Edited version of private advice

Authorisation Number: 1052033551250

Date of advice: 13 September 2022

Ruling

Subject: CGT - beneficial ownership interest - inherited property

Question 1

Is the sale of the vacant block that was inherited and the curtilage of the main residence, exempt from capital gains tax?

Answer

No, the disposal of the inherited block that was the back yard of your main residence is not exempt from capital gains tax.

Question 2

Did you have an ownership interest in one third of the main residence block and the block from Question 1 for the purposes of reporting capital gains tax?

Answer

Yes, you held an equitable ownership interest in each block.

This ruling applies for the following period:

1 July 2020 to 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Your mother, purchased Property A in 199X for $Y.

Your mother purchased Property B in 199X for $Z.

The transfer of Property B to your mother was not registered until 202X. You attribute the failure to register the title to your mother at the time of purchase to inaction of her solicitors at the time.

Property A and Property B were adjoining and your family used them as one property, with Property A holding your dwelling and Property B being your backyard (i.e. no dwelling).

Your mother passed away on DD MM 200X (date of death).

Property A was your mothers primary place of residence up to her date of death.

From your mother's date of death, you and your two brothers continued to live at Property A with Property B as your backyard.

On DD MM 200Y, the Supreme Court in your state granted letters of administration of your mother's intestate to your grandmother and yourself.

Legal ownership of Property A was transferred to your grandmother and yourself on DD MM 202X, as administrators of the estate of your mother.

Legal ownership of Property B was transferred to your grandmother and yourself on DD MM 202X, as administrators of the estate of your mother.

Property B was sold for $XXX,XXX on 13 October 202X.

You are an Australian resident for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Capital gains tax on sale of adjacent land

Generally, you can disregard a capital gain or capital loss you make on the disposal of a dwelling that was your main residence, in accordance with section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997).

A full exemption from capital gains tax is typically available when:

•                    you are an individual, and

•                    the dwelling was not used to produce assessable income, and

•                    the dwelling was your main residence throughout your ownership period.

For the purpose of the main residence exemption, a dwelling, relevantly, includes a unit of accommodation that is a building or is contained in a building and consists wholly or mainly of residential accommodation and the land immediately under the unit of accommodation (section 118-115 of the ITAA 1997).

Land that is adjacent to your main residence will also be included in the main residence exemption provided that the land:

•                    is used exclusively for private or domestic purposes in association with the dwelling, and

•                    does not exceed two hectares (section 118-120 of the ITAA 1997).

Paragraph 7 of Taxation Determination TD 1999/68 explains that the main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it (section 118-165 of the ITAA 1997).

Similarly, a capital gain or capital loss for a CGT event that happens in relation to a dwelling, or your ownership interest in a dwelling, is disregarded when the interest passes to you as an individual beneficiary in a deceased estate, or as the trustee of the deceased estate, subject to other conditions (section 118-195 of the ITAA 1997).

When you sold Property B, CGT event A1 happened. However, as you did not also sell Property A, which held the dwelling, the CGT event did not also happen to Property A. As such, the disposal of Property B is not eligible for the main residence exemption or able to be disregarded as a capital gain for a dwelling that passed to you as a beneficiary in a deceased estate.

Ownership interest

Broadly, you have an ownership interest in land or a dwelling if you have a legal or equitable interest in it or a right to occupy it (section 118-130 of the ITAA 1997).

An equitable interest in property is generally said to exist there you have a right to obtain legal title to the property.

To the extent that you were entitled to claim legal title to Property A and Property B as a beneficiary of your mother's estate, you held an ownership interest.

Given this, when Property B was sold, you disposed of your interest in Property B and the capital gain arising from the disposal will be attributable to you, to the extent of your ownership interest, in the income year it was sold.

You will continue to hold an equitable ownership interest in Property A, to the extent that you have a right to obtain legal title, until that interest is disposed of, whether by sale of the property or relinquishment of your right to obtain legal title to it.