ATO ID 2004/936: Capital Gains Tax: consequences of barring estate tail
Date of decision: 28 October 2004
Year of income: Year ended 30 June 2005
Business line: Small Business/Individual Taxpayers

Issue
Are there any capital gains tax (CGT) implications when a taxpayer, who owns an estate in fee tail in a property, bars the tail and obtains an estate in fee simple in the property?

Decision
No. There are no CGT implications when an estate in fee tail is barred. The owner of the property is not taken to have acquired any asset for the purposes of Division 109 of the Income Tax Assessment Act 1997 (ITAA 1997) when the fee tail is barred.

Facts
As a result of the death of an individual before 20 September 1985, the taxpayer acquired an estate in fee tail in a property that the deceased person had owned at the time of their death. The taxpayer wishes to bar the fee tail and obtain an estate in fee simple in the property. Once the taxpayer has obtained the fee simple they intend to sell the property. The taxpayer is unsure whether they will be treated as having acquired the property before 20 September 1985.

Reasons for decision
Summary: Under the deceased's will the taxpayer obtained an estate in fee tail in a property. An estate in fee tail is an interest in property which is less than a fee simple. An estate in tail can only descend to lineal descendants of the donee. If the line ended, then the estate would revert to the original donor or their heirs. The owner of an estate in tail cannot alienate the estate for a period longer than their life. For this reason, a variety of methods were developed to bar the tail and convert the estate in tail into an estate in fee simple. Ultimately it became established that all devices aimed at preventing the barring of estates tail were void, that is, it became impossible to create an unbarrable estate tail. In this case, the taxpayer intends to bar the estate tail by the use of a disentailing deed. By entering into a disentailing deed, the taxpayer does not dispose of the property, their interest merely enlarges ( Re Gaskell and Walters' Contract [1906] 2 Ch 1). It is considered that no CGT event in Division 104 of the ITAA 1997 will happen when the taxpayer's interest in the property is enlarged as a result of entering into the disentailing deed. Essentially, the ability of the taxpayer to disentail the property was inherent in the asset that the taxpayer acquired from the deceased former owner. Therefore, the taxpayer is taken to have acquired the estate in fee simple under the terms of the deceased's will. Section 128-15 of the ITAA 1997 sets out the CGT consequences that result when a CGT asset a deceased person owned just before they died passes to a beneficiary in the deceased's estate. One consequence is that the beneficiary is taken to have acquired the asset on the day the deceased person died (subsection 128-15(2) of the ITAA 1997). In this case, the deceased died before 20 September 1985. Therefore, the taxpayer is taken to have acquired the property before that time. The date the taxpayer acquired the property was not affected by their having entered into the disentailing deed. As the taxpayer acquired their interest in the property before 20 September 1985, any capital gain or capital loss they make when they dispose of the property will be disregarded (subsection 104-10(5) of the ITAA 1997).

Legislative references: Income Tax Assessment Act 1997 Division 104 subsection 104-10(5) Division 109 section 128-15 subsection 128-15(2)
Case references: Re Gaskell and Walters' Contract [1906] 2 Ch 1
Related public rulings and determinations: Taxation Determination TD 93/37
Subject references: Acquisition dates CGT deceased estates Deceased estates Heirs Wills