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

Ruling: Question and Answer: | Is the property held by Company X, the trustee for a trust still considered a pre-CGT asset once the life interest reverted back to the trust on the death of Person A, the life tenant? | Yes

Relevant facts and circumstances: The rulee, Company X is the corporate trustee for the trust, The beneficiaries as listed in the trust deed were: 1. Person A 2. Such children of Person A and their spouse as shall from time to time be living 3. Such of the grandchildren of the person A and their spouse as shall become entitled pursuant to the provisions of a clause of this deed. Company X purchased a residential property before 20 September 1985. Person A resided in the property as their main residence. Several years ago, after 20 September 1985, Person A was granted a life interest in the property in return for consideration of a sum. The property continued to be Person A's main residence until their death in the 2011-12 income year. Following the death of Person A, the interest in the property reverted back to the trust. The property will be sold in the 2011-12 income year. The life tenancy was registered and the solicitors for the trustee have received instruction to remove the life tenancy registration. The property title did not change at any time. There has been no change in the trust deed or the beneficiaries since the property was acquired, apart from the death of Person A.

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 104-20. | Income Tax Assessment Act 1997 Section 128-10.

Reasons for decision: Summary: The trust purchased a residential property before 20 September 1985 which Person A used as their main residence. Person A was granted a life interest in the property after 20 September 1985 in return for consideration of a sum. Taxation Ruling TR 2006/14 gives guidance on the consequences of creating life and remainder interests in property. According to paragraph 85 of TR 2006/14, bringing a legal life interest into existence involves a disposal of part of an existing CGT asset in a similar way to the disposal of a percentage interest in it. The part of the original asset that is not disposed of to the life interest owner is the legal remainder interest. By creating a life interest in the property in question, the trustee disposed of part of its freehold interest in the property, in a similar way to disposing of a percentage interest in it. CGT event A1 happened when the life interest was created. The part of the property that was not disposed of to Person A was the remainder interest. | Detailed Reasoning - Death of life interest owner: A capital gain or capital loss from a CGT event that results from a CGT asset owned by a deceased individual just before dying is disregarded under section 128-10 of the ITAA 1997. Paragraph 102 of TR 2006/14 states that on the death of the life tenant owner, CGT event C1 in section 104-20 of the ITAA 1997 happens. The Commissioner does not consider that CGT event C2 happens in this case because the legal life interest is not an intangible asset. If the life interest owner makes a capital gain or capital loss from CGT event C1 happening, it is disregarded under section 128-10 of the ITAA 1997. The death of the life interest owner has no CGT consequences for the remainder (beneficiary) owners. The remainder owners do not acquire any asset from the life interest owner, their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset. As the trust acquired the property in question before 20 September 1985, the property will retain its pre CGT status on the reversion of the life interest to the trust.

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