Edited version of private advice

Authorisation Number: 1051805249495

Date of advice: 16 February 2021

Ruling

Subject: Capital gains tax

Question

Will the sale of the property be subject to the capital gains tax provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A and entity B purchased the Property on xxxx.

Entity A died on xxxx.

Entity B died on xxxx.

Entity A and entity B have never been registered for GST.

Probate for the Estate of entity A was granted on xxxx.

Probate for the Estate of entity B was granted on xxxx.

Under the will of entity A, dated xxxx, the whole estate was given to the children, entity C, entity D and entity E in equal shares. The x children were executors and trustees of the will.

Entity D and entity E were appointed executors and trustees of the will of entity B, dated xxxx. The children, entity C, entity D and entity E are beneficiaries of the estate of entity B.

Entity A and entity B had been estranged for years even though they lived at the same address until xxxx.

The original registered owners of the Property were entity A and entity B as joint tenants.

A Title Search shows that the property was later owned by entity A and entity B as tenants in common. The ownership interest was tenants in common as at the date of deaths.

The property is xxxx hectares.

The Property was used by entity A and entity B as their main residence. No farming enterprise was carried on.

The Property has remained vacant since date of deaths and has been maintained by entity E in the interim for insurance purposes.

The Property has not been transferred to the beneficiaries and is held by the Executors for each deceased estate.

The valuation of the property on xxxx was $xxxx.

Initial discussions with agents began in xxxx to sell the property. Entity F was engaged sometime later following assessment of marketing proposals from agents.

In xxxx, x offers were received by entity F for residential developments.

In early xxxx, negotiations with another party began, to sell the property for commercial development. The Deed included a lengthy period to allow the purchaser to undertake due diligence and then to undertake full development approval from the Council.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Sub-Division 118-B

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Division 115

Reason for decision

Capital gains tax provisions on sale of property

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens.

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

Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property.

You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base.

In some cases, where a taxpayer is carrying on a business or enters into an isolated commercial transaction with a view to a profit, a profit on the sale of property may be regarded as revenue in nature and assessable as ordinary income under section 6-5 of the ITAA 1997. However, in the circumstances of this case, the sale of the property is regarded as a mere realisation of a capital asset and not revenue in nature.

Deceased estate

On the death of a person, the property of the deceased passes to their estate and legal control is exercised by an executor or administrator.

In this case, the executors will sell the property as part of the deceased estate and any capital gain is assessable to the deceased estate.

Under Division 128 of the ITAA 1997, the legal personal representative is taken to have acquired the asset on the day the person died. Capital gains tax (CGT) does not apply when you acquire the asset, however CGT may apply when the property is later sold. The date of the person's death is generally relevant when calculating the capital gain.

Cost base

Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset such as property. You dispose of an asset when a change of ownership occurs from one entity to another entity.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Subsection 128-15(4) of the ITAA 1997 sets out the cost base rules of the CGT asset in the hand of the legal personal representative. If the asset was acquired by the deceased person before 20 September 1985, the first element of the cost base is the market value of the asset on the day the person died.

Under the CGT rules, the deceased estate of entity A acquired the share of the property on xxxx. The remaining share of the property was acquired by the deceased estate of entity B on xxxx.

As each deceased estate owns a separate interest in the same CGT asset, the cost base for each portion may be different.

As the property was purchased by entity A and entity B before 20 September 1985, the first element of the cost base of each portion of the property is the market value of the property on the relevant date of deaths.