Private ruling: Cost base
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Can you apply the market value substitution rule in section 112-20 of the Income Tax Assessment Act 1997 (ITAA 1997) for an investment property obtained from a deceased estate? | A1: No.

Relevant facts and circumstances: Prior to 1985 relative A purchased a property. After 20 September 1985, relative B and C purchased the property from relative A. The house was renovated and placed on the market. The house wasn't selling, so relative B purchased relative C's share in the property. The house became a rental property and remained so until its sale. Relative B passed away and you obtained a market valuation of the property at this date. The title to the property was placed into your name as you were a beneficiary of relative B's estate.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 128-15(4)

Reasons for decision: Summary: Section 112-5 of the ITAA 1997 discusses the modifications that can occur to the cost base and reduced cost base of a CGT asset you acquire. Subdivision 112-A of the ITAA 1997 sets out the general modification to the cost base rules including the market value substitution rule. Subdivision 112-B of the ITAA 1997 sets out which element of the cost base (or reduced cost base) of a CGT asset is affected by various situations. The effect of death is specifically considered by section 112-55 of the ITAA 1997 and provides that the relevant modification is contained in section 128-15 of the ITAA 1997. It is a general rule of statutory interpretation that where there is a conflict between general and specific provisions, the specific provision prevails: Perpetual Executors and Trustees Association of Australia Ltd v. Federal Commissioner of Taxation (1948) 77 CLR 1. Accordingly, section 128-15 prevails over the general market value substitution rule in section 112-20A of the ITAA 1997.