Private ruling: Sale of inherited property
Published: February 2013
Ruling period: 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: A4: Yes

Relevant facts and circumstances: Person X was the beneficiary under a will of their late relative, who died prior to September 1985. The will created an equitable life interest in a property, with person X and others as the remaindermen. Person X was entitled to a partial interest in the property on the strict terms of the will. However, the other remaindermen, in exchange for greater or total ownership of the assets of the estate, agreed among themselves that the executor of the estate appropriate the totality of the title to this property to person X. As a consequence, person X became the sole registered proprietor via a transfer registration which took effect after September 1985 when the life tenant died. Soon after, person X transferred the title to you (their spouse) and themself as joint tenants, by a transfer which was registered after the death of the life tenant. Person X died, upon which you acquired the whole property by survivorship. The properly was later sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108- 7 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 112-20 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-50 | Income Tax Assessment Act 1997 Section 114-10

Reasons for decision: Summary: Where an asset which formed part of the deceased's estate passes to a remainder beneficiary on the subsequent death of a life tenant, the remainder beneficiary is taken to have acquired the asset when the deceased owner died and not when the life tenant died. Section 128-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an asset of the estate of a deceased person passes to a beneficiary if the beneficiary becomes the owner: (a) under the will of the deceased person, or under that will as varied by a court order ; or (b) by operation of an intestacy law, or such a law as varied by a court order; or (c) because it is appropriated to the beneficiary by the legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the estate; or (d) under a deed of arrangement if: (A) the deed was entered into in settlement of a claim to participate in the distribution of the estate of the deceased person; and (B) the consideration (if any) given by the beneficiary for the asset consisted of the variation or waiver of a claim to one or more other assets that formed part of that estate; In your case, the remainder beneficiary became the owner of the property, on the death of their relative because they inherited the property as a remainderman where a deed of arrangement was entered into that satisfied section 128-20 of the ITAA 1997. Thus, the remainder beneficiary acquired a pre-CGT asset. Section 108-7 of the ITAA 1997 explains individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common. Section 112-25 of the ITAA 1997 provides if you split a CGT asset, you are the beneficial owner of the original asset and each new asset and the splitting is not a CGT event. CGT Determination Number 7 states: Where pre-CGT land is sub-divided after 19 September 1985 the land will maintain its pre-CGT acquisition date because no CGT event has happened. The subdividing of the land is not itself a CGT event: section 112-25 of the ITAA97. Subject to its exceptions, section 112-20 of the ITAA 1997 provides the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if you did not incur expenditure to acquire it or you did not deal at arm's length with the other entity in connection with the acquisition. In your case, the exceptions in section 112-20 of the ITAA 1997 do not apply thus you acquired your 50% ownership interest in the property at market value at the time of acquisition because you did not incur expenditure to acquire it. Also, although the asset was not 'split' into two assets, the principle in section 112-25 can be applied, in that the remainder beneficiary retained ownership of a pre-CGT asset. In other words they did not dispose of an asset, where they were the exclusive owner, to a new owner, that is, you and the remainder beneficiary jointly. Instead, the remainder beneficiary simply disposed of a half interest in their property. Item 4 of subsection 128-15(4) of the ITAA 1997 provides if a deceased person acquired an asset before 20 September 1985, a beneficiary who inherits that asset is taken to have acquired it at market value on the day the deceased person died. Section 128-50 of the ITAA 1997 lists rules for joint tenants. Subsection 128-50(4) of the ITAA 1997 provides if the individual who died acquired his or her interest in the asset before 20 September 1985, the first element of the cost base and reduced cost base, of the interest each survivor is taken to have acquired, is the market value of the interest of the individual who died (worked out on the day the individual died) divided by the number of survivors. For the purpose of discount capital gains, Item 7 in section 115-30 of the ITAA 1997 provides an interest acquired under section 128-50 is treated as having been acquired when the deceased acquired his or her interest in the other CGT asset. In your case, your cost base for the property consists of the market value of a 50% interest in the property at date of acquisition and the market value of a 50% interest in the property when the remainderman died. Section 115-30 of the ITAA 1997 applies discount capital gains to the entire sale proceeds.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Questions and Answers: 1. Is the remainder beneficiary considered to have become the owner of a property when the deceased owner died? | 2. Where a life tenant dies and the remainder beneficiary transfers 50% of a pre-CGT property to you, does the remainder beneficiary retain a 50% interest in a pre-CGT asset and do you acquire a 50% interest with a cost base of the market value of a 50% interest in the property at the date of your acquisition? | 3. Is your cost base for the whole of the property at the time of sale calculated by: | (a) the cost base of the 50% interest you inherited from the remainder beneficiary determined by the market value of a 50% interest in the property when the remainder beneficiary died; and | (b) the cost base for your original 50% interest determined by the market value of a 50% interest in the property at time of acquisition, namely, transfer date; | 4. Is your capital gain the aggregate of: | (a) the difference between the cost base of the 50% interest you inherited and 50% of the net sale proceeds, with application of the general discount; and | (b) the difference between your original cost base and 50% of the net sale proceeds, with application of the general discount.