Edited version of private advice

Authorisation Number: 1052038463284

Date of advice: 9 November 2022

Ruling

Subject: CGT - deceased estate - cost base

Question 1

Is the Property a CGT asset pursuant to section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the sale of the Property a CGT event pursuant to section 104-10 of the ITAA 1997?

Answer

Yes.

Question 3

Can the main residence exemption apply to the sale of the Property pursuant to sections 118-110 or 118-195 of the ITAA 1997?

Answer

No.

Question 4

Is the portion of the Property owned by you since 1976 a pre-CGT asset pursuant to section 995-1 of the ITAA 1997?

Answer

Yes.

Question 5

Is the first element of the cost base of the portion of the Property transferred to you upon the death of Sibling A calculated pursuant to section 128-50 of the ITAA 1997?

Answer

Yes.

Question 6

Is the first element of the cost base of the portion of the Property transferred to you upon the death of Parent calculated pursuant to section 128-50 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The Family

1.    The Family consists of:

•           You;

•           Your parent (Parent)

•           Your sibling (Sibling A)

•           Your sibling (Sibling B).

2.    Prior to 20 September 1985, you migrated to Australia and have resided in Australia since that time.

3.    You are an Australian citizen.

4.    Parent is not an Australian citizen and has not resided in Australia.

5.    Sibling A is not an Australian citizen and has not resided in Australia.

The Property

6.    You are the registered owner of a property located in an overseas jurisdiction (the Property).

7.    Prior to 20 September 1985, the Property was purchased.

8.    The Property was held in a joint tenancy by you, Parent and Sibling A.

9.    On DD Month 20xx, Sibling A passed away. As the surviving joint tenants, you and Parent received Sibling A's interest in the Property.

10.  On DD Month 20x1, Parent passed away. As the surviving joint tenant, you received Parent's interest in the Property and are now the sole owner of the Property.

11.  Only the Family has resided in the Property at all times:

12.  The Property has never been used to earn an income.

13.  The Property has been sold and settlement will take place on DD Month 20x2.

14.  The proceeds of the sale will be divided between Sibling B and you.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 104-10

Subsection 104-10(5)

Section 108-5

Section 108-7

Section 118-110

Subsection 118-110(4)

Section 118-195

Section 118-197

Division 128

Subsection 128-50(2)

Subsection 128-50(3)

Subsection 128-50(4)

Section 149-10

Subsection 995-1(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Summary

The Property is a CGT asset and the sale of it is a CGT event.

You are not entitled to a main residence exemption on the disposal of the Property.

In calculating the capital gain or capital loss on the Property, the following applies:

• Any capital gain or capital loss calculated on the interest of the Property owned by you prior to 20 September 1985 is disregarded;
• The first element of the cost base of the interest acquired from Sibling A is the market value of that interest on the date of their death;
• The first element of the cost bases of the interests you acquired from Parent are:
  • The original interest that Parent has held since prior to 20 September 1985, is the market value of that interest on the date of their death; and
  • The interest that Parent acquired from Sibling A is the cost base of that interest at the time of Parent's death.

Detailed reasoning

CGT events

1.    Section 104-10 provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of an asset when a change of ownership occurs from you to another entity. However, subsection 104-10(5) provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

CGT asset

2.    A capital gain or capital loss may arise if a CGT event happens to a CGT asset. A CGT asset is defined at section 108-5 to mean any kind of property, or a legal or equitable right that is not property. Land and buildings are specifically listed as a CGT asset.

3.    Section 108-7 provides that where assets are jointly owned, then for CGT purposes each of the owners is treating as owning a CGT asset in equal shares.

Pre-CGT asset

4.    The term 'pre-CGT' asset is defined in the Dictionary at subsection 995-1(1) as having the meaning given by section 149-10. In turn, section 149-10 defines a 'pre-CGT asset' as having been last acquired prior to 20 September 1985 and not having stopped being a pre-CGT asset due to other provisions of either the ITAA 1936 or ITAA 1997.

Main residence exemption

5.    Section 118-110 sets out the requirements in which a capital gain or capital loss made from a CGT event happening in relation to a dwelling, or a taxpayer's ownership interest in it, will be disregarded. Essentially, the capital gain or capital loss will be disregarded where:

•      The entity involved is an individual;

•      The 'dwelling' was the individual's main residence throughout the 'ownership period';

•      The individual did not acquire the 'ownership interest' either as a beneficiary or trustee of a deceased estate; and

•      The CGT event is a 'relevant' CGT event.

6. Section 118-195 sets out the requirements in which a capital gain or capital loss made from a CGT event happening in relation to a dwelling, or a taxpayer's ownership interest in it, will be disregarded if that interest passed to the taxpayer as a beneficiary of a deceased estate. However, the capital gain or capital loss will not be disregarded if the deceased was an excluded foreign resident just before their death (paragraph 118-195(1)(c)).
7. Section 118-197 provides that if you and another individual owned ownership interests in a dwelling as joint tenants, and the other individual dies, Subdivision 118-B (which sets out the rules for the main residence exemption) applies to you as if the ownership interest of the person who died "passed to you as a beneficiary of the deceased estate".

8.    The term 'excluded foreign resident' is defined in the Dictionary at subsection 995-1(1) as having the meaning given by subsection 118-110(4). In turn, subsection 118-140(4) defines an 'excluded foreign resident' to mean a foreign resident, who at that time, has been a foreign resident for more than six years.

