Edited version of private advice

Authorisation Number: 1052249152778

Date of advice: 21 May 2024

Ruling

Subject: CGT - subdivision of land by deceased estate

Question 1

Is any capital gain or loss the Taxpayer makes from the sale of each Lot disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the Taxpayer adjust any capital gain or loss arising due to the sale of each Lot by excluding the period that the dwelling on the Property was the main residence of the deceased's spouse from the non-main residence days in the formula in subsection 118-200(2) of the ITAA 1997?

Answer

No.

Question 3

Will the Commissioner exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for the Taxpayer to sell each Lot until the settlement of each sale?

Answer

No.

This ruling applies for the following periods:

20XX-XX income year

20XX-XX income year

20XX-XX income year

20XX-XX income year

20XX-XX income year

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased became the registered proprietor of the Property before 1985. The Property has an area of just under two hectares and was occupied by the deceased and their spouse as their principal place of residence. At no stage during the deceased's ownership was the Property used for any income producing purpose.

The deceased died some XX years ago and in their will left their entire estate to their spouse, with the spouse appointed as sole executor. Probate of the will was granted promptly. The lawyers acting on the spouse's behalf in the estate registered them on title as the legal personal representative of the deceased but did not take the next step of transferring the property to them in their own right as the sole beneficiary under the will.

The deceased's spouse continued to use the Property as their principal place of residence until their death some XX years ago. Probate was granted promptly appointing two of the children as Executors of the deceased's Estate (the Taxpayer). Shortly afterwards, the children became registered proprietors of the Property as the Legal Personal Representative of the deceased's Estate. The lawyers acting for the spouse's Estate queried why they were registered as Legal Personal Representatives of the deceased's Estate (and not of the spouse's Estate) and were informed by the Registrar of Titles that as the spouse was never the proprietor of the land but executor, the registration was correct. The Applicant understands that the children were registered on this basis as the Executors of the spouse (in their capacity as Executor of the deceased's Estate).

The Taxpayer sought to subdivide the Property. Due to the matters outlined below, the subdivision process was significantly delayed:

•         It took approximately a year to have the Planning Permit approved by the local Council.

•         Following the issue with the Planning Permit, there were problems associated with the construction of the subdivision, with the Covid pandemic being the largest contributor to the delay in works.

•         Until the above works could be completed, the Plan of Subdivision could not be registered and the sale of the lots completed.

The Plan of Subdivision whereby the Property was to be subdivided into XX lots was then registered. With respect to the XX lots:

•         XX have been sold

•         X are available for sale

•         X have been passed to one beneficiary

•         Another (with the dwelling) is not for sale and is expected to be passed to a different beneficiary

•         The final XX are not for sale

Each Lot that has been sold was vacant land at the time of sale. (There was no dwelling on them.)

Each Lot that is available for sale is vacant land.

Assumption

For the purpose of this ruling, it is assumed that all of the Lots that are available for sale will be sold during the period of this ruling as vacant land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 Section 118-195

Income Tax Assessment Act 1997 Division 128

Reasons for decision

Question 1

Summary

Any capital gain or loss the Taxpayer makes from the sale of each Lot is not disregarded under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 102-20 of the ITAA 1997 states that you can make a capital gain or capital loss if and only if a CGT event happens. The capital gain or loss is made at the time of the event.

Each CGT event applies to a particular CGT asset. Where real property has been subdivided, it is the CGT event that determines the state and nature of the relevant CGT asset. To assist in this, section 108-5 of the ITAA 1997 states that a part of a larger CGT asset is itself a CGT asset if the context requires it (to avoid doubt).

Section 104-10 provides that CGT event A1 happens if there is a change of ownership of a CGT asset from you to another entity. Here, the context requires that each Lot is a separate and distinct CGT asset.

The consequence of each Lot being its own CGT asset is that the capital gains provisions are applied independently to each Lot as and when a CGT event happens to it.

This private ruling will not consider the CGT consequences for the Lots that are not for sale because no CGT event will happen for them during the ruling period. There are only CGT consequences if a CGT event happens.

Likewise, this private ruling will not consider the CGT consequences for the Lots that have passed to a beneficiary. Law Administration Practice Statement PSLA 2003/12 states at paragraph 2 that:

... the ATO's practice is to not recognise any taxing point in relation to assets owned by a deceased person until they cease to be owned by the beneficiaries named in the will (unless there is an earlier disposal by the legal personal representative or testamentary trustee to a third party or CGT event K3 applies).

The basic CGT calculation

For CGT event A1, subsection 104-10(4) of the ITAA 1997 states that a capital gain is made if the capital proceeds are more than the asset's cost base and a capital loss is made if those proceeds are less than the reduced cost base. Section 102-22 of the ITAA 1997 states that the amount of the capital gain or loss is the difference between the amounts being compared.

The split asset rule in section 112-25 of the ITAA 1997 applies due to the subdivision of the Property into 22 Lots. It requires apportionment of the cost base of the Property among the Lots in a reasonable way. Taxation Determination TD 97/3 provides some guidelines about reasonable apportionment.

It is the cost base of the Property as it was immediately before the subdivision that is subject to the split asset rule. The Table in subsection 128-15(4) of the ITAA 1997 modifies the first element of the cost base of the Property for the Taxpayer so that it is its market value calculated as at the date the deceased passed away. Other elements of the cost base of the Property should reflect the outgoings incurred by the Taxpayer.

