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Edited version of your written advice
Authorisation Number: 1051430111493
Date of advice: 19 September 2018
Ruling
Subject: Income tax - Capital gains tax - Deceased estates – Disposal.
Question 1:
Did the Taxpayer own X% of the Property for capital gains purposes?
Answer 1:
Yes
Question 2:
Will the capital gain made on the disposal of the Property be assessable to the Taxpayer?
Answer 2:
Yes
This ruling applies for the following periods:
Income year ending 30 June 2015
Income year ending 30 June 2016
Income year ending 30 June 2017
Income year ending 30 June 2018
Income year ending 30 June 2019
The scheme commences on:
1 July 2014
Relevant facts and circumstances
Sometime after 19 September 1985, the Taxpayer and their partner purchased a property (the Property) and occupied it as their main residence.
The Property exceeds two hectares.
The Property was purchased as tenants in common, with the Taxpayer owning a X% share and their partner a Y% share.
The certificate of title indicates a X% interest to the Taxpayer and a Y% interest to their partner.
A number of years later, the Taxpayer and their partner entered into a contract to sell the Property.
Deposits were paid over four instalments.
The balance of $X2 will be paid at settlement.
The Taxpayer passed away before settlement.
The will states that the Taxpayer’s Z% interest in the Property is to be split between the three children in equal shares.
A capital gain has been made upon the sale of the Property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subsection 104-10(3)
Reasons for decision
Legal ownership
A legal interest in property refers to the legally enforceable right to possess or use the property.
A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.
Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land. The most common forms of land ownership are as joint tenants or tenants in common.
Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - e.g., A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property.
Tenants in common differs from a joint tenancy in that each owner has a quantifiable share. That is, the extent, nature and duration of each co-owner's interest need not be the same - e.g., C owns a 30% share of a property while D owns a 70% share of the property. C and D are, provided the other requisite features are present, tenants in common.
It is the legal interest that ultimately determines the apportionment of capital gains amongst co-owners of a property.
Application to your situation
In your case, the Taxpayer’s will refers to their Z% interest in the Property, however the certificate of title has the legal interest in the property as being X% ownership to the Taxpayer and Y% ownership to their partner. Therefore, upon the disposal of the property, the capital gain will need to be apportioned in line with the legal interests as determined by the certificate of title.
Capital gains tax
Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset.
You dispose of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).
The time of the event is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).
Where a contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year that the contract is settled.
The time when a contract is entered into is the time when it comes into existence for general law purposes.
The death of a seller before settlement takes place does not affect the legal obligations of the party. There is still a contractual obligation to complete the sale. The rights that are usually afforded to the seller under the contract will pass to legal person representative who will be entitled to collect the payment of the balance of purchase money on their behalf.
Application to your situation
In this situation, the CGT event occurred when the Taxpayer and their partner entered into the contract to dispose of the property. Therefore, even though the Taxpayer passed away before settlement has occurred, the capital gain made on the disposal of the Property is to be included in the Taxpayer’s income tax return in the income year in which the contract was entered into.
Any capital gain should be apportioned according to legal ownership interest and included in the assessable income of the Taxpayer’s date of death return.