Edited version of private advice

Authorisation Number: 1052396372260

Date of advice: 16 May 2025

Ruling

Subject: Capital gains tax - deceased estate

Question

Are you entitled to reduce the cost base of the property by the sum bequeathed to a beneficiary upon transfer of the property to that beneficiary?

Answer

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 20XX, the deceased passed away.

On XX XX 20XX, probate was granted.

The deceased acquired ownership of the property after 20 September 1985.

The deceased never occupied the property as their main residence.

There are 5 beneficiaries to the property.

The will of the deceased states that in addition to an equal share of the property, one beneficiary (the beneficiary) will receive the sum of $amount on account of funding renovations to the property.

The deed of family arrangement between the executors/trustees and the beneficiaries provides, 'the pool of assets was to be divided equally after adjusting 'the beneficiaries' share by an amount of $amount which was set out as a legacy'. The beneficiaries confirm that the estate will be distributed as follows:

   (a) transferred to 'the beneficiary' as a bequest to the extent of the sum of $amount plus their remaining share of his interest in the estate

   (b) the remaining share of the property will be purchased by 'the beneficiary' from the estate.

Property valuation - market value $amount.

Reasons for decision

Real estate is a capital gains tax (CGT) asset and the CGT provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to any real estate acquired on or after 20 September 1985.

For CGT purposes, if you acquire real estate as the executor of a deceased estate, you are taken to have acquired the real estate on the day the deceased person died.

Generally, if you dispose of real estate acquired on or after 20 September 1985, any assessable gain or loss made from that disposal will be included in your assessable income under the provisions of section 102-5 of the ITAA 1997. The gain or loss is made at the time of the CGT event giving rise to the gain or loss.

When you dispose of real estate, CGT event A1 happens. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

You will make a capital gain from the disposal of real estate if the capital proceeds from the disposal are more than the cost base of the property. A capital loss results if the capital proceeds are less than the reduced cost base of the property.

In the case of the disposal of real estate, the capital proceeds is the amount of money you receive or are entitled to receive for the disposal of the property.

In some cases, when real estate that has been acquired by the executor of a deceased estate is disposed of as part of the administration of the estate, an exemption may apply that allows the executor to disregard (and therefore not include in their assessable income) any assessable gain or loss made from the disposal.

With regard to real estate that was initially acquired by a deceased person after 20 September 1985, a full or partial CGT exemption may be available under the main residence exemption when the property is later disposed of by the executor of the deceased's estate. This exemption (either in full or in part) is only available if the property was the deceased person's main residence just before they passed away.

The deceased acquired the property after 20 September 1985. The dwelling was never the main residence of the deceased therefore the executor of the deceased estate cannot disregard (either in part or in full) any assessable gain or loss made from the disposal of the property. To determine whether or not the executor will make an assessable gain or loss from the disposal, the cost base/reduced cost base of the property in the hands of the executor needs to be determined.

Calculating the cost base/reduced cost base of real estate - general

The basic rules for determining the cost base/reduced cost base of any CGT asset are the same. In most cases the cost base of a CGT asset is comprised of costs that can be attributed to one of the five elements described below:

   • The first element: money or property given for the asset.

   • The second element: incidental costs of acquiring the asset or that relate to the CGT event.

   • The third element: costs of owning the asset.

   • The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

   • The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.

The reduced cost base of a CGT asset has the same five elements as the cost base. The third element of the cost base of a CGT asset is the costs of owning the asset, as distinct from the costs of becoming the owner. The third element only applies if the asset was acquired by the taxpayer after 20 August 1991.

Determining the cost base/reduced cost base of real estate acquired by the executor of a deceased estate

The rules for determining the first element of the cost base/reduced cost base of real estate that passes to an executor of a deceased estate are modified, depending on the date the deceased person acquired the property.

For real estate acquired by a deceased person on or after 20 September 1985, the first element of the cost base/reduced cost base in the hands of the executor is taken to be the cost base/reduced cost base of the property on the day the person died.

Because the property was acquired by the deceased prior to 20 August 1991, no third element costs (including council rates, water rates, other statutory charges, and insurance costs) that were incurred between the date of acquisition and the date of death can be included in the cost base of the property. Nor can those costs be included in the reduced cost base.

There are no provisions in the tax law that would allow the executor to include any distribution of the net proceeds from the estate in either the cost base or the reduced cost base of the property. Such a distribution is not a cost that can be related to any of the five elements that comprise the cost base/reduced cost base of a CGT asset. Any such distribution is simply an arrangement between the executor and another party about how the proceeds from the estate should be dealt with.

Application to your situation

In this case, the cost base, for CGT purposes, will be calculated based on the market value of the property at the date of death of the deceased. The sum of $amount bequeathed to 'the beneficiary' under the terms of settlement of the estate, was compensation for the cost of renovations to the property that were funded by 'the beneficiary' and cannot be used by the other beneficiaries to reduce the cost base of the property upon disposal. You are also entitled to the 50% CGT discount in relation to the property.