards to the deceased's share because the disposal of the dwelling will not be within 2 years of death. The first element of the cost base for their interest is market value from date of death and you acquired it on their date of death.