Edited version of private advice

Authorisation Number: 1052273467146

Date of advice: 10 July 2024

Ruling

Subject: CGT - adjacent land, deceased estate

Question 1

Will the disposal of the property be a CGT A1 event in the summary table in section 104-5 and under subsection 104-10(1) of the ITAA 1997?

Answer

Yes. A CGT A1 event happens when you dispose of a CGT asset.

Question 2

Will the time of the CGT A1 event be when the contract for the disposal was entered in accordance with paragraph 104-10(3)(a) of the ITAA 1997?

Answer

Yes. The time of the CGT event, according to subsection 104-10(3) of the ITAA 1997, is when you enter into the contract for the disposal; or if there is no contract when the change of ownership occurs.

Property A

Question 3

In relation to the ownership interest that was always held by the taxpayer, will the exception in subsection 104-10(5) of the ITAA 1997 apply to disregard any capital gain made in relation to the disposal of the main residence (because it was acquired before 30 September 1985)?

Answer

Yes. A capital gain or capital loss is disregarded, under subsection 104-10(5), if the asset was acquired before 20 September 1985.

Question 4

Alternatively, in relation to the ownership interest that was always held by the taxpayer, will paragraph 118-110(1)(b) of the ITAA 1997 apply to disregard any capital gain made in relation to the disposal of the taxpayer's main residence?

Answer

Yes. The dwelling was the main residence of XXX and XXX and not subject to CGT.

Question 5

Is the taxpayer taken to have acquired their spouse's interest in the main residence on the day of death in accordance with subsection 128-50(2) of the ITAA 1997?

Answer

Yes. The property was owned as joint tenants. Subsection 128-50(2) provides that the survivor is taken to have acquired the individual's interest in the asset on the day the individual died.

Question 6

In relation to the ownership interest that passed to the taxpayer upon the death of the spouse, will Item 2(a) in paragraph 118-195(1)(b) of the ITAA 1997 apply to disregard any capital gain made in relation to the disposal of the main residence from the date of death until the ownership interest ended?

Answer

Yes. A capital gain or capital loss from the CGT event in relation to your dwelling is disregarded under Item 2(a) in paragraph 118-195(1)(b) because the deceased acquired the ownership before 20 September 1985.

Property B

Question 7

In relation to the ownership interest that was always held by the taxpayer, will the exception in subsection 104-10(5) of the ITAA 1997 apply to disregard any capital gain made in relation to the disposal of property B acquired before 30 September 1985?

Answer

Yes. The property was acquired prior to 20 September 1985 and therefore the capital gain is disregarded.

Question 8

Is the taxpayer taken to have acquired their spouse's interest in property B (pre-CGT) on the day of death in accordance with subsection 128-50(2) of the ITAA 1997?

Answer

Yes. As joint tenants, subsection 128-50(2) provides that the survivor is taken to have acquired the individual's interest in the asset on the day the individual died.

Question 9

Is the taxpayer taken to have acquired their spouse's interest in property B (pre-CGT) on the day that their partner acquired the share in the property in accordance with item 7 of the table in subsection 115-30(1) of the ITAA 1997?

Answer

Yes. Section 115-30 of the ITAA 1997 provides special rules about the time of acquisition. Item 7 provides the acquirer is treated as having acquired the CGT asset when the deceased acquired their interest in the CGT asset.

Question 10

In relation to the ownership interest that passed to the taxpayer upon the death of the spouse, will the exception in subsection 104-10(5) of the ITAA 1997 apply to disregard any capital gain made in relation to the disposal of property B (pre-CGT)?

Answer 10

Yes. The property was acquired prior to 20 September 1985 and therefore the capital gain is disregarded.

Property C

Question 11

Does the CGT asset (property C) pass to the taxpayer when they became the owner under their spouse's Will, in accordance with paragraph 128-20(1)(a) of the ITAA 1997?

Answer

Yes. Subsection 128-20(1) provides that a CGT asset passes to a beneficiary in your estate under the Will. The taxpayer inherited the property according to the deceased's Will.

Question 12

Does section 128-15 of the ITAA set out what happens to the interest in Property C the spouse owned which passed to the taxpayer as a beneficiary of the deceased estate?

Answer

Yes. Section 128-15 provides that the CGT asset you owned just before dying devolves to your legal personal representative; or passes to a beneficiary in your estate. The asset is taken to have been acquired by the taxpayer, as a beneficiary, on the day the deceased died.

Question 13

Will the first element of the cost base of the interest that passed, in property C, to the taxpayer as a beneficiary of the deceased estate be modified to be the spouse's cost base on the day of death in accordance with item 1 in the table in subsection 128-15(4) of the ITAA 1997?

