Private ruling: Capital gains tax
Published: April 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2009

Ruling: Q1: Will the automatic rollover in Subdivision 124-J of the Income Tax Assessment Act 1997 apply to the asset? | A1: Yes. | Q2: Will the capital gain or loss be disregarded when the pre capital gains tax (CGT) portion of the ownership interest in the asset passes to the Australian resident beneficiary? | A2: Yes. | Q3: Will the capital gain or loss be disregarded when the post CGT portion of the ownership interest in the asset passes to the Australian resident beneficiary? | A3: Yes. | Q4: Will the capital gain or loss be disregarded when the pre CGT portion of the ownership interest in the asset passes to the foreign resident beneficiary? | A4: Yes. | Q5: Will the capital gain or loss be disregarded when the post CGT portion of the ownership interest in the asset passes to the foreign resident beneficiary? | A5: No.

Relevant facts and circumstances: The deceased passed away in the 2009-10 financial year. At the time of their death, the deceased was an Australian resident. The beneficiaries of the deceased estate are the 2 relatives of the deceased. One is an Australian resident for tax purposes; the other is a foreign resident. The deceased had X separate interests in an overseas asset. The deceased acquired an interest pre CGT and the other interest post CGT. The old asset expired and the new asset issued in the 2012-13 financial year. The deceased had applied for a renewal prior to their death. The interest in the asset did not revert back to the overseas Government. The beneficiaries have been receiving income from the property. The executor is proposing to transfer the property to the beneficiaries.


Reasons for decision: Summary: According to section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997), CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because it is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expired. For this purpose, a lease is taken to have expired even if it is extended or renewed If you enter into a contract that results in the asset ending, the time of CGT event C2 is when you enter into that contract. If there is no such contract, CGT event C2 happens when the asset comes to an end. You make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than its cost base. If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made. According to subsection 104-25(5) of the ITAA 1997, a capital gain or loss from CGT event C2 is ignored if the asset was acquired before 20 September 1985. If the asset is a lease, the capital gain or loss is ignored if it was granted before 20 September 1985 or, if it has been renewed or extended, the start of the last renewal or extension occurred before 20 September 1985. For example, the CGT provisions have no application where consideration is received by a lessee for the surrender on or after 20 September 1985 of a lease granted before that date ( Taxation Ruling IT 2363). | Detailed Reasoning - Rollover - Crown lease: Subdivision 124-J of the ITAA 1997 sets out the situations in which the holder of a Crown lease over land obtains a replacement asset roll-over when the lease is, among other things, renewed, extended or converted to an estate in fee simple. A Crown lease is defined in section 124-580 of the ITAA 1997 as a lease of land granted by the Crown under an Australian law (other than the common law) or a similar lease granted under a foreign law. Section 124-575 of the ITAA 1997 is the central operative provision of Subdivision 124-J of the ITAA 1997. It provides an automatic roll-over where: · a taxpayer holds one or more Crown leases over land (the "original right"); · the taxpayer surrenders the Crown leases or they expire; · the taxpayer is granted one or more estates in fee simple or one or more new Crown leases over land (or both) (the "new right"); and · the new estates in fee simple and/or the new leases relate to the same land as the original Crown leases(s). For the roll-over to happen, the new right must be granted by: · renewing or extending the term of the original Crown lease, mainly because the taxpayer held the original Crown lease; · changing the purpose for which the land to which the original Crown lease related can be used; · converting the original Crown lease to a Crown lease in perpetuity; · converting the original Crown lease to an estate in fee simple; · consolidating, or consolidating and dividing, the original Crown lease; · subdividing the original Crown lease; · excising or relinquishing a part of the land to which the Crown lease related; or · expanding the area of the land. | Detailed Reasoning - Rollover consequences: The rollover consequences are set out in Subdivision 125-A of the ITAA 1997. A capital gain or loss you make from the original asset is disregarded. If the original asset was acquired on or after 20 September 1985, the first element of each new assets cost base is calculated as per subsection 124-10(3) of the ITAA 1997. If the original asset was acquired before 20 September 1985, you are taken to have acquired each new asset before that day. | Detailed Reasoning - Application to your circumstances: In this case, the deceased acquired separate interests in an overseas asset. One of the interests was acquired pre CGT and the other post CGT. Although the lease was set to expire prior to the deceased's death, ownership of the asset did not revert back to the overseas government. We accept that the lease continued up until the new lease was granted. The automatic rollover in Subdivision 124-J of the ITAA 1997 will apply as the deceased held a lease over land, the lease expired and the deceased was granted new leases over the same land. The renewal of the original leases was mainly because the deceased held the original lease. As this rollover applies, the interest in the leasehold property originally acquired by the deceased before 20 September 1985 will retain its pre CGT status. | Detailed Reasoning - Question 2 and 3: Subsection 128-15(1) of the ITAA 1997 sets out what happens if a CGT asset a person owned just before they died devolves to a legal personal representative or passes to a beneficiary of the estate. Subsection 128-15(2) of the ITAA 1997 states that the legal personal representative, or beneficiary, is taken to have acquired the asset on the day the person died. The rules for working out the cost base of the asset are set out in subsection 128-15(4) of the ITAA 1997. Under subsection 128-15(3) of the ITAA 1997, any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary in the estate is disregarded. Note that if the asset passes to a beneficiary that is a foreign resident different rules apply. In this case, the executor of the estate proposes to pass a portion of the pre CGT and post CGT interests in the property to an Australian resident beneficiary. The beneficiary will be taken to have acquired their interests in the assets on the date of the deceased's death. As per subsection 128-15(3), any capital gain or loss the executor makes will be disregarded. | Detailed Reasoning - Question 4 & 5: CGT event K3 is triggered if a CGT asset owned by a person who was an Australian resident for tax purposes just before they died, passes to a beneficiary in their estate who is, when the asset passes, a non resident of Australia for taxation purposes and the asset is not taxable Australian property (in the hands of the non-resident beneficiary) (section 104-215 of the ITAA 1997). As the interests in the property are not taxable Australian property (in the hands of the non-resident beneficiary), when the assets are subsequently sold, the non-resident will not be subject to further capital gains tax in Australia on their portion of the assets. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death. Where CGT event K3 is triggered, the trustee of the deceased estate will be required to calculate any capital gain or capital loss made on the post CGT assets and include, in the date of death return, any net capital gain for the income year in which the deceased died. Subsection 104-215(5) of the ITAA 1997 does provide an exception for assets acquired before 20 September 1985, where any capital gain or capital loss is disregarded. In this case, the executor of the estate proposes to pass a portion of the pre CGT and post CGT interests in the leasehold property to a foreign resident beneficiary. CGT event K3 is triggered as the asset is not taxable Australian property and it is passing to a non resident of Australia for taxation purposes. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death. Note that any capital gain made on the pre CGT interest in the leasehold property will be disregarded.