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Edited version of private advice
Authorisation Number: 1051614937815
Date of advice: 5 December 2019
Ruling
Subject: Pre CGT Property
Question 1
Does the property maintain its pre-capital gains tax (CGT) status if it is disposed of as per the offer?
Answer
Yes. Having considered the circumstances and the relevant factors the Commissioner considers that the property will maintain its pre-CGT status. Further information can be found by searching 'ATO ID 2011/107' on ato.gov.au
This ruling applies for the following periods:
Year ending 30 June 2020
The scheme commences on:
01 July 2019
Relevant facts and circumstances
The taxpayer's grandparent acquired property before September 1985.
The taxpayer's grandparent died before September 1985.
The will of the taxpayers' grandparent left the land to the taxpayer's parent, for their life use, and then to the taxpayer and their siblings, (the beneficiaries) as tenants in common in equal shares.
Each beneficiary has a vested interest in the land contingent upon their parent's death as a 'life tenant'.
A signed family agreement set outs how the estate is to be divided between the siblings on the death of their parent. Subsequently, town planners and surveyors were engaged to carry out the subdivision for the purposes of dividing the land for estate planning so that separate legal titles could be transferred to the siblings upon the death of their parent.
The property has been the principal place of residence for the taxpayer's parent.
The land was used for primary production by the taxpayer's parent.
The taxpayer's parent passed away after September 1985.
The then subdivided lots were transferred to the siblings as beneficiaries according to the will of the taxpayers grandparent as agreed in the family agreement.
The taxpayer became the registered proprietor of the land.
The taxpayer decided to reside on the property on weekends and continue running the primary production operation.
The taxpayer is now retired from their trade.
The taxpayer has received an offer to purchase the land.
The taxpayer will dispose of the entire land in one transaction but will receive the proceeds in multiple instalments as per the offer.
The taxpayer will cease farming activities.
The sale of the land will be a direct sale and not part of a development agreement.
The taxpayer is not a property developer and has never undertaken property development activities.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 149-10
Income Tax Assessment Act 1997 Section 149-15
Income Tax Assessment Act 1997 Section 149-30
Reasons for decision
Summary
Question 1
The property is a pre-CGT asset when the taxpayer sells it.
Detailed reasoning
The taxpayer originally acquired the property before 20 September 1985 making it a pre-CGT asset for capital gains purposes.
Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This applies to the asset as if the entity had acquired the asset at the earliest date when majority underlying interest changed.
Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:
(a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and
(b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset.
Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date; otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset.
In these cases, the asset is deemed to have a new date of acquisition (the date the majority underlying interest changed). Section 149-35 of the ITAA 1997 provides that the deemed first element acquisition costs for the purposes of determining the cost base (and reduced cost base), will be the market value of the asset at the time of change.
In this case, there were no significant changes in the underlying interests prior to the death of the taxpayer's parent. This is because the taxpayer's parent only enjoyed a life interest in the land.
Consequently, the majority underlying interests in the property did not change after 20 September 1985 and the Division 149 acquisition conversion provision is not triggered.
Therefore, the land will retain its pre-CGT status when the taxpayer disposes of it.