Private ruling: capital gains tax
Date of advice: 18 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Does the deceased estate acquire the dwelling and adjacent land at the market value at the date of death? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-65 | Income Tax Assessment Act 1997 Section 118-120 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-15

Reasons for decision: Detailed Reasoning - Detailed reasoning: Capital gains tax provisions Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. Under section 104-10 of the ITAA 1997, CGT event A1 happens when you dispose of a CGT asset. You will make a capital gain if the capital proceeds from the disposal of a property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base. Section 108-65 of the ITAA 1997 provides that land that acquired on or after 20 September 1985 that is adjacent to land (the original land) acquired before that day is taken to be a separate CGT asset from the original land if it and the original land are amalgamated on the one title. However, Subdivision 118-B of the ITAA 1997 outlines the rules that apply to a main residence. Section 118-120 extends the definition of dwelling to adjacent land up to a maximum of 2 hectares. Taxation Determination TD 92/171 Income tax: capital gains: does the main residence exemption extend to the additional land acquired after the time of acquisition of the residence? provides some relevant guidelines. As outlined in TD 92/171, an exemption will extend to additional land acquired after the time of acquisition of the main residence if the following requirements of sections 118-120 and 118-165 of the ITAA 1997 are satisfied: ● the additional land (including the area of land on which the dwelling is built) is adjacent to that on which the dwelling is situated; ● the total area of land is not greater than 2 hectares; ● the additional land is used primarily for private or domestic purposes in association with the dwelling; and ● the CGT event that happens in relation to the additional land also happens in relation to the dwelling (or your ownership interest in it). TD 92/171 also confirms that the exemption applies whether or not the dwelling is a pre or post CGT dwelling. The above requirements have been satisfied in this case. Therefore both the original property and the adjacent land were regarded as the deceased’s dwelling under the CGT provisions. Cost base Division 128 of the ITAA 1997 sets out what happens if a capital gains tax (CGT) asset passes to a beneficiary of a deceased estate or devolves to a legal personal representative. Where a CGT asset devolves to the legal personal representative or passes to a beneficiary in a deceased estate, they are taken to have acquired the asset on the date of the deceased’s death (section 128-15 of the ITAA 1997). Where you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base. Subsection 128-15(4) of the ITAA 1997 provides a table which sets out modifications to the first element of the cost base and reduced cost base of a CGT asset in the hands of a legal personal representative or beneficiary of a deceased estate. Item 3 of the table provides that the first element of the cost base and reduced cost base of a dwelling that: ● was the main residence of the deceased just before death, and ● was not being used for the purpose of producing assessable income at that time, is the market value of the dwelling on the date of the deceased’s death. As the property was the deceased’s main residence at the date of their death, and was not being used for the purpose of producing assessable income at that time, the first element of the cost base and reduced cost base of the property in your hands is the market value of the property on the date of death. As outlined above, the original property and adjacent land are regarded as the deceased’s dwelling. Therefore, the first element of the cost base for the original dwelling and adjacent land for the deceased estate is the market value on date of death.

Relevant facts: The deceased acquired their residence prior to 1985. | The property comprised of a cottage on land and was used as the deceased’s sole and principal place of residence from the date of purchase until their date of death a few years ago. | After 1985, to allow rear access to the property, the deceased purchased adjacent land. | The adjacent land purchase was vacant of any structural improvements and was immediately incorporated into the existing property via a boundary adjustment. | The two lots were amalgamated and the address remained the same. | The original residence and the additional land purchase were always used for private or domestic purposes until the deceased’s death. The total area of land is less than two hectares. | The property was sold in late 2018.