Edited version of your written advice

Authorisation Number: 1051493300043

Date of advice: 14 March 2019

Ruling

Subject: CGT - life interest

Question 1

Will the surrender of your life interest in the Estate of your late spouse result in any ordinary assessable income?

Answer

No.

Question 2

Will a capital gain tax (CGT) event A1 occur on the surrender of your life interest?

Answer

Yes.

Question 3

Will any capital gain or capital loss on your life interest in your main residence up to two hectares be disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 4

Is the first element of the cost base and reduced cost base of your life interest the market value on the date of death of your spouse?

Answer

Yes.

Question 5

Will the capital proceeds from the CGT event be the market value at the time it is surrendered?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commenced on

1 July 2018

Relevant facts

You were married to your spouse (the testator) who died many years ago.

You and the testator owned as tenants in common property 1.

You and the testator also owned property 2. On property 2 was the main residence of you and the testator. This property is over 2 hectares. You still live in this residence.

Property 1 and property 2 were acquired before 20 September 1985.

The testator left a life interest in both of the above properties to you.

This life interest has continued until the present day.

You, as life tenant, have allowed your child and associate to carry on the business on both properties when you retired.

Since your retirement, your interest in the properties is the maintaining of your main residence and the payment of rates and taxes of both properties.

You are now wishing to surrender your life interest to speed up the terms of the will at which point the testator’s interest in property 1 and property 2 will pass to the remainder.

A rollover under subdivision 124-J of the ITAA 1997 applied when the Crown lease on the land was converted to a freehold title.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Section 128-15

Detailed reasoning

Ordinary income

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

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that are earned, are expected, are relied upon, and have an element of periodicity, recurrence or regularity.

Surrendering your life interest is capital in nature and does give rise to any ordinary income. Therefore any amount received in relation to you surrendering your life interest is not assessable under section 6-5 of the ITAA 1997.

Capital gains tax

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. Your life interest is a CGT asset (section 108-5 of the ITAA 1997).

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.

Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests is relevant in your circumstances.

Where a life interest owner surrenders or releases their interest, a CGT event A1 happens (paragraph 66 of TR 2006/14).

Therefore, CGT event A1 will occur when you surrender your life interest in property 1 and property 2.

Main residence

Under section 118-195 of the ITAA 1997, a capital gain or capital loss made in relation to a dwelling or your ownership interest in it is disregarded if the deceased acquired the dwelling prior to 20 September 1985 and from the deceased’s death until you disposed of your ownership interest, the dwelling was the main residence of one or more of:

● a person who was the spouse of the deceased immediately before the deceased’s death

● an individual who had a right to occupy the home under the deceased’s will, or

● you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

In your case, your life interest is regarded as an ownership interest as per section 118-130 of the ITAA 1997. Therefore, any capital gain or capital loss made on the surrender of your life interest in the dwelling that is your main residence is disregarded under section 118-195 of the ITAA 1997.

Please note, that the main residence exemption can apply to a dwelling’s adjacent land to the extent that the land was used primarily for private or domestic purposes in association with the dwelling. The maximum area of adjacent land covered by this exemption is two hectares, less that area of the land immediately under the dwelling (section 118-120 of the ITAA 1997).

Cost base

Where a taxpayer acquires a CGT asset from another entity, but does not incur any expenditure to acquire it, the first element of the cost base and reduced cost base of the asset is its market value at the acquisition time.

Therefore, the cost base of your life interest is the market value of the interest at the time you acquired it (section 112-20 of the ITAA 1997 and TR 2006/14, paragraph 26).

You acquired your life interest in both properties at the date of death based on a reasonable apportionment of the legal personal representative’s cost base and reduced cost base (subsections 128-15(4) and (5) of the ITAA 1997). An apportionment based on the relative market values of the interests created would be considered reasonable (paragraph 99 of TR 2006/14).

Capital proceeds.

The capital proceeds for the surrender are any money or property received in exchange for the surrender. If, you do not receive anything in exchange for the surrender, by virtue of section 116-30 of the ITA 1997, you are treated as having received the market value of the asset (paragraph 68 of TR 2006/14).

It is acknowledged that the life interest is generally measured with reference to the life of the owner. However other factors such as the asset’s yield may also be relevant. The life interest plus the remainder interest generally equals the total market value of the property.

The Commissioner does not generally rule on the market value for a future CGT event. The market value should be fair and reasonable. Relevant information should be kept to support the calculation of the market value at the time the life interest is surrendered.