Edited version of your written advice

Authorisation Number: 1013016265518

Date of advice: 20 May 2016

Ruling

Subject: Sale of partially pre-CGT land

Issue 1

Question 1

Will the interests in the land and dwelling (the Property) that were passed to the beneficiaries from the estate of a relative after their death on a date before 20 September 1985 and that are still held by those beneficiaries be treated as pre-Capital Gains Tax (CGT) assets?

Answer

Yes

Question 2

Will the additional interests in the Property which were purchased by agreement on a date in 198X be treated as post-CGT assets?

Answer

Yes

Question 3

Will the interests in the Property held by the estate of a second relative be treated as post-CGT assets from the time of their death?

Answer

Yes

Issue 2

Question 1

Will the owners of interests in the Property who have treated dwellings on the Property as their main residence be eligible for a main residence exemption on part of the taxable gain on the sale?

Answer

Yes

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

The scheme commences on:

1 July 2015

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.

Your relative One entered into possession of the property located at a location (the Property) on a date in 193X. The land area of the property was less than 10 hectares. Your relative One never held legal title to the land.

The property was used by your relative One for primary production until they passed away intestate on a date before 20 September 1985. Letters of administration were granted to your relative Two, and X of the ownership interests in the Property were to be distributed to your relative Two.

The remaining X were to be divided equally between another X beneficiaries. The property rights remained held by the estate in trust for the beneficiaries.

On a date in 198X an agreement (the Agreement) was entered into whereby X beneficiaries agreed to sell their ownership interests in the Property for an amount, to your relative Two and the remaining X beneficiaries. This gave rise to new post-CGT ownership interests of the Property for the X. The Property was valued at a value at this time.

Your relative Two lived on the Property until their death on a date in 201X. Their interests in the Property were left in X parts; X each to X beneficiaries and X each to the remaining X beneficiaries. Their pre-CGT interest acquired on a date before 20 September 1985 was divided into X new post-CGT interests, and their post CGT interests acquired in 198X was also divided into X new post CGT interests.

On a date in 201Y the possessory land was converted to estate fee simple by way of an adverse possession application.

X beneficiaries continue to operate a farming business on the Property, although the scale of activity has reduced in recent years.

There is a dwelling on the Property. This was the main residence of relative Two up until their death, and the main residence of X beneficiaries since before any interests became post CGT.

A contract for the sale of the Property to an unrelated third party was entered into on in November 201Z for an amount. The land is sold "as-is". No development has been undertaken by the beneficiaries.

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 118-200

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 149-10

Reasons for decision

Issue 1

Question 1

Summary

Because relative One died before 20 September 1985, the assets of the estate remain pre-CGT when distributed to the beneficiaries.

Detailed reasoning

An asset is a pre-CGT asset if it was owned by an entity before the 20 September 1985. If you acquire an asset held by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the date the person died. If that was before 20 September 1985, you disregard any capital gain or loss you make on the sale of the asset. For CGT purposes, an interest in a CGT asset will be treated as a separate CGT asset for calculating capital gains and losses.

Although legal title to the land was only established by an adverse possession action in 201Y, the ownership interest is taken to begin from when relative One was eligible to assert ownership, regardless of when the claim for adverse possession was actually made. Certainly this date was before 20 September 1985.

As the beneficiaries have retained their ownership of the directly inherited interests in the Property uninterrupted from the date of death, and the date of death was pre-CGT, these interests will continue to be pre-CGT.

Question 2

Summary

The interests in the Property that were acquired via the Agreement in 198X became post-CGT assets at the point they were acquired. The date of acquisition was the date that the agreement was entered into, and the cost base at this point was the market value on the date of acquisition.

Detailed reasoning

When X beneficiaries entered into the Agreement to purchase the interests in the Property from X beneficiaries on a date in 208X, these interests ceased to be pre-CGT. At this date, these X interests were divided into X interests, with relative two holding the largest interest, and the remaining X beneficiaries each holding the remainder. These ownership interests are separate to the beneficiaries' pre-CGT ownership interests.

These interests will have a cost base of their market value on the date of acquisition, plus any costs involved with the transfer of the Property. It should be noted that the this cost base of a percentage of the market value at this date will be slightly greater than the price paid to theX beneficiaries for their interests.

The legal personal representatives and beneficiaries of relative Two's estate will be taken to have acquired their share of the interests in the Property acquired via the Agreement on the date of their death. Because these interests were post-CGT assets at the time of their death, they will be taken to have been acquired with relative two's existing cost base, plus costs involved with administering this part of the estate and in otherwise establishing ownership of the interests. This interest was divided into X new interests; X to X beneficiaries and X each to X beneficiaries.

These inherited interests will need to be treated separately to those obtained by those beneficiaries directly during the Agreement where there were additional costs incurred during the administration of the estate, or where a partial main residence exemption applies up unto the date of relative two's death.

Question 3

Summary

A pre-CGT asset that is acquired from the estate of a person who died after 20 September 1985 will be a post-CGT asset from the date of the deceased's death.

Detailed reasoning

When you acquire an asset owned by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the date the person died. If the date of death was after 20 September 1985, the asset will be a post-CGT asset.

If the asset was a pre-CGT asset in the hands of the deceased, the legal personal representative or beneficiary will be taken to have acquired the asset on the date of death of the deceased with a first element cost base of the market value on the date of death. (Income Tax Assessment Act 1997 Section 128-15)

Because relative Two died on a date in 201X, their legal personal representatives and their beneficiaries will be taken to have acquired their interest in the Property that relative Two received from relative One at this date, with a first element cost base of the market value of this interest in the Property at the date of relative Two's death.

Issue 2

Question 1

Summary

The owners who have treated the dwelling as their main residence will be entitled to a main residence exemption. In addition, the owners of the interests that relative Two acquired in the Agreement will be entitled to a partial main residence exemption up to the time of relative Two's death.

Detailed reasoning

The main residence exemption is available when an owner of a dwelling treats that dwelling as their main residence. The main residence exemption is available for the dwelling and up to two adjacent hectares that have not been used for business purposes.

The ownership interests in the Property are interests in the entirety of the property, rather than in the dwelling and an adjacent two hectares. Therefore the owner of an interest who has treated a dwelling as their main residence will only be eligible for an exemption for the percentage of their ownership interest for the proportion of the sale value that is allocated to the dwelling and the adjacent land.

This exemption is only available to those whose main residence was on the Property for the period that the gain on their ownership interest was taxable, and does not apply to interests that the taxpayers owns in the land that are pre-CGT. X beneficiaries have treated the dwelling as their main residence for the entire time they have owned their post-CGT interests, and so the exemption will be available for them on these interests for the entire period.

As the dwelling was also the main residence of relative Two, there will be a main residence exemption for their interest in the dwelling and the surrounding lands available up until the date of their death. As this interest was divided between the X beneficiaries, the remaining X beneficiaries will be able to apply a main residence exemption on a portion of these interests inherited from relative Two for the period from 198X to 201X.

Someone who owns a Y% interest in land, on which the dwelling and adjacent land that they wish to claim a main residence exemption for makes up Y% of the value of the land, and is claiming the main residence exemption for the entire period that the gain was taxable will be eligible for an exemption of Y% x Y% (or 0.Y%) of the capital gain. If the same taxpayer also owned a 0.Y% and a Y% interest in the land, they would have separate main residence exemptions of 0.0Y% and 0.Y% on the gains from these interests.