Edited version of private advice

Authorisation Number: 1052114167807

Date of advice: 8 May 2023

Ruling

Issue

Subject: CGT - deceased estate

Question 1

Will any capital loss or gain on the disposal of Property C be disregarded in accordance with section 118-195?

Answer

Yes.

Question 2

Will the first element of the cost base of your interest in the property located at Property B that passed to you following the death of your parent be the cost base of that interest on the date of death in accordance with section 128-15 of the ITAA 1997?

Answer

Yes.

Question 3

Will your capital proceeds from the disposal of your interest in Property B be the market value of that interest in accordance with section 116-30 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

Year ending XX June 20XX

The scheme commences on:

XX June XX

Relevant facts and circumstances

Your parents, purchased three properties during their lifetimes:

•         Property A

•         Property B

•         Property C.

Property A was purchased before 1985 and was your parents' main residence for several years.

Property B was purchased after 1985 and used as a rental property.

Property C was purchased in before 1985 and was used as a rental property until your parents stopped using Property A as their main residence. At that time, which was before 1985, it became their main residence until their deaths.

Property C was less than 2 hectares and not used to produce assessable income.

All three of the properties were owned as joint tenants.

On X Month 20XX, one of your parents died. The other parent (Person A) acquired their share of the three properties through survivorship.

On XX Month 20XX Person A died leaving their remaining estate to you and your two siblings (Sibling B and Sibling C) in equal shares.

On XX Month 20XX the three properties transferred to you and your two siblings in equal shares.

You and your siblings intend to transfer your interests in each property between each other so you each end up with 100% ownership of a single property. The outcome will be:

•         You own 100% of Property A

•         Sibling B owns 100% of Property B

•         Sibling C owns 100% of Property C.

You will transfer your interest in Property B to Sibling B.

You will transfer your interest in Property C to Sibling C.

Siblings B and C will transfer their interests in Property A to you.

You will not give or receive any other money or property in consideration of the transfers.

Your ownership interest in Property C will end within 2 years of Person A's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Reasons for decision

Detailed reasoning

Capital gains tax provisions

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 CGT even happens to a CGT asset. Real property is a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset as per subsection 104-10(1) of the ITAA 1997.

Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law.

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 104-10(4) of the ITAA 1997).

Main residence exemption

Section 118-195 of ITAA 1997 provides that in certain circumstances any capital gain or loss you make from a CGT event in relation to a dwelling you acquired from a deceased estate will be disregarded. The CGT event relating to the disposal of your interest in Property C meets the requirements of this section:

•         The dwelling was the main residence of the deceased just before their death and was not being used for the purpose of producing assessable income, and

•         You will dispose of your interest in the dwelling within 2 years of Person A's death.

Therefore, any capital gain or loss arising from the disposal of your interest in Property C will be disregarded.

Cost Base

The cost base of an asset for CGT purposes generally comprises of five elements:

•         First element: the cost of acquiring the asset

•         Second element: incidental costs

•         Third element: costs of owning the asset

•         Fourth element: capital expenditure increasing or preserving the value of the asset or of installing or moving the asset

•         Fifth element: capital expenditure to establish, preserve or defend title.

When a taxpayer's legal personal representative or a beneficiary of the taxpayer's estate acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the legal personal representative or beneficiary are modified under the table in subsection 128-15(4) of the ITAA 1997.

If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base - the acquisition cost - is the deceased's cost base for the asset on the day they died under Item 1 in the table, unless it is covered by another item in the table.

As Property B is a post CGT asset and is not covered by any other item in the table, the first element of its cost base will be the cost base of the asset on Person A's date of death.

Market Substitution - Capital Proceeds

Upon initial acquisition by bequeathment of the deceased estate, you and your siblings acquired a one-third individual interest in each property.

When the transactions occur to enable each of you to have sole ownership of an individual property, you have disposed of your interests in Property B and Property C. The capital proceeds you receive are the interests in Property A.

The different properties will have inherently different values, however you are simply exchanging your interests with no further consideration being provided. You are not dealing with each other at arm's length. As such subsection 116-30 (2) will apply:

The *capital proceeds from a *CGT event are replaced with the *market value of the *CGT asset that is the subject of the event if:

...

(b) those capital proceeds are more or less than the market value of the asset and:

(i) you and the entity that *acquired the asset from you did not deal with each other at *arm's length in connection with the event;

When calculating the capital gain or loss associated with the disposal of property B the capital proceeds will be the market value of that property on the day the CGT event occurs.