Private ruling: Capital gains tax - deceased estate - subdivision - pre assets
Date of advice: 21 November 2018
Published: February 2019
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: For capital gains tax (CGT) purposes, on the sale of unit 1 do the executors need to calculate the portion of the cost base referable to the following components of their interests in the property: a) The portion of the land referable to unit 1 that was a pre- CGT asset to the deceased; b) The portion of the land referable to unit 1 that was a post- CGT asset to the deceased; c) The portion of unit 1 that was built on the pre-CGT portion of the land? | A1: Yes. | Q2: Is the cost base in the hands of the executors of the interest in the land acquired by Person A prior to 20 September 1985 calculated as the market value of the land as at the time of death plus any incidental costs incurred by the executors on the subdivision and sale for the purposes of section 110-25 Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Is the cost base in the hands of the executors of the interest in the building and the land acquired by the deceased after 20 September 1985 calculated as the market value of the property as at the time of Person A’s spouse’s date of death plus any relevant holding costs, plus 50 per cent of the construction costs of the building, less any amounts claimed under Division 43 ITAA 1997, plus any incidental costs incurred by the executors incurred on the subdivision and sale for the purposes of section 110-25 Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q4: Is the cost base in the hands of the executors of the interest in the building constructed in 2001 on the land the deceased acquired prior to 20 September 1985 calculated as 50 per cent of the construction costs of the building, less any amounts claimed under division 43 ITAA 1997, plus any incidental costs incurred by the executors on the subdivision sale for the purposes of section 110-25 ITAA 1997? | A4: Yes. | Q5: Are the cost base components combined when the various assets merge in the hands of the executors? | A5: Yes. | Q6: Is the cost base of the commercial property in the hands of the executors at the time of sale the market value of the property as at Person A’s date of death plus holding costs since that date and any incidental costs incurred on the sale? | A6: Yes.

Relevant facts and circumstances: The deceased (Person A) acquired with their spouse a dwelling. (The dwelling) The dwelling was acquired around prior to 20 September 1985 and was their main residence. Person A also acquired a commercial property. The commercial property was acquired jointly prior to 20 September 1985 (The commercial property) Person A’s spouse passed away after XX/mth/19XX. Person A acquired their spouse’s interest in the dwelling. You have estimated that the market value at this time was approximately $XXX. Person A continued to reside in the dwelling for a number of years until their marriage to their second spouse. Around this time they moved out of the dwelling and into their second spouse’s dwelling. Person A’s second spouse passed away after XX/mth/19XX. After a period of time, the existing dwelling was demolished and the block of land was subdivided into a number of lots, with a residential dwelling (unit) built on each new lot. Units 1 and 2 have always been used as rental properties. Unit 3 has been used by the child of Person A as their main residence. Person A passed away. You have estimated the market value at this time for unit 1 as $XXX. ($XX for the land and $XX for the capital improvements) In 20XX unit 1 was sold for $XXX. The commercial property was valued around $XXX to $XXX as at 30 July 20XX. You sold the commercial property in 20XX for $XXX

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 112-25(2) | Income Tax Assessment Act 1997 Subsection 112-25(3) | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 116-20 | Income Tax Assessment Act 1997 Subdivision 128

Reasons for decision: Detailed Reasoning - Deceased estate: Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their legal personal representative (LPR) or to a beneficiary in a deceased estate. Subsection 128-15(2) of the ITAA 1997 provides that your deemed date of acquisition of property from a deceased estate, is the date of the deceased’s death. Section 128-15(4) (ITAA 1997) sets out the rules for determining the first element of the cost base of assets in the hands of the LPR or beneficiary. This is for the purposes of calculating any CGT liability in relation to subsequent CGT events such as selling the asset. Post CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for the cost base of the asset in the hands of the deceased at their date of death. Pre CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for its market value at the date of the deceased death. The beneficiary’s cost base can include expenditure incurred by the LPR. | Detailed Reasoning - Subdivision: Land, or an interest in land, is a Capital Gains Tax (CGT) asset (section 108-5 of the ITAA 1997). Section 112-25(2) of the ITAA 1997 states, that the subdivision of land into a number of lots is not itself a CGT event (Taxation Determination TD 97/3). When any of the subdivided lots is sold, CGT event A1 applies by virtue of section 104-10 of the ITAA 1997. Subsection 104-10(4) of the ITAA 1997 provides that a capital gain will arise if the capital proceeds from the disposal are more than the asset's cost base and a capital loss will arise if the capital proceeds are less than the asset's reduced cost base. Any gain made on the sale of unit 1 will be a capital gain and subject to subsection 104-10(4) of the ITAA 1997 and will be included in assessable income under section 6-10 of the ITAA 1997. The original block of land is deemed to have been split into a number of new assets as a result of the subdivision. The cost base and the reduced cost base of the new asset is worked out under the method statement in subsection 112-25(3) of the ITAA 1997. Under the method statement, each element of the asset's cost base or reduced cost base is determined at the time the original asset is split. When the split of the original asset occurs, each element of the cost base or reduced cost base is apportioned in a reasonable way to each new asset. | Detailed Reasoning - Commercial property: Division 128 of the ITAA 1997 contains rules that apply when an asset owned by a person just before they die, passes to their LPR or to a beneficiary in a deceased estate. Subsection 128-15(2) of the ITAA 1997 provides that your deemed date of acquisition of property from a deceased estate, is the date of the deceased’s death. Section 128-15(4) (ITAA 1997) sets out the rules for determining the first element of the cost base of assets in the hands of the LPR or beneficiary. This is for the purposes of calculating any CGT liability in relation to subsequent CGT events such as selling the asset. Post CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for the cost base of the asset in the hands of the deceased at their date of death. Pre CGT assets of the deceased are taken to have been acquired by the LPR or beneficiary for its market value at the date of the deceased death. The executor’s cost base can include expenditure by the LPR. Any gain made on the sale of the commercial property will be a capital gain and subject to subsection 104-10(4) of the ITAA 1997 and will be included in assessable income under section 6-10 of the ITAA 1997.