Private ruling: Acquisition date and cost base of property acquired by the deceased by way of adverse possession
Published: November 2011
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Questions and answers | 1. Did the deceased acquire the property prior to 20 September 1985? | Yes. | 2. Is the cost base of the property its market value on the date of the deceased's death? | Yes.

Relevant facts and circumstances: Some time prior to 20 September 1985, the deceased was gifted a block of land in a State (herein referred to as the property). The gift was made orally and was confirmed by way of a letter. The deceased and the deceased's family erected a cottage on the land and resided in it as their main residence. The deceased never paid any rent for the property. The rate notices were issued in the deceased name and were paid by the deceased and the deceased's family. Over twenty years later, the Department of Lands notified the deceased that it had commenced the process of converting the title of the property from Old System title to Torrens title and that according to the departments records the land was held by a third party. The deceased, and the deceased's solicitors, then commenced completing a Primary Application (herein referred to as the application) with the Department of Lands in order to establish the deceased's claim to ownership of the property by possessory title. The deceased passed away. As the deceased passed away before all the evidence in support of the application was collected, the application was filed by the deceased's legal personal representative. The application in relation to the deceased's possessory title was successful and the property was registered in the names of the deceased's legal personal representatives. The property was the deceased's main residence from the time the cottage was constructed until the date of the deceased's death. It has been used to produce rental income since just after the deceased's death and is currently on the market for sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 109-5(1) , | Income Tax Assessment Act 1997 Subsection 128-15(2) and | Income Tax Assessment Act 1997 Subsection 128-15(4).

Reasons for decision: Summary: Subsection 109-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you acquire a capital gains tax (CGT) asset when you become its owner. In your situation you did not become the registered proprietor of the property until after 20 September 1985. However, the law recognises that in special circumstances title to property can be acquired based on a claim of adverse possession or possessory title. In order for title to property to be acquired by adverse possession, the person claiming title must establish that the time limit on the right of the registered proprietor to recover possession of the land has expired and that they satisfy the common law requirements of adverse possession. In your case the property was located in NSW. In NSW the Limitations Act 1969 provides that a claim of adverse possession may be made against a documentary owner; · after a period of 12 years if the adverse possession commenced after 1 January 1970, and · after a period of 20 years if the adverse possession commenced before 1 January 1970. · At common law, to extinguish the registered proprietor's title, the possession must be; · open - not secret, · peaceful - not by force, and · adverse - not by consent of the documentary owner. In your situation, the third party who held documentary title had 20 years to attempt to recover possession from the deceased. They did not do so and the deceased satisfied the common law requirements to establish adverse position. As a result possessory title was granted to the deceased legal personal representative. It is therefore considered that the deceased obtained possessory title to, and acquired the property in accordance with subsection 109-5(1) of the ITAA 1997, before 20 September 1985. Pursuant to subsection 128-15(2) of the ITAA 1997, a deceased person's legal personal representative is taken to have acquired the CGT asset on the day the deceased died. Subsection 128-15(4) of the ITAA 1997 provides that where a deceased person acquired a CGT asset prior to 20 September 1985, the first element of the assets cost base is its market value on the day the deceased died. Accordingly, you are taken to have acquired the property on the day that the deceased passed away for its market value at that time.

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