Private ruling: Deceased estate and capital gains tax
Date of advice: 9 March 2016
Published: May 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Will the proceeds from the sale of the subdivided blocks of land constitute assessable income in the hands of the executors of the deceased estate? | No. | 2. Will the proceeds from the sale of the subdivided blocks of land be subject to the CGT provisions of the Income Tax Assessment Act 1997 (ITAA 1997) in the hands of the executors of the deceased estate? | Yes. | 3. Will the proceeds from the sale of the subdivided blocks of land be assessable as either income or capital gains in the hands of the beneficiaries of the deceased estate? | No. | 4. Will the executors of the deceased estate be able to disregard any capital gain or capital loss made from the sale of any of the subdivided blocks of land? | No. | 5. Will the executors of the deceased estate make any capital gain or capital loss in relation to the demolition of the dwelling? | No. | 6. Will the executors of the deceased estate be able to apply the capital gains discount of 50% to capital gains made on any blocks of land that are disposed of at least 12 months after the date of death of the deceased? | Yes.

Relevant facts and circumstances: The deceased purchased a parcel of land with their spouse prior to 1985. The deceased built a house (the dwelling) across several of the blocks. The dwelling was the main residence of the deceased and his/her spouse during their lifetimes. The spouse of the deceased passed away several years before the deceased. The deceased passed away in 20XX. Under the will, the children of the deceased are the executors and beneficiaries of the estate. The parcel of land including the dwelling was left equally to the beneficiaries in the will and the will did not provide for the creation of a Testamentary Trust. The property has been subdivided into a number of blocks which are being offered for sale by the executors of the estate of the deceased. It is the intention of the executors to sell the blocks of land as part of administering the estate and none of the blocks will be distributed to the beneficiaries. The blocks for sale include the blocks the dwelling is situated on and the dwelling will be demolished to facilitate the sale of those blocks. The cost of the demolition will be approximately $X and the executors will not receive any proceeds in relation to the demolition. None of the beneficiaries of the deceased estate were living in the dwelling at the time of the passing of the deceased or have been living in the dwelling since that time.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-15 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-20 | Income Tax Assessment Act 1997 Subsection 104-20(1) | Income Tax Assessment Act 1997 Subsection 104-20(3) | Income Tax Assessment Act 1997 Subsection 108-55(1) | Income Tax Assessment Act 1997 Section 112-20 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Section 112-30 | Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 Section 115-30 | Income Tax Assessment Act 1997 Section 116-25 | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Section 128-15

Reasons for decision: Detailed Reasoning - Income or capital proceeds: Profits on the sale of subdivided land can be assessable as income or as capital gains depending on the circumstances. Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) considers the assessability of profits on isolated transactions in light of the principles outlined in Myer Emporium . According to paragraph 1 of TR 92/3, the term 'isolated transactions' refers to: • those transactions outside the ordinary course of business of a taxpayer carrying on a business, and • those transactions entered into by non-business taxpayers. Paragraph 6 of TR 92/3 provides that a profit from an isolated transaction will generally be income when both the following elements are present: • your intention or purpose in entering into the transaction was to make a profit or gain, and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. Some of the factors to consider when looking at whether an isolated transaction amounts to a business operation or commercial transaction are listed at paragraph 13 of TR 92/3. They are: (a) the nature of the entity undertaking the operation or transaction (b) the nature and scale of other activities undertaken by the taxpayer (c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained (d) the nature, scale and complexity of the operation or transaction (e) the manner in which the operation or transaction was entered into or carried out (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction (g) if the transaction involves the acquisition and disposal of property, the nature of that property and (h) the timing of the transaction or the various steps in the transaction. Profits on the sale of subdivided land can therefore be income according to ordinary concepts within section 6-5 of the ITAA 1997, or as a profit making undertaking or plan within section 15-15 of the ITAA 1997, if the taxpayer's subdivisional activities have become a separate business operation or commercial transaction, or an isolated profit making venture. In contrast, paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the 'mere realisation' of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. In this case, the executors have subdivided the parcel of land into a number of blocks for sale and it is not considered that the nature and scale of the subdivision has the hallmarks of a separate business operation, commercial transaction or an isolated profit making venture. Instead, the executors are going about the realisation of the land in an enterprising way and the sale of the blocks will represent the mere realisation of a capital asset. Consequently, the sale of the blocks will be subject to the CGT provisions and CGT event A1 will happen when each subdivided block is disposed of. The time of each event will be when a contract for the sale of a block is entered into (section 104-10 of the ITAA 1997). | Detailed Reasoning - Administration of deceased estate: In this case, the executors (or trustees) of the estate are undertaking the subdivision and sale of the blocks of land during the administration of the estate and none of the blocks will be passed on to any of the beneficiaries of the estate. Consequently, all proceeds from the sale of the blocks will be assessed in the hands of the executors of the estate and not the beneficiaries. | Detailed Reasoning - Dwellings acquired from deceased estates: Where a CGT asset owned by a deceased person is acquired by an individual as a legal personal representative or beneficiary of the estate, the legal personal representative or beneficiary is taken to have acquired the asset on the day the person died (section 128-15 of the ITAA 1997). Where a dwelling was the main residence of the deceased person and was not then being used to produce assessable income, the legal personal representative or beneficiary is taken to have acquired the dwelling for its market value on the day the person died (subsection 128-15(4) of the ITAA 1997). Further, if a dwelling owned by a deceased person passes to an individual as an individual beneficiary of a deceased estate or as the trustee of a deceased estate, a capital gain or capital loss made on disposal of the dwelling may be disregarded provided certain conditions are met (section 118-195 of the ITAA 1997). In this case, the will of the deceased provided for the property to be left to their children who are also the executors of the estate. The executors have decided that the dwelling on the property will be demolished to facilitate the disposal of the blocks of land it is situated on. Consequently, the dwelling will not be 'disposed' of as is required by section 118-195 of the ITAA 1997 and the executors will not be able to disregard the capital gain or capital loss made on disposal of any of the blocks of land, regardless of whether they are the blocks on which the dwelling is situated or they are the other vacant blocks. | Detailed Reasoning - Subdivision of land: Section 112-25 of the ITAA 1997 provides that a CGT event does not happen when a CGT asset is split into two or more assets. In the case of land, the subdivided blocks are treated as new separate assets and they are taken to have been acquired by the owner when the original land was acquired (Taxation Determination TD 97/3 (TD 97/3)). Consequently, in this case, the executors are taken to have acquired the subdivided blocks at the date of death of the deceased. In working out the cost base of the subdivided blocks, Subsection 112-25(3) of the ITAA 1997 provides that each element of the cost base of the original asset is worked out at the time of the split and apportioned in a 'reasonable way' to each element of the new asset's cost base. TD 97/3 states that the Commissioner will accept any approach that is appropriate in the circumstances of each particular case, for example, on an area basis or relative market value basis. | Detailed Reasoning - Demolition of dwelling: CGT event C1 happens if a capital gains asset is lost or destroyed. In this case, the dwelling was not a separate CGT asset because none of the balancing adjustment provisions in subsection 108-55(1) of the ITAA 1997 applied to it. However the note to subsection 104-20(1) of the ITAA 1997 makes it clear that CGT event C1 can apply to part of a CGT asset. Taxation Determination TD 1999/79 confirms that CGT event C1 can happen on the voluntary destruction of an asset where for example, a taxpayer might demolish a building in the course of redeveloping a property. