Edited version of private advice

Authorisation Number: 5010083976434

Date of advice: 17 June 2022

Ruling

Subject: CGT - deceased estates

Question 1

Can the deceased's cost base be reconstructed from information obtained using website property searches and stamp duty calculators?

Answer

Decline to rule.

Question 2

Will a partial main residence exemption apply to the capital gain or loss you make on the disposal of your ownership interest in a dwelling acquired from a deceased estate (the property)?

Answer

Yes.

Question 3

Can the estimate provided in the ruling be used as a fair market price to calculate the capital gain or loss when disposing of the property?

Answer

Decline to rule.

Question 4

Will the capital gain or loss made on the disposal of the property be disregarded by the deceased estate and need to be included in beneficiary's income tax return?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

XX December 20XX

Relevant facts and circumstances

The deceased owned a dwelling that they acquired in June 20XX (the property).

The deceased passed away in December 20XX.

The property was the main residence of the deceased from June 20XX until September 20XX.

It is alleged that the deceased allowed Person B to take over mortgage repayments and maintain the property, until they were in a financial position where legal title would be transferred.

At the time of the deceased's death, the title remained in the deceased's name.

The property has never been used to produce assessable income.

The deceased did not have a will.

Person A made an application for letters of administration, letters of administration were granted to the Person A in May 20XX.

Person A is the sole beneficiary of the entirety of the deceased's estate.

Due to a lack of documentation, you have reconstructed the deceased's cost base of the property from information obtained using website property searches and stamp duty calculators.

A State Government body has provided an estimate of the current property value.

Person B contends the property belongs to them and has legally challenged Person A.

Person B has lived in the property as their main residence from September 20XX.

To settle the legal dispute, Person A has agreed to sell and transfer legal title of the property to Person B for the sum of the State Government body's estimate.

Relevant legislative provisions

Income tax assessment act 1997 Section 100-10

Income tax assessment act 1997 Section 102-5

Income tax assessment act 1997 Section 104-10

Income tax assessment act 1997 Section 110-25

Income tax assessment act 1997 Section 112-20

Income tax assessment act 1997 Section 115-5

Income tax assessment act 1997 Section 115-25

Income tax assessment act 1997 Section 115-100

Income tax assessment act 1997 Section 115-215

Income tax assessment act 1997 Section 116-30

Income tax assessment act 1997 Section 118-110

Income tax assessment act 1997 Section 118-200

Income tax assessment act 1997 Section 121-20

Income tax assessment act 1997 Section 128-15

Income tax assessment act 1997 Section 128-20

Tax administration act 1953 Section 359-35

Reasons for decision

Question 1

Can the deceased's cost base be reconstructed from information obtained using website property searches and stamp duty calculators?

Answer

Decline to rule.

Summary

Subsection 359-35(2) of the Tax Administration Act 1953 (TAA 1953) outlines that the Commissioner may decline to make a private ruling if it is considered that making the ruling would prejudice or unduly restrict the administration of a taxation law. Providing a ruling how a cost base could or should be reconstructed would directly restrict the administration and application of Section 121-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 121-20 of the ITAA 1997 outlines that you must keep records of every act, transaction, event, or circumstance that can reasonably be expected to be relevant to working out a capital gain or loss. Subsection 121-20(5) of the ITAA 1997 specifies that if the necessary records of an act, transaction, event, or circumstance do not already exist, you must reconstruct them or have someone else reconstruct them. There is also a provided example where the capital gain or loss from a CGT event may depend on the market value of a property at a particular time. To record a market value properly, you may need to get a valuation done.

In relation to your circumstances, as you have a lack of information regarding the necessary records relevant to working out the deceased's cost base, you may have to reconstruct them or have someone else reconstruct them. You will need to retain all the information used in reconstructing these records to support your reconstruction if your tax affairs are reviewed.

General Guidance

Subsection 128-15(4) provides a table that sets out modifications to the cost base and reduced cost base of CGT assets in the hands of a legal person or beneficiary in a deceased estate. For a CGT asset acquired by the deceased on or after 20 September 1985, the first element of the cost base of the asset is the cost base of the asset for the deceased on the day they died.

Section 110-25 of the ITAA 1997 outlines general rules about the cost base of a CGT asset. The cost base consists of 5 elements:

•         The first element is the total amount of money paid in respect to acquiring the asset.

