Edited version of your written advice

Authorisation Number: 1013071731688

Date of advice: 15 August 2016

Ruling

Subject: Capital gains tax - deceased estate - contract date

Question:

Is the cost base for the estate the market value of the dwelling the deceased's cost base?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts

The deceased acquired a dwelling (the dwelling)

The dwelling was acquired for the deceased's step parent to reside in pursuant to a clause of the deceased's late parent's will. ('A')

'A' passed away in 19XX.

A short time after the death of 'A', the deceased's step parent requested that a dwelling be acquired for them to reside.

A suitable dwelling was located and an offer was made to purchase in early 19XX.

The contract for sale settled in 19XX.

The administration of the estate required that properties needed to be sold in order to acquire the dwelling.

It was decided between the beneficiaries that the deceased would be the legal owner of the dwelling.

The deceased passed away in 20XX.

You have provided a number of documents, which should be read in conjunction with, and form part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

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

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

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

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Subsection 109-5(2)

Reasons for decision

Capital gains tax

You may make a capital gain when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT A1 which happens when you dispose of your ownership interest in a CGT asset to another entity.

When a CGT asset is disposed of as a result of CGT event A1, the time of the event is when a contract for the disposal of the CGT asset occurs, or if there is no contract, when a change of ownership occurs.

A person acquiring a CGT asset as a result of a CGT event A1 is taken to have acquired the CGT asset when the disposal contract is entered into, or if none, when the entity disposing of the CGT asset stops being the asset's owner.

Generally, CGT assets acquired before 20 September 1985 are exempt from CGT, and any capital gain made on the disposal of pre-CGT assets can be disregarded.

Date of contract

A contract is required only to have the attributes prescribed by common law for the formation of a contract. Briefly, a binding contract is generally entered into where one party communicates unconditional acceptance of an offer made by the other party. In some cases difficulty may arise in determining at what point of time a binding contract is made. This could be particularly so in the case of a contract that is wholly or partly oral.

Thus, a contract may be an oral contract and the date for such a contract would be the date ascribed to it at common law. This would mean that the contract in question might be unenforceable, or even illegal, at the time of its making. But if it was carried into effect with the consequent disposition of an asset, then the relevant time of the making of the contract was when the unenforceable contract was made.

If the asset is disposed of under a contract, the time of CGT event A1 is when the taxpayer enters into the contract. For this purpose, a contract may be an oral contract, provided it has the attributes required by common law, eg an intention by both parties to be bound by it. A number of cases have considered the date when a contract was formed. In Gardiner v FC of T 2000 ATC 2018, the AAT held that a property was acquired when a taxpayer's offer was accepted by the vendor, not when the contracts were formally exchanged two months later.

In McDonald & Anor v FC of T 2001 ATC 4146, the Full Federal Court confirmed that capital gains derived from the sale of a property were subject to CGT where the oral contract was made pre-CGT but the written contract was exchanged post-CGT. The court was swayed by the convention in the law on the sale of land in NSW that no binding contracts existed until the exchange of contracts.

This convention could be overridden by the parties with mutual intention, but clear evidence of this intention had to be produced. In this case, the evidence showed that the first time that the parties had reached a consensus with the intention to form legal relations occurred on exchange and the parties could not rewrite history by backdating the contract.

Application to your case

In this case, the deceased purchased a dwelling pursuant to a direction in a will.

The deceased made an offer to purchase the dwelling in early 19XX. It is standard practice in the state in which the dwelling is located that settlement occurs a number of weeks later.

The acquisition of the dwelling by the deceased and acceptance by the vendor shows that there was mutual intention of all parties to enter into binding obligations and the documents provided support the existence of this intention to form legal relations and supports that a contract was formed on the date that the contract was exchanged with the purchaser. Therefore, it is viewed that the deceased acquired the dwelling when contract was entered into.