Edited version of private advice

Authorisation Number: 1051835800971

Date of advice: 24 June 2021

Ruling

Subject: CGT - other (cost base)

Question 1

Will the compensation received for the Public Acquisition Overlay be considered as additional capital proceeds as part of the sale of the property?

Answer

Yes.

Question 2

Will the first element of the cost base or reduced cost base of the main residence portion of the property when you inherited it be its market value on the date of death of your relative?

Answer

Yes.

Question 3

Will the first element of the cost base or reduced cost base of the non-main residence portion of the property when you inherited it be the deceased's cost base on the date of death of your relative?

Answer

Yes.

Question 4

Will you have a capital gains tax event on the transfer of an interest in the property to your then spouse?

Answer

Yes.

Question 5

Will you be able to offset any potential capital loss incurred when you transferred an interest in the property to your spouse against any future capital gain on sale?

Answer

Yes.

Question 6

Will the first element of the cost base or reduced cost base of the interest you received back from your spouse be its market value at the time of transfer?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You hold a 100% interest in a property.

You inherited the property from a relative's estate. You were the sole beneficiary.

The property is greater than two hectares in size.

The deceased acquired the property after 20 September 1985.

After probate was granted on your relative's estate you transferred sole title to joint tenants with your spouse.

Your spouse later transferred their interest back to you and from that date you became the sole title holder.

You are entitled to loss on sale compensation for the PAO where compensation will be paid where, upon sale of the property, the sale price is lower than expected as a consequence of the PAO.

The compensation rights for the PAO exist as personal rights to the owner and cannot be sold with the land as part of the market value.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 110-55(2)

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 subsection 128-15(4)

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Reasons for decision

Question 1

Section 116-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the 'capital proceeds' from a CGT event includes 'the money you have received, or are entitled to receive, in respect of the event happening'.

Taxation Ruling TR 95/35 discusses the CGT implications for compensation receipts. Paragraph 70 of TR 95/35 provides that in determining the most relevant asset in respect of which the compensation has been received, it is often appropriate to adopt a 'look-through' approach to the transaction which generates the compensation receipt.

The 'look-through' approach is defined in paragraph 3 of TR 95/35 as follows:

The 'look-through' approach is the process of identifying the most relevant asset. It requires an analysis of all of the possible assets of the taxpayer in order to determine the asset to which the compensation amount is most directly related. It is also referred to in this Ruling as the underlying asset approach.

In your case, you are entitled to the compensation for the reduction in sale proceeds received on the sale of the land because of the PAO.

Applying the 'look-through' approach, the most relevant asset to which the PAO compensation directly relates is the property. Also, the PAO compensation is only payable to you once you have suffered a financial loss, being the reduced sale proceeds on a sale, so it is clear that the PAO compensation will be received in the course of the same 'continuum of events' as the sale of the property.

Consequently, the PAO compensation will be additional capital proceeds for the sale of the property.

Question 2 & 3

Subsection 128-15(4) of the ITAA 1997 sets out the first element of the cost base when calculating CGT for the disposal of your ownership interest in an inherited property, which the deceased acquired after 20 September 1985, it was their main residence just before their death and was not being used for the purpose of producing assessable income at that time.

The section allows for the first element of the cost base or reduced cost base to be substituted with the market value of the dwelling as of the date of the deceased's death.

In your circumstances, this means the first element of your cost base or reduced cost base would be the market value of the property at the date the deceased passed away.

Subsection 128-15(4) of the ITAA 1997 provides a table which sets out the modifications to the first element of the cost base, or reduced cost base, of the CGT asset in the hands of a beneficiary of a deceased estate.

Item 1 of the table includes that where a CGT asset the deceased acquired on or after 20 September 1985, the first element of your cost base, or reduced cost base, of that interest will be the deceased's cost base of the asset on the day they died.

Item 3 of the table includes that where a dwelling that was the deceased's main residence just before they died, and was not then being used for the purpose of producing assessable income, the first element of your cost base, or reduced cost base of that interest will be the market value of the dwelling on the deceased's date of death.

Section 118-115 of the ITAA 1997 defines a dwelling as including a unit of accommodation that is a building or is contained in a building that consists wholly or mainly of residential accommodation and any land immediately under the unit of accommodation. The definition of dwelling is extended by section 118-120 of the ITAA 1997 to include up to two hectares of land that is adjacent to the dwelling to the extent that the land is primarily for private or domestic purposes in association with the dwelling.

Consequently, when determining the cost base of the property, your interest will then be broken down to take into account the 2 hectare limit on of a main residence.

You are taken to have acquired the main residence portion of the property at the market value on the deceased's date of death (Item 3 of subsection 128-15(4)). For the non-main residence portion of the property, you have acquired the deceased's cost base on their date of death (Item 1 of subsection 128-15(4)).

Questions 4 & 5

CGT event A1 happens if you dispose of your ownership interest in a CGT asset (Section 104-10 of the ITAA 1997). You dispose of that interest if a change of ownership occurs from you to another entity, including a change in beneficial ownership. The timing of the event will be when the contract is entered into, or if there is no contract when the change in ownership occurs.

In your case CGT event A1 happened when you transferred a half share of the property to your spouse.

If you made a capital loss on the transfer it can generally be offset against capital gains made in later income years. To the extent that a net capital loss cannot be used to offset capital gains in an income year, it can be carried forward to a later income year.

Question 6

In working out your capital gain, you determine the cost base of the CGT asset involved in the CGT event. Under the general cost base and reduced cost base rules covered under subsections 110-25(2) and 110-55(2) of the ITAA 1997 the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it. The general rules may be modified if the market value substitution rule in section 112-20 of the ITAA 1997 applies.

The market value substitution rule generally applies where you did not incur expenditure to acquire the asset (paragraph 112-20(1)(a) of the ITAA 1997). If the market value substitution rule applies, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another person is its market value at the time of acquisition.

In your case, when your spouse transferred their share of the property back to you, the first element of the cost base of the share of the property is the market value of the property at the time of the transfer.