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Edited version of your written advice
Authorisation Number: 1051394333235
Date of advice: 4 July 2018
Subject: Capital gains tax on passing of conditional gift from deceased estate to beneficiaries
Question 1
Will subsection 128-15(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the transfer of the property by the executors of the estate to the primary beneficiaries pursuant to clause X.X of the will of the deceased, such that the capital gain on the transfer will be disregarded under subsection 128-15(3) of the ITAA 1997?
Answer
Yes.
Question 2
Will the cost base modifications in subsection 128-15(4) of the ITAA 1997 apply to the acquisition of the property by the primary beneficiaries?
Answer
Yes.
This ruling applies for the following periods:
Financial year ended 30 June 20xx
Financial year ended 30 June 20xx
Financial year ended 30 June 20xx
Financial year ended 30 June 20xx
Financial year ended 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The deceased died in XXXX. Probate to the will was granted in XX/XXXX.
The will is currently being contested by one of the residual beneficiaries. As a result, the administration of the Estate is not completed yet.
The property was acquired by the deceased as a joint tenant with their late spouse before 20 September 1985. When the deceased’s spouse died after 20 September 1985, the deceased inherited the other interest in the property as surviving spouse.
The will states there shall be a conditional gift of the real property to the primary beneficiaries. One of the conditions is that the primary beneficiaries take on the mortgage over the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 128-15
Income Tax Assessment Act 1997 section 128-20
Reasons for decision
Question 1
It is considered that clause X.X of the will is better characterised as granting a conditional gift rather than a right or option to purchase. Therefore it is accepted that the property would pass to the primary beneficiaries in their capacity as beneficiaries rather than as purchasers. Consequently there would be no gain by the legal personal representative when the asset passes to the beneficiaries.
Question 2
If the deceased acquired the asset before 20 September 1985 the acquisition cost will be equal to the market value at the date of the deceased's death (item 4 of the table in subsection 128-15(4) of the ITAA 1997). If the deceased acquired the asset on or after 20 September 1985, the beneficiary's acquisition cost will be determined in accordance with items 1, 2, 3 or 3A of the table in subsection 128-15(4) of the ITAA 1997.
As 50% of the deceased’s interest in the property is a pre-CGT interest and the other 50% is a post-CGT interest inherited after the passing of their spouse, then the asset passes to the beneficiaries with a mixed cost base – 50% under item 1 and 50% under item 4.
As the passing of the property to the beneficiaries is accepted as having occurred from the legal personal representative it is expected that the beneficiaries inherit the trustee’s cost base for the asset and no amount is included in the cost base in respect of the payments that they make under the will.