Private ruling: Capital gains tax - deceased estate - compulsory acquisition - replacement asset rollover
Date of advice: 13 January 2017
Published: March 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the purchase of a residential rental property satisfy the conditions of a replacement capital gains tax (CGT) asset under subsection 124-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will an investment in a Property Investment Trust or Company satisfy the conditions of a replacement CGT asset under subsection 124-75(4) of the ITAA 1997? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 106-50. | Income Tax Assessment Act 1997 Section 124-70. | Income Tax Assessment Act 1997 Section 124-75. | Income Tax Assessment Act 1997 subsection 124-75(2). | Income Tax Assessment Act 1997 subsection 124-75(3). | Income Tax Assessment Act 1997 paragraph 124-75(3)(a). | Income Tax Assessment Act 1997 paragraph 124-75(3)(b). | Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision: Detailed Reasoning - Deceased estate: A capital gains tax (CGT) asset owned by a deceased person at the time of their death passes to a beneficiary of the deceased's estate if the beneficiary becomes the owner of the asset under the will or in one of the other ways set out in subsection 128-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Any capital gain or loss made when the asset passes to a beneficiary of the deceased estate is disregarded under subsection 128-15(3) of the ITAA 1997 (unless CGT event K3 in section 104-215 of the ITAA 1997 happens as a result of the asset passing to a tax-advantaged beneficiary). However, the beneficiary will be the relevant taxpayer if a CGT event happens to the asset after it has passed to the beneficiary. While it is clear that an asset has passed to a beneficiary once legal ownership of the asset has transferred to the beneficiary, we consider that an asset can pass to a beneficiary prior to transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee. It is considered that there is nothing in section 128-20 of the ITAA 1997 that makes 'passing' dependent upon the acquisition of legal ownership (Taxation Determination TD 2004/3). We consider that you are an absolutely entitled beneficiary of the estate. | Detailed Reasoning - Replacement asset rollover: Section 124-70 of the ITAA 1997 allows CGT roll-over relief if an asset owned by you is compulsorily acquired by an Australian government agency. A further requirement is that the owner of the original asset must receive money or another CGT asset or both for the CGT event to be eligible for roll-over. On satisfying these conditions, section 124-75 of the ITAA 1997 provides other requirements which must be satisfied if money is received for the event happening. Under subsection 124-75(2) of the ITAA 1997, the owner of the asset must incur expenditure in acquiring another CGT asset. In accordance with paragraph 124-75(3)(a) of the ITAA 1997, at least some of the expenditure must be incurred no earlier than one year before the event happens, or under paragraph 124-75(3)(b) of the ITAA 1997, no later than one year after the end of the income year in which the event happens, or within such time as the Commissioner allows in special circumstances. Where the original asset was not in any way connected to a business being carried on by you, the replacement asset must be used (for a reasonable period after it is acquired) for the same purpose, or a similar purpose, to the purpose for which the original asset was used just before the event happened. Taxation Determination TD 2000/42 provides some guidance as to the scope of the words ‘for the same purpose… or for a similar purpose’ that are used in subsection 124-75(4) of the ITAA 1997. When establishing whether or not the purchase of another residential rental property, investment in a Property Investment Trust or Company will satisfy the requirements under subsection 124-75(4) of the ITAA 1997, consideration must be given as to whether the assets would be ‘for the same purpose… or for a similar purpose’ as that of your original asset. In your situation, the original asset was a rental property. Accordingly the purchase of another residential rental property would clearly be considered as being ‘for the same purpose’ and therefore satisfy the conditions under subsection 124-75(4) of the ITAA 1997. If a person ‘directly’ invests in a rental property it can be said to be used for the purpose of benefiting from rental income and capital growth from real property value. An indirect investment in a property trust can be said to be used for the purpose of benefiting from rental income and capital growth from real property value and can reasonably be viewed as being used for the same purpose or at least ‘a similar purpose. Therefore investment in a Property Investment Trust or Company will also satisfy the requirements under subsection 124-75(4) of the ITAA 1997.

Relevant facts: You are a beneficiary of a deceased estate (The deceased). | The deceased was the legal owner of a dwelling (The dwelling). | The dwelling was the deceased’s main residence. | The deceased passed away after 20 September 1985. | You and your parent, (‘A’) were the only beneficiaries of the deceased’s estate. | ‘A’ passed away after a period of time. | You were the residuary beneficiary of ‘A’s estate and therefore inherited their interest in the dwelling. | You are now the sole beneficiary of the deceased’s estate and therefore absolutely entitled to the assets of the estate. | Legal title to the dwelling has not been transferred to you personally. | The dwelling was used to produce assessable income for a number of years. | The dwelling was left vacant for a period of time and subsequently became derelict. | The local council issued a notice of intention to compulsory acquire the dwelling. | You entered into a deed of settlement with the local council in relation to the compulsory acquisition. | You have made a capital gain as a result of the compulsory acquisition. | You will purchase a replacement investment property. | You will acquire shares or units in a property trust or company.