Answer

Yes. The property was acquired after 20 September 1985, therefore the taxpayer acquired the asset on the day the deceased died under subsection 128-15(2). Item 1 of the table provides the first element of the asset's cost base is the cost base of the asset on the day the deceased died.

Question 14

Will the cost base be indexed, for property C, in accordance with section 114-10 of the ITAA 1997?

Answer

Indexation can be applied where a capital gain from a CGT event happens in relation to a CGT asset acquired prior to 21 September 1999. The taxpayer can choose to utilise the indexed cost base instead of applying the CGT discount method in Division 115 to calculate the taxable capital gain.

The taxpayer has chosen not to use the indexation method and will apply the discount capital gain method to the gain made on the sale of property C.

Question 15

Upon the disposal of the properties by the taxpayer, did the same CGT even happen to property C as it did to the main residence at XXX for the purposes of subsection 188-120(1) of the ITAA 1997?

Answer

Yes. The rear of property C was fenced off and separate to the dwelling at the front of the property. The fenced area was unavailable to the tenants of the property and did not form part of the rental agreement. The rear of the property formed part of the main residence property.

Question 16

Was the land at the rear of property C 'adjacent land' to the extent that the land was used primarily for private or domestic purposes in association with the main residence at XXX for the purposes of subsection 118-120(2) of the ITAA 1997?

Answer

Yes. The main residence exemption applies to land that is adjacent to the dwelling; but only to the extent that the adjacent land was used primarily for private or domestic purposes in association with the dwelling under section 118-20(1). The maximum area of adjacent land that qualifies for the main residence exemption is two hectares, including the area of land on which the dwelling is situated, under subsection 118-120(2).

The adjacent land was used by the deceased and the taxpayer for private and domestic purposes.

Question 17

Was the land area of the adjacent land and the main residence less than 2 hectares as required by subsection 118-120(3) of the ITAA 1997?

Answer

Yes. The total area of the adjacent land and main residence is less than 2 hectares

Question 18

Will the main residence exemption in subdivision 118-B of the ITAA 1997 apply to the XX% land at the rear of property C under the extension to adjacent land in section 188-120 of the ITAA 1997?

Answer

Yes. The rear of property C was fenced off from the dwelling on the property. The rear formed part of the main residence property and considered adjacent land under section 118-120, and not subject to capital gains tax when sold.

Question 19

Is the main residence exemption that is extended to the XX% adjacent land limited under section 188-165 of the ITAA 1997 because a different CGT even happens to the land that does not also happen to the main residence?

Answer

No. The CGT event for the sale of the adjacent land on XXX occurred at the same time as the main residence and is not limited.

Question 20

Will the capital gain that arises upon the sale of the remaining XX% of the property be a discount capital gain in accordance with section 15-10?

Answer

Yes. The discount capital gain is available to the taxpayer as an individual under section 115-10 of the ITAA 1997.

Property D

Question 21

In relation to the ownership interest, in property D, that was always held by the taxpayer, will the cost base be indexed in accordance with section 114-10?

Answer

No. Indexation is not available for assets acquired after 21 September 1999. The discount method applies to the property acquired in 20XX.

Question 22

Is the taxpayer taken to have acquired the spouse's interest in property D on the day that the spouse acquired their share in the property in accordance with item 7 of the table in subsection 115-30(1) of the ITAA 1997?

Answer

Yes. Section 115-30 of the ITAA 1997 provides special rules about the time of acquisition. Item 7 provides the acquirer is treated as having acquired the CGT asset when the deceased acquired their interest in the CGT asset.

Question 23

In relation to the ownership interest, in property D, that passed to the taxpayer upon the death of the spouse, will the first element of the taxpayer's cost base be taken to be the spouse's cost base in accordance with subsection 128-50(3) of the ITAA 1997?

Answer

Yes. Section 128-50 provides if a CGT asset owned by joint tenants and one of them dies, the survivor is taken to have acquired the individual's interest in the asset on the day the joint tenant died.

Question 24

Will the cost base, for property D, be indexed in accordance with section 114-10 of the ITAA 1997?

Answer

No. Section 114-10 only provides indexation for assets acquired before 21 September 1999.

Question 25

Will the capital gain that arises upon the sale of property D be a discounted capital gain in accordance with section 115-10 of the ITAA 1997?

Answer

Yes. As an individual the taxpayer can apply the discount method to the gain on the sale of property D under section 115-10.

Property E

Question 26

In relation to the ownership interest, in property E, that was always held by the taxpayer, will the cost base be indexed in accordance with section 114-10?

Answer

No. Section 114-10 only provides indexation for assets acquired before 21 September 1999.

Question 27

Is the taxpayer taken to have acquired the spouse's interest in property E on the day the spouse acquired the share in the property in accordance with item 7 of the table in subsection 115-30(1) of the ITAA 1997?

