Edited version of private advice

Authorisation Number: 1051617740961

Date of advice: 6 December 2019

Ruling

Subject: Capital gains tax - deceased estate - life interest

Question 1:

Will the capital gains tax provisions apply to the disposal of your ownership interests in the Property?

Answer:

Yes. When you dispose of your ownership interest in the Property a capital gains tax event will occur and you will have to calculate the capital gain made on their disposal.

Question 2:

Will the cost base of the Property be the market value on the date the life tenant passed away?

Answer:

No. The cost base of the Property will be the market value on the date the Deceased passed away.

Question 3:

Will the capital gain be calculated from the time the Property was used for income producing purposes?

Answer:

No. It is viewed that you acquired your ownership interests in the Property when the Deceased passed away. Your entire ownership period will be taken into consideration when determining whether you have made a capital gain on the disposal of your ownership interests in the Property. However, as there was a life interest in the Property for the majority of your ownership period, the capital gain will be calculated from the time the person with the life interest passed away until you disposed of your ownership interests.

This ruling applies for the following period

Income year ending 30 June 2019

The scheme commences on

1 July 2018.

Relevant facts and circumstances

Your parent, Person A, purchased a property (the Property) prior to 20 September 1985.

Parent A constructed a house on the Property, and they and your other parent, Parent B, moved to the Property a number of years after the Property had been purchased.

After a significant period of time Parent A (the Deceased) passed away.

The Property had been the Deceased's main residence up to the time they passed away.

The Deceased's last will provided Person B with a life interest in the Property in addition to you, Person X and/or Person Y, each being granted remainder interests.

A Trustee was appointed to administer the Deceased's estate and probate was obtained.

A dispute occurred between Person B and the Trustee. To resolve this issue, the title of the Property was transferred into your name and your sibling's name, being Person X and/or Person Y (collectively referred to as 'you'), as tenants in common which ended the Trustee's involvement with the Deceased's estate.

The Property is the only remaining asset in the Deceased's estate.

Person B (the life tenant) resided at the Property until they passed away many years after Person A had passed away.

Your or Person X's child, Person Z, resides overseas. They had indicated that they wished to purchase the Property prior to the date Person B had passed away.

The Property was left vacant for a number of months following the passing of Person B.

To provide Person Z with some time to organise their finances it was decided that the Property would be let and the Property commenced being rented.

Person Z indicated that they did not wish to proceed with the purchase of the Property almost two years after Person B had passed away.

The Property ceased being rented out more than two years after Person B had passed away.

The Property was not listed for public sale however discussions had occurred with developers in relation to the Property during 2017 and 2018.

You entered into a contract for the sale of the Property more than two years after Person B had passed away, with settlement occurring on the sale after a number of months.

You have made a capital gain on the disposal of your ownership interests in the Property.

Relevant legislative provisions

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 110-25

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Capital gains tax

You can only make a capital gain or capital loss if a capital gains tax (CGT) event happens. The most common event is CGT event A1 when you dispose of an ownership interest in a CGT asset to another entity.

Application to your situation

In this situation, you entered into a contract for the sale of the Property and CGT event A1 occurred at that time. Any capital gain you make on the sale of each of your ownership interests in the Property will determined under the general application of the CGT provisions.

Remainder and life interests

In some cases, an individual may, by will, give legal life and remainder interests in a dwelling that they owned when they died. An interest in a CGT asset is also a CGT asset.

Once the life interest has been relinquished, usually by the death of the person with the life interest or the surrender of their interest, the asset will pass to the remainderman of the estate.

Where an asset which formed part of a deceased person's estate passes to the remainderman on the subsequent death of a life tenant, the remainderman is taken to have acquired the asset on the day when the deceased owner passed away, not the day when the life tenant passed away.

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, discusses the implications of the creation of a life interest over a CGT asset.

Paragraph 103 of TR 2006/14 provides the following:

The death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner; their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset......

Application to your situation

In this case, the Deceased made provisions in their will for Parent B to have a life interest in the Property and as a result a trust was created granting a life interest in the Property to Parent B and granting both of you a remainder interest.

The passing of Parent B had no CGT consequences for you but resulted in the interests in the Property held by you being enlarged. Consequently, no additional amount can be included in the first element of the cost base of your ownership interests in the Property.

As the Deceased had acquired the Property before 20 September 1985, for CGT purposes you each acquired your ownership interest in the Property for its market value on the day that Person A passed away, apportioned in accordance with each of your ownership interests.

There is no CGT provision to enable you to disregard the capital gain made on the disposal of your ownership interests in the Property. However, if you meet the conditions to be eligible to the 50% CGT discount any capital gain made on the disposal of your ownership interests can be reduced by 50%.

Note: Further information about the 50% CGT discount can be viewed at our website www.ato.gov.au by conducting a search for QC 17159