Edited version of private advice

Authorisation Number: 1052254520437

Date of advice: 24 May 2024

Ruling

Subject: CGT - sale of property by statutory trustees

Question 1

Did you, as Trustees, acquire the Property as a result of a capital gains tax (CGT) event happening to the Defendant and Plaintiff?

Answer

Yes.

Question 2

Will the total of the first, second and third elements of the cost base of the Property for the purpose of section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for the Trustees equal the capital proceeds on the sale of the Property by the Trustees?

Answer

Yes.

Question 3

Will the Trustees make a capital gain on the sale of the Property under Part 3-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Persons A and B (the Trustees) were appointed trustees for the sale of a property State A (the Property), under section 66G of the Conveyancing Act 1919 (NSW). The Trustees were appointed under a Court Order issued by the Equity Division of the Supreme Court of NSW.

The Court Orders provide the following:

1.            Pursuant to s 66G of the Conveyancing Act 1919 (NSW), appoint [Persons A and B] as trustees (Trustees) for the sale of the property located State A (Property).

2.            The Property is vested in the Trustees subject to any encumbrances affecting the entirety of the Property, but free from encumbrances, if any, affecting any undivided share or shares in the Property, to be held by the Trustees upon the statutory trust for sale under Division 6 of Part 4 of the Conveyancing Act 1919 (NSW).

3.            On completion of the sale of the Property pursuant to Order 2, the Trustees distribute the proceeds in the following manner:

a.            In payment of all rates, taxes and insurances and other outgoings on the Property;

b.            In payment of all the other costs of sale including, but not limited to legal costs, advertising costs and agent's commission;

c.            In payment of the Trustees' fees for time in attendance up to completion of the sale on an indemnity basis;

d.            In payment of the expenses incurred by the Trustees for the purpose of bringing the Property up to a reasonable condition that would facilitate the sale;

e.            In payment of the plaintiff's costs of the proceedings on the indemnity basis; and

f.            The balance one-half each to the plaintiff and the defendant.

4.            Cross-summons dismissed.

5.            Cross-claimant/defendant to pay the plaintiff's costs on an indemnity basis.

Prior to the Property vesting in the Trustees, the previous owners had used the Property for a business, but it had been vacant for a number of years since the death of one of the previous owners.

At the time the Property vested in the Trustees, it consisted of a residential premises and other structures and/or buildings as outlined in the advertising material used in the sale of the Property.

The Property has remained vacant since the Property was vested in the Trustees and there have been no business operations conducted on the Property since that time.

No income was derived from the Property by the Trustees while it was vested in them.

The Trustees sold the Property at auction in the year ended 30 June 20YY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 110-55

Reasons for decision

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 109-5(1) provides that you acquire a CGT asset when you become its owner.

ATO ID 2009/129 Income Tax: Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1? (ATO ID 2009/129) states that the making of a court order effects a disposal of property from the previous owners to the trustees for sale by operation of the law.

The granting of the Court Orders effected a disposal of the Property by the previous owners, being the Plaintiff and Defendant, to you as Trustees for sale by operation of law. This resulted in CGT event A1 occurring to the previous owners. Accordingly, you as Trustees acquired the Property at the time CGT event A1 occurred to the previous owners and you as Trustees compulsorily became the Property's owner by operation of law.

Under the general cost base and reduced cost base rules covered by 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 the property given (or required to be given) in respect of acquiring it.

Because you, as Trustees, undertook an obligation to pay the net proceeds of the sale to the previous owners of the Property, your payment of the net proceeds to them will be your cost of acquisition ('the money you are required to pay') for the purposes of subsections 110-25(2) and 110-55(2) of the ITAA 1997.

The second and third elements of the cost base are provided by subsections 110-25(3) and 110-25(4) of the ITAA 1997 respectively. Clause 3 of the Court Order relates to outgoings by the Trustees that will form the second and third elements of the cost base of the Property.

ATO ID 2009/129 also states that on the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received.

Therefore, the total of the first, second and third elements of the cost base of the Property will equal the capital proceeds, being the money that the Trustees received in respect of the sale of the Property. Given that the proceeds from the sale of the Property will equal your cost base of the Property on acquisition, you will realise neither a capital gain nor a capital loss on the sale of the Property.