Private ruling: Capital gains tax
Published: March 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers: | 1. Will you be liable for a capital gain or loss on the purchase of a life interest? | No. | 2. Will you be liable for a capital gain or loss when you sell the property? | Yes.


Relevant legislative provisions: Income tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-25 | Income tax Assessment Act 1997 Section 110-25 | Income tax Assessment Act 1997 Section 110-55 | Income tax Assessment Act 1997 Section 114-5(2)

Reasons for decision: Summary: If a life interest or remainder owner surrenders or releases their interest capital gains tax (CGT) event A1 (in section 104-10) rather than CGT event C2 (in section 104-25) happens. The Commissioner considers that CGT event A1 is the applicable event, as there is a change of ownership of the interest from one party to the other, rather than a mere ending of it. Whether the surrender of a life interest constitutes a conveyance of that interest was considered in Platt and others v. Commissioners of Inland Revenue (1953) 46 TC 418. The Court held that deeds, described as deeds of surrender and release operated as conveyances or transfers of the life interests which were the subject of the deed: It seems to me to be, on principle, perfectly plain that these documents... did operate as voluntary dispositions inter vivos ; they had the effect of accelerating or bringing into operation interests which, but for their execution, would not have existed .... I think they were conveyances or transfers, and no less so because they have chosen to be described as surrenders or releases or deeds, or by any other name; they did in fact operate as voluntary dispositions inter vivos , and if authority be required for that proposition it is undoubtedly to be found in the case ... Stanyforth v. Commissioners of Inland Revenue [1930] AC 339. The acquisition date for your interest in the property is the date the deceased died. The merger of the life and remainder interest as a result of the purchase of the life interest will be registered on the title deed. This will result in one asset rather than two assets. If two or more assets are merged, the respective cost base or reduced cost bases are combined. The splitting, changing or merging of CGT assets are not CGT events. That is, there are no CGT implications at the time of these transactions. | Detailed Reasoning - Example: Josie owned two parcels of land (adjacent to each other) of 850 square metres each, which she had purchased for $55,000 and $65,000 respectively. In January 1997, Josie decided to merge the two parcels of land. The respective cost bases are combined to total an amount of $120,000. Josie then owned a 1,700 square metre block with a cost base of $120,000 (ignoring any other Incidental costs). In December 2006, Josie decided to subdivide the block into five equal allotments off 340 square metres each. The cost base of the total block (that is: $120.000) is apportioned on a reasonable basis over the newly subdivided blocks. As the blocks are of equal size, the total cost base can simply be divided by five to equal $24,000 per block. Note that no CGT events occurred as a result of the transactions in January 1997 and December 2006, therefore, no CGT implications arise until Josie disposes of any of the blocks. You will not make a capital gain or loss when you purchase the life interest in the property. | Detailed Reasoning - Sale of the property:: A CGT event will occur when the CGT asset is disposed of. A capital gain or loss will occur for the legal owner of the asset. The conditions under which an A1 event occurs are outlined in section 104-10 of the ITAA 1997. Once it has been established that a CGT event has occurred, the capital gain or capital loss is calculated, it needs to be included in your income tax return for the year in which you dispose of the rental property. The capital gain is calculated by subtracting the cost base of the property from the capital proceeds (sale). A capital loss arises if the cost base (reduced) exceeds the proceeds. | Detailed Reasoning - Cost base: Generally, the cost base and reduced cost base of an asset is made up of 5 elements (sections 110-25 and 110-55 of the Income Tax Assessment Act 1997 (ITAA 1997)). Briefly these are; Money you paid for the asset. Which will include the money you paid for the life interest and the market value of your remainder interest which you acquired as a result of the deceased's death. These amounts combine to give you your first element of the cost base. Incidental costs of acquiring or selling the asset (for example agent's fees and stamp duty). Non capital costs associated with owning the asset. (Please note: you cannot include expenditure for which you have, or could have claimed as a deduction for income tax purposes in any year. You can only include these costs for assets that you acquired after 21 August 1991. You cannot include these costs to work out a capital loss). Capital costs associated with increasing the value of your asset. Capital costs to preserve or defend your title rights to your asset. For the purposes of calculating the reduced cost base of a CGT asset, the third element of the cost base is ignored. | Detailed Reasoning - Example:: Jack died on 1 January 2001. At the time of his death he owned a property which, under his will, he left on trust for his daughter Georgia for life and his grandchildren Dylan and Thomas in remainder. The administration of the estate was completed in 2002. The first element of the cost base of Georgia's life interest (that is, its market value at the time the administration of the trust was completed) was $90,000. The first element of the cost base of each of Dylan and Thomas' remainder interests is $200,000. Georgia surrendered her life interest to Dylan and Thomas in 2003. Georgia incurred $5,000 in legal expenses associated with the surrender. The market value of the life interest at the time it was surrendered was $100,000. CGT event A1 will happen when Georgia surrenders her life interest. The cost base/reduced cost base of Georgia's life interest will be $95,000 (that is, $90,000 + $5,000). As Georgia did not receive any capital proceeds as a result of the surrender, she is taken to have received the market value of the life interest. Therefore Georgia's capital gain is $5,000 (that is, $100,000 - $95,000). Dylan and Thomas each acquire a life interest with an acquisition cost of $50,000. | Detailed Reasoning - Capital proceeds: The capital proceeds are the amount of money you receive or consideration you receive when you dispose of the asset. If there is no money or consideration given, then the market value of the asset on the day that the disposal happens becomes your capital proceeds. There are two methods available to calculate your gain or loss. The indexation and 50% discount methods. The indexation method You can use the indexation method to calculate your capital gain providing that you have chosen the indexation method under subsection 114-5(2) of the ITAA 1997: a CGT event happens to an asset you acquired before 11.45am (by legal time in the ACT) on 21 September 1999, and You owned the asset for 12 months or more. Under this method, you increase each amount included in an element of the cost base (other than those in the third element non-capital costs of ownership) by an indexation factor. You can only index the elements of your cost base up to 30 September 1999. You use this formula: Indexation factor = CPI for quarter ending 30/09/1999 (123.4) . CPI for quarter in which expenditure was incurred You work out the indexation factor to three decimal places, rounding up if the fourth decimal place is five or more. For most assets, you index expenditure from the date you incur it, even if you do not pay some of the expenditure until a later time 50% discount method If a CGT event happens in relation to a CGT asset that you have held for more then 12 months you may be able to reduce any capital gain you make by the 50% discount method. The 50% discount method applies if the asset was acquired before 21 September 1999 and you have held the asset for more than 12 months. You are then able to reduce any capital gain made on the disposal of the asset by 50%.

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. | Relevant facts: You were appointed as one of the trustees of an estate. | The deceased owned a property that was left in trust to you (with a life-interest in the property being given to one of the other trustees). | You have been approached by the other trustee to purchase their life interest in the property. You have come to an arrangement where you will buy the life interest. | You will register the merger of the life and remainder interest on the title deed. | You intend to rent the house out after the purchase of the life interest and you will hold the house for at least 12 months before selling.