Subsection 128-15(2) of the ITAA 1997 states that the Taxpayer acquired the Property on the date that the deceased passed away. Paragraph 2 of Taxation Determination TD 97/3 states that the same acquisition date applies to each of the subdivided Lots.

Entitlement to the full main residence exemption under section 118-195 of the ITAA 1997

The conditions for the full main residence exemption under section 118-195 of the ITAA 1997 for the Taxpayer are:

•         The CGT event must happen in relation to a dwelling

•         They owned it as the trustee of the deceased estate (that means it was owned by the deceased when they passed away)

•         One of two conditions about the deceased's ownership is satisfied (either the deceased acquired it before 20 September 1985 or, if acquired after 20 September 1985, it was their main residence when they passed away and not then being used to derive assessable income)

•         One of two conditions for the period after the deceased's death is satisfied (either settlement of the disposal is completed within two years of the deceased passing away or the dwelling is occupied by certain individuals for the whole of the period from the date of death until settlement of the sale), and

•         The deceased was not an excluded foreign resident just before their death.

The full main residence exemption under section 118-195 of the ITAA 1997 is not available if any of these conditions are not satisfied.

The first condition is that the CGT event must happen in relation to a dwelling.

It is the state and nature of the CGT asset that is the object of the CGT event at the time of the CGT event and at the date of settlement that determines whether or not the CGT event is in relation to a dwelling.

Section 118-165 of the ITAA 1997 states:

The exemption does not apply to a CGT event that happens in relation to land ... to which the exemption can extend under section 118-120 (about adjacent land) if that event does not also happen in relation to the dwelling or your ownership int it.

That means that the dwelling and the adjacent land are disposed of to the same purchaser at the same time in the same contract. (See paragraph 7 of Taxation Determination TD 1999/68.)

The residence that the deceased and their spouse occupied as their main residence is on a Lot that is not the subject of this private ruling. It is of no assistance to the outcome for the other Lots that Norm and Joan used the whole of the Property in conjunction with this residence because the Property is not being disposed of as one CGT asset. The CGT provisions are applied to each Lot that has been or will be sold independently.

There was no dwelling on any of the Lots that have been sold at the time they were sold. The same outcome will occur in relation to the Lots are to be sold during the period of this ruling.

The first condition is not satisfied in relation to the Lots that have been or will be sold because the CGT event for each of them is not in relation to a dwelling.

Therefore, the conditions for accessing the full main residence exemption afforded by section 118-195 of the ITAA 1997 are not satisfied in relation to the CGT events that have happened to the Lots that have been sold or in relation to the CGT events that will happen to the Lots that will be sold during the period of this ruling and it does not apply to them.

Question 2

Summary

The Taxpayer will not adjust any capital gain or loss arising due to the sale of each Lot by excluding the period that the dwelling on the Property was the main residence of the deceased's spouse from the non-main residence days in the formula in subsection 118-200(2) of the ITAA 1997.

Detailed reasoning

A partial main residence exemption reduces the amount of any capital gain or loss that is worked out under the basic CGT calculation.

Entitlement to the partial main residence exemption under section 118-200 of the ITAA 1997

A taxpayer may be entitled to a partial main residence exemption under section 118-200 of the ITAA 1997 if they are not entitled to the full main residence exemption under section 118-195.

However, the partial main residence exemption is only available if the first two conditions for the full main residence exemption are satisfied. They are:

•         The CGT event must happen in relation to a dwelling

•         You owned it as the trustee of the deceased estate (that means it was owned by the deceased when they passed away)

For the reasons outlined above, the first condition is not satisfied in relation to the Lots that have been or will be sold because the CGT event for each of them is not in relation to a dwelling.

Therefore, the conditions for accessing any partial main residence exemption afforded by section 118-200 of the ITAA 1997 are not satisfied in relation to the CGT events that have happened to the Lots that have been sold or in relation to the CGT events that will happen to the Lots that will be sold during the period of this ruling and it does not apply to them.

Question 3

Summary

The Commissioner will not exercise the discretion under section 118-195 of the ITAA 1997 to allow an extension of time for the Taxpayer to sell each Lot until the settlement of each sale.

Detailed reasoning

The Commissioner's discretion in section 118-195 of the ITAA 1997 is a component of the fourth condition mentioned above, which is about the period after the deceased passed away. If exercised, this discretion allows a period longer than two years for the owner's ownership interest to end.

The two-year condition operates independently from the 'use by certain individuals' condition.

Exercising the Commissioner's discretion under section 118-195 of the ITAA 1997

One factor considered by the Commissioner when deciding if the discretion in section 118-195 of the ITAA 1997 should be exercised is that exercising it will have practical consequences for the taxpayer that has capital gains consequences.

All of the other conditions in section 118-195 of the ITAA 1997 as described above need to be satisfied, if exercising the Commissioner's discretion is to have any consequences.

For the reasons outlined above, the first condition in section 118-195 of the ITAA 1997 is not satisfied in relation to the Lots that have been or will be sold because the CGT event for each of them is not in relation to a dwelling.

Consequently, the Commissioner will not contemplate exercising his discretion under section 118-195 of the ITAA 1997 to allow longer than two years to dispose of these Lots because another condition that is required for the full main residence exemption is not satisfied.