•         The second element is any incidental costs incurred in acquiring the asset; these can include costs by the legal personal representative before the asset is passed to a beneficiary under subsection 128-15(5) of the ITAA 1997.

•         The third element is the costs of owning the CGT asset you incurred and can include:

•         Interest on money borrowed to acquire the asset,

•         Costs of maintaining, repairing, or insuring the asset,

•         Rates or land tax, and/or

•         Interest on money you borrow to refinance the money you borrowed to acquire the asset.

•         The fourth element is any capital expenditure incurred to preserve or increase the asset's value.

•         The fifth element is any capital expenditure that you incurred to establish, preserve, or defend your title to the asset or a right over the asset.

For further information regarding calculating your cost base and reduced cost base, go to ato.gov.au and search for 'QC 66022'.

Question 2

Will a partial main residence exemption apply to the capital gain or loss you make on the disposal of your ownership interest in a dwelling acquired from a deceased estate (the property)?

Answer

Yes.

Summary

Where the dwelling was not the deceased's main residence for their entire ownership period, section 118-200 of the ITAA 1997 allows a partial main residence exemption for the period that the deceased used the dwelling as their main residence. Using the formula listed under subsection 118-200(2) of the ITAA 1997, you can claim a partial main residence exemption for the period that the deceased used a dwelling as their main residence, that you have acquired as a beneficiary of their estate.

Detailed reasoning

Section 118-110 of the ITAA 1997 allows you to disregard any capital gain or loss made on the disposal of a dwelling that was your main residence and is commonly referred to as the 'main residence exemption'. The application of this legislation is limited to the individual who used the dwelling as their main residence throughout their ownership period and specifically removes where ownership is transferred as a beneficiary of a deceased person.

Where the dwelling was not the main residence of the deceased just before their death, section 118-200 of the ITAA 1997 allows a partial main residence exemption for the period that the deceased used the dwelling as their main residence. Subsection 118-200(2) of the ITAA 1997 outlines the method to calculate the capital gain or loss using the following formula:

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Where:

•         CG or CL amount is the standard capital gain or loss you would have made from disposal of the dwelling; the subtraction of your cost base of the CGT asset from the capital proceeds of the CGT event.

•         non-main residence days is the sum of:

-        the number of days in the deceased's ownership period when the dwelling was not the deceased's main residence; and

-        the number of days in the period from the death until your ownership interest ends

•         total days is the number of days in the period from the acquisition of the dwelling by the deceased until your ownership interest ends.

However, subsection 118-200(3) of the ITAA 1997 outlines that you can adjust the formula to ignore any non-main residence days and total days in the period from the deceased's death until your ownership interest ended if your ownership interest ends within two-years of the deceased's death. This period may be extended under specific circumstances with the Commissioner's discretion listed in paragraph 11 of PCG 2019/5. Go to ato.gov.au and search for 'PCG 2019/5' to view the Practical Compliance Guide.

Additionally, section 115-5 of the ITAA 1997 provides conditions to allow a discount on the capital gain, if these requirements are met, including holding the interest ownership for at least 12-months, section 115-5, in conjunction with paragraph 115-25(1) and subparagraph 115-100(a)(i) of the ITAA 1997 allows a 50% discount to the capital gain for an individual.

Subsection 115-215(1) of the ITAA 1997 outlines that where a trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, therefore the beneficiary can apply capital losses against gains and the appropriate discount percentage to gains.

Finally, section 102-5 of the ITAA 1997 details the operative provisions relating to assessable income including net capital gains including a 5-step process to work out your capital gain.

In relation to your circumstances, you are entitled to a partial main residence exemption of the capital gain when disposing the property using the formula provided in subsection 118-200(2) of the ITAA 1997. Additionally, if the property is settled within two-years of the deceased's death, you can adjust the formula to ignore any non-main residence days and total days in the period between the deceased's death until your ownership interest ends, or longer under the Commissioner's discretion.

Finally, the deceased owned the property for more than 12-months before their date of death, therefore a CGT discount of 50% applies under section 115-100 of the ITAA 1997.

Question 3

Can the estimate provided in the ruling be used as a fair market price to calculate the capital gain or loss when disposing of the property?

Answer

Decline to rule.

