Edited version of private advice

Authorisation Number: 1052303446835

Date of advice: 10 September 2024

Ruling

Subject: CGT - property acquired from deceased estate

Question 1

Is the property a pre capital gains tax (CGT) asset under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for you, given it was acquired by the deceased before 20 September 1985?

Answer 1

No. The property was a pre-CGT asset for the deceased. Your ownership interest in the property commenced at their date of death and is therefore, in your hands, a post-CGT asset.

Question 2

Will the pre-CGT status of the property be preserved under section 128-15 of the ITAA 1997, when you acquired the asset?

Answer 2

No. Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative (LPR) or beneficiary, is taken to have acquired the asset on the day the deceased passed away.

Question 3

Can you disregard any capital gain or capital loss on the proposed sale of your property?

Answer 3

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX XX 19XX, your husband, (the Deceased) acquired a property (the Property).

The Property is used for farming.

On XX XX 20XX, the Deceased passed away and the Property passed to you by way of survivorship.

On XX XX 20XX, the Property title was registered in your name.

The Property has never been your primary residence and continues to be used for farming.

In XX 20XX, you relocated to an aged care facility and are considering selling the Property.

You have drafted a Contract of Sale to sell the Property to your neighbours, via private sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 128-15

Income Tax Assessment Act 1997 section 118-195

Reasons for decision

Summary

Subsection 128-15(2) of the ITAA 1997 states that the LPR, or beneficiary, is taken to have acquired the asset on the day the deceased died. In 2004, on the passing of your spouse, you acquired your ownership interest in the dwelling. In your hands, the property is a post-CGT asset.

You are not eligible for the main residence exemption as you acquired the dwelling after 20 September 1985, and the Property was not used as your main residence. You cannot disregard any capital gain or capital loss on the proposed sale of the Property.

When you dispose of the Property, CGT event A1 will occur. The timing of the event in accordance with subsection 104-10(3) of the ITAA 1997 will be when the contract for the disposal is entered into, or if there is no contract, when the change of ownership occurs.

Detailed reasoning

Section 100-25 of the ITAA 1997 defines that a CGT asset includes land and buildings.

Section 104-5 of the ITAA 1997 provides a summary of CGT events and confirms that on the disposal of an asset, CGT event A1 occurs. The timing of the event is either when you enter into a contract for the disposal, or if there was no contract for disposal, when the change of ownership occurs, as detailed under section 104-10 of the ITAA 1997.

Inherited property and CGT

Where a deceased individual acquired an asset before 20 September 1985, the asset is a pre-CGT asset while they (the deceased) owned it. When you inherit a CGT asset, the acquisition date for you, is the date of death of the former owner (the deceased).

In your case, the Property was the main residence of the deceased and was not used to produce assessable income. You inherited the Property as the spouse of the deceased, and the Property has never been your main residence.

Section 118-195 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it, may be disregarded if it passed to you as an individual and the interest passed to you as a beneficiary in a deceased estate, or your owned it as the trustee of a deceased estate.

For a pre-CGT property to qualify as CGT exempt when you dispose of your ownership interest, paragraph 118-195(1)(b) of the ITAA 1997 requires that from the time the deceased died, the pre-CGT property was the main residence of at least one of the following people:

(a)            The spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

(b)            An individual who had a right to occupy the dwelling under the deceased's will; or

(c)            If the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary - that individual.

You are not eligible for the main residence exemption where you have acquired a dwelling on or after 20 September 1985, and the property was not used as your main residence.

You cannot disregard any capital gain or capital loss on the proposed sale of the property.

Cost base of an inherited asset to a beneficiary

Section 128-15 of the ITAA 1997 addresses what happens if a CGT asset you (the deceased) owned just before dying, devolves to your LPR or passes to a beneficiary in the deceased estate. Subsection 128-15(2) of the ITAA 1997 states that the LPR, or beneficiary, is taken to have acquired the asset on the day you (the deceased) died.

Subsection 128-15(4) of the ITAA 1997 sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the LPR or beneficiary and confirms at item 4 that for a CGT asset acquired before

20 September 19XX (pre-CGT asset), the first element of the asset's cost base is the market value of the asset on the day you (the deceased) died.

You are entitled to apply the 50% CGT discount when calculating any capital gain as you have held your ownership interest for more than 12 months.