9.    The term 'foreign resident' is defined at subsection 995-1(1) to mean a person who is not a resident of Australia for the purposes of the ITAA 1936.

Consequences of death of joint owners

10.  Division 128 sets out the CGT consequences of a death. It sets out the rules that apply where a CGT asset passes through a deceased estate and where subsequently it is subject to a CGT event in the hands of a beneficiary of the estate. Generally, the passage of a CGT asset from the deceased to a beneficiary will not trigger any CGT consequences. However, CGT will apply if later a CGT event happens to the asset in the hands of the beneficiary.

11.  The rules in Division 128 apply to any CGT assets owned by the deceased at their date of death. Importantly, the rules also apply to joint interests in any real property. This is so even though such assets are not transmitted to the beneficiary under the terms of the deceased's will. Instead, they vest automatically in the other joint owner/s.

12.  Subsection 128-50(2) provides that a surviving joint tenant is taken to have acquired the deceased joint tenant's interest in the asset at the date of the deceased's death. If there are two or more survivors, they are taken to have acquired that interest in equal shares.

13.  Subsection 128-50(3) provides that if the deceased individual acquired their interest in the jointly owned asset on or after 20 September 1985, the first element of the cost base of the interest for each surviving joint tenant will be the cost base of the interest of the individual who died (worked out on the day the individual died) divided by the number of survivors.

14.  Subsection 128-50(4) provides that if the deceased individual acquired their interest in the jointly owned asset prior to 20 September 1985, the first element of the cost base of the interest for each surviving joint tenant will be the market value of the interest of the individual who died (worked out on the day the individual died) divided by the number of survivors.

In your circumstances

CGT asset

15. You owned the Property. The Property consists of land and buildings, which are specifically listed as a CGT asset. In accordance with section 108-5, the Property is a CGT asset.

CGT event

16.  You sold the Property which will lead to a change of ownership. You have disposed of the Property and, in accordance with section 104-10, CGT event A1 will apply to the disposal

Ownership interests

17.  The Property was purchased prior to 20 September 1985 and was held by three joint tenants: you, Sibling A and Parent. In accordance with section 108-7, you were treated as owning equal interests in the Property, being two-sixths each.

18.  Sibling A passed away after 20 September 1985. In accordance with subsection 128-50(2), you and Parent are taken to have acquired Sibling A's interest in the property in equal shares as at the date of their death. Therefore, on the date of Sibling A's death, you owned three-sixths of the Property, being:

•         two-sixths interest you originally acquired prior to 20 September 1985, and

•         one-sixth interest you are taken to have acquired from Sibling A after 20 September 1985.

19.  On the date of Sibling A's death, Parent owned three-sixths of the Property, being:

•         two-sixths interest originally acquired prior to 20 September 1985, and

•         one-sixth interest taken to have acquired from Sibling A after 20 September 1985.

20.  Parent passed away and in accordance with subsection 128-50(2), you are taken to have acquired Parent's interest in the Property as at the date of their death. Therefore, from the date of Parent's death, you were the sole owner of the Property, holding all the interests in the property as follows:

•      two-sixths interest you originally acquired prior to 20 September 1985,

•      one-sixth interest you are taken to have acquired from Sibling A after 20 September 1985,

•      three-sixths interest you are taken to have acquired from Parent after 20 September 1985, made up of:

o   two-sixths interest Parent originally acquired prior to 20 September 1985, and

o   one-sixth interest Parent was taken to have acquired from Sibling A after 20 September 1985.

Pre-CGT asset

21.  You acquired your original interest in the Property prior to 20 September 1985. As no provision of the ITAA 1936 or the ITAA 1997 has deemed that interest to be acquired after that date, your original interest in the Property is a pre-CGT asset.

22.  Further, as your ownership interest was acquired prior to 20 September 1985, any capital gain or capital loss you make on the disposal of that interest is disregarded in accordance with subsection 104-10(5).

23.  As you acquired the interests from Sibling A and Parent after 20 September 1985, subsection 104-10(5) does not apply to disregard any capital gain or loss you make on disposal of those interests.

Main residence exemption

24.  Neither Parent nor Sibling A were Australian residents for the purposes of the ITAA 1936. Further, they were not Australian residents in the preceding six years prior to their deaths. Accordingly, both Parent and Sibling A are excluded foreign residents and you are not entitled to the main residence exemption for the ownership interests that passed to you on their deaths.

Cost base of deceased interests

25.  In respect of the one-sixth interest you are taken to have acquired from Sibling A after 20 September 1985, as Sibling A acquired this interest prior to 20 September 1985, the first element of the cost base of the interest is calculated pursuant to subsection 128-50(4). Therefore, the first element of the cost base of the interest is the market value of that interest on the day Sibling A died.

26.  In respect of the three-sixths interests you are taken to have acquired from Parent after 20 September 1985, the first element of the cost base is calculated pursuant to subsections 128-50(3) and 128-50(4) as they acquired their interests at different times.

27.  As Parent's original two-sixths interest was acquired prior to 20 September 1985, the first element of the cost base of that interest is calculated pursuant to subsection 128-50(4). Therefore, the first element of the cost base of Parent's original two-sixths interest is the market value of that interest on the day they died.

28.  As Parent was taken to have acquired Sibling A's one-sixth interest after 20 September 1985, the first element of the cost base of that interest is calculated pursuant to subsection 128-50(3). Therefore, the first element of the cost base of the one-sixth interest you are taken to have acquired from Parent that was previously acquired from Sibling A is the cost base of that interest in Parent's hands on the day Parent died.