Summary

Subsection 359-35(2) of the TAA 1953 outlines that the Commissioner may decline to make a private ruling if it is considered that making the ruling would prejudice or unduly restrict the administration of a taxation law. Providing a ruling on an estimate as a fair market price to calculate the capital gain or loss on disposal of the property could restrict the administration and application of sections 112-20 and 116-30 of the ITAA 1997.

Detailed reasoning

Paragraph 112-20(1)(c) of the ITAA 1997 provides that the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is the market value at the time of acquisition if you did not deal at arm's length with the other entity in connection with the acquisition; this is known as the Market value substitution rule.

Subparagraph 116-30(2)(b)(ii) provides a modification to the Market value substitution rule being that the capital proceeds from a CGT event are replaced with the market value of the CGT asset where the capital proceeds are more or less than the market value of the asset and you and the entity that acquired the asset from you did not deal with each other at arm's length in connection with the event. The market value is worked out as at the time of the event.

In relation to your circumstances, you may choose to sell the property at the Valuer General's estimate as per your settlement arrangement with your deceased husband's mother, however you should consider the application of the Market value substitution rule and its modification under sections 112-20 and 116-30 of the ITAA 1997.

General Guidance

A market valuation of an asset must be objective and supported with appropriate evidence. In providing evidence of a market valuation, you should be able to demonstrate that you have:

•         set out the scope and purpose of the valuation,

•         acknowledged the valuer's independence to draw conclusions and write their report,

•         recognised that the valuer can refuse to provide an opinion or report if you do not provide the information and explanations they need,

•         grant the necessary access to your premises and records,

•         provided all necessary help to complete the report, and

•         state that any fee is not dependent on the report's outcome.

Further information regarding a Market valuation for tax purposes can be found by going to ato.gov.au and searching for 'QC 21245'.

It is a requirement that you keep a market valuation report or other records that show the valuation is objective, accurate and supported by evidence, and include all the required information. These will be needed to support the valuation if your tax affairs are reviewed. Further information can be found by going to ato.gov.au and searching for 'QC 66067'.

The ATO recommends engaging an independent valuer to determine the correct market value of the property and provide a report for audit purposes. The ATO can arrange a valuer to provide an independent market valuation, however the cost of this service will be passed onto you. Please see the attached fact sheet or search for 'Private rulings and valuations' on ato.gov.au for further information.

Generally, if you engage and properly instruct a professional valuer, you will not be liable for penalties if we find that professional valuation is deficient.

Question 4

Will the capital gain or loss made on the disposal of the property be disregarded by the deceased estate and need to be included in beneficiary's income tax return?

Answer

Yes.

Summary

Your income tax liability is affected by your net capital gain for the year under section 100-10 of the ITAA 1997. When a dwelling is passed to a beneficiary of a deceased estate under section 128-20 of the ITAA 1997, they take on the any capital gain or loss liability when a CGT event is triggered in its disposal under section 104-10 of the ITAA 1997. As a result, any net capital gain should be included in the beneficiary's tax return for the relevant financial year when it occurs.

Detailed reasoning

Section 128-15 of the ITAA 1997 provides how a capital gain or loss is treated when an asset devolves to a legal personal representative, such as the executor of a will, or passes to a beneficiary of a deceased estate. The legal personal representative, or beneficiary, is taken to have acquired the asset on the day of the deceased's death. Subsection 128-15(3) of the ITAA 1997 outlines that the capital gain or loss made by the legal personal representative is disregarded if the asset is passed to a beneficiary in accordance with section 128-20 of the ITAA 1997.

Section 100-10 of the ITAA 1997 describes the fundamentals of capital gains tax being that your income tax liability is affected by your net capital gain for the income year. Your net capital gain is the total of your capital gains for the income year, reduced by certain capital losses you have made. Subsection 100-10(2) of the ITAA 1997 outlines that when preparing your income tax return, you will need to include any capital gains you have made for the relevant income year.

In your circumstances, the capital loss or gain in relation to disposal of the property is disregarded by the deceased estate and you in the context of being the legal personal representative of the deceased estate. As the beneficiary of the estate, however you are taken to have acquired the property and include any capital gain or loss in your income tax return under section 100-10 of the ITAA 1997, when you trigger a CGT event by disposing of the property, in this instance, when you sell the property to Person B.