Answer

Yes. Section 115-30 provides special rules about the time of acquisition. Item 7 provides the acquirer is treated as having acquired the CGT asset when the deceased acquired their interest in the CGT asset

Question 28

In relation to the ownership interest, in property E, that passed to the taxpayer upon the death of the spouse, will the first element of the taxpayer's cost base be taken to be the spouse's cost base in accordance with subsection 128-50(3) of the ITAA 1997?

Answer

Yes. Section 128-50 provides if a CGT asset owned by joint tenants and one of them dies, the survivor is taken to have acquired the individual's interest in the asset on the day the joint tenant died.

Question 29

Will the cost base, of property E, be indexed in accordance with section 114-10 of the ITAA 1997?

Answer

No. Section 114-10 only provides indexation for assets acquired before 21 September 1999.

Question 30

Will the capital gain that arises upon the sale of property E be a discounted capital gain in accordance with section 115-10 of the ITAA 1997?

Answer

Yes. As an individual the taxpayer can apply the discount method to the gain on the sale of property E under section 115-10.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The deceased died on XX XXX 20XX.

The taxpayer, is the partner of the deceased.

Main residence at XXX (property A) was purchased as joint tenants on XX XXX 19XX.

The property is less than 2 hectares.

The dwelling was the main residence until the deceased passed away in 20XX and remained the main residence of the taxpayer until the property was sold on XX XXX 20XX.

XXX properties included in the taxpayer's main residence (pre-CGT asset), and XXX adjoining properties (of which another property was also a pre-CGT asset).

Prior to the deceased's death in 20XX, the XXX properties, including the taxpayer's main residence, were either jointly owned between the deceased and the taxpayer, or in one case, owned solely by the deceased.

The taxpayer inherited the properties upon the death of the deceased in accordance with joint tenant ownership, or the Will of the deceased.

The XXX properties were sold in one transaction on XX XXX 20XX to a single purchaser. The sale occurred within two years of the deceased's death.

Property B

•         Purchased as joint tenants in 19XX (pre-CGT). The property is XXX square metres and adjoined the main residence property

•         the dwelling on the property was rented with a small parcel of land surrounding the dwelling

•         a fence was erected at the rear of the property restricting access to the tenants. The original rear fence of the main residence property was removed, allowing access to the rear of Property B

•         during the entire ownership period the dwelling, and small block, was rented to tenants. The large backyard was used exclusively for private purposes by the deceased and the taxpayer

•         the title was transferred to the taxpayer upon the deceased's death

•         the property was sold on XX XXX 20XX.

Property C

•         Purchased by the deceased on XX XXX 19XX

•         the property was XXX square metres with a large backyard that adjoined the backyard of the main residence

•         the dwelling on the property was rented with a small parcel of land surrounding the dwelling

•         a fence was erected at the rear of the block restricting access to the tenants. The original rear fence of the main residence property was removed, allowing access to the rear of Property C

•         during the entire ownership period the dwelling, and small block, was rented to tenants. The large backyard was used exclusively for private purposes by the deceased and the taxpayer

•         the title and ownership was transferred to the taxpayer upon the deceased's death

•         the property was sold on XX XXX 20XX.

Property D

•         Purchased as joint tenants by the deceased and the taxpayer on XX XXX 20XX

•         the property was XXX square metres and next to the main residence

•         during the entire ownership period the dwelling was rented to tenants

•         the title and ownership was transferred to the taxpayer upon the deceased's death

•         the property was sold on XX XXX 20XX.

Property E

•         Purchased as joint tenants on XX XXX 20XX.

•         the property was XXX square metres and next door to the main residence

•         during the entire ownership period the dwelling was rented to tenants

•         the title and ownership was transferred to the taxpayer upon the deceased's death.

•         the property was sold on XX XXX 20XX.

The intention of gradually acquiring properties B, C, D and E was to secure the surrounding land for the exclusive use of the family.

The rental income received from the property was modest with the funds intended to repay mortgages, and to cover ownership and maintenance costs. No major additions or improvements were made to any of the dwellings.

The rental agreements for properties B and C limited the tenant's area that could be utilised. It was explicit that the large backyard area at the rear of the block was not accessible to the tenants and remained the exclusive property of the owners.

The deceased and the taxpayer enjoyed an outdoor life on the land. Their passion was fulfilled with the exclusive large backyard (from the three adjoining properties. The backyard included:

•         an orchard containing various fruit trees

•         numerous productive vegetable patches

•         chicken pen and coop with a fenced yard; and

•         beehives.

Maintenance of the properties, due the combined size (fenced separately from the other properties), was done by the deceased, using a ride-on mower, wheelbarrows and various other machinery and tools.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 114-10

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-120

Income Tax Assessment Act 1997 section 118-165

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 section 128-50