Private ruling: Capital gains tax
Date of advice: 18 September 2019
Published: December 2019
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Is the ownership interest in the property still regarded as a pre-capital gains tax (CGT) asset? | A1: No.


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 108-70 | Income Tax Assessment Act 1997 Section 118-42 | Income Tax Assessment Act 1997 Section 124-190 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-15

Reasons for decision: Summary: 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. A capital gain or capital loss is disregarded if you acquired the asset before 20 September 1985. Deceased estate Division 128 of the ITAA 1997 sets out what happens if a 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). Therefore, in this case, the deceased estate acquired their ownership interest in the property on the date of death. The ownership interest is no longer a pre-CGT asset. The first element of the cost base of the ownership interest is the market value of the property on the date of death. Separate asset Subdivision 108-D of the ITAA 1997 outlines situations when some assets become separate CGT assets. For CGT purposes there are exceptions to the common law principle that what is attached to the land is part of the land and rules about when a capital improvement to a CGT asset is treated as a separate CGT asset. Section 108-70 of the ITAA 1997 provides information on when a capital improvement is a separate asset. Subsection 108-70(2) of the ITAA 1997 states that a capital improvement to a CGT asset (the original asset) that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is: (a) more than the improvement threshold for the income year in which the event happened; and (b) more than 5% of the capital proceeds from the event. The improvement threshold for 2018-19 financial year was $150,386. The improvement threshold is indexed annually (section 108-85 of the ITAA 1997). In this case, the deceased estate acquired the property after 1985. The cost base of the new lot is more than the relevant threshold and estimated to be more than 5% of the capital proceeds, therefore it is considered to be a separate CGT asset from the original land. Therefore any capital gain/loss made on a future CGT event in relation to this lot will not be disregarded, as it is not a pre-CGT asset.

Relevant facts: Entity A, entity B and entity C purchased as tenants in common in equal shares a residential property prior to 20 September 1985. The owners had apartments constructed before 1985. | The owners had another apartment recently constructed. The construction of this apartment commenced in late 20XX and is now completed. The cost being over $200,000 is shared jointly. | All the existing apartments have been leased. | While there was no written agreement originally in place each owner has the exclusive right to receive rental income from the tenants in designated apartments. | Renovation work has been carried out at the complex. After the renovations, each of the existing lots are of approximate equal value. The renovations carried out to the apartments did not exceed the improvement threshold. The owners carried out the renovation to their respective lots at their own cost. | Information provided shows rental income for specific apartments going to a specific owner. | The owners have entered into a Deed of Partition. | As outlined in the Deed of Partition, the owners propose to register a strata sub-division in respect of the property. | As and from the date of the Deed, each party will be entitled to the rents and profits and will be liable for all rates, water sewerage and drainage service and usage charges, land tax and all other periodic outgoings of the lots in accordance with the partition. | Where an owner dies before the date of transfer, the executor of the estate shall be bound by the Deed of Partition. | The new lot is held in equal shares as tenants in common. | It is estimated that the cost base for the new apartment will be greater than 5% of the capital proceeds from the CGT event in respect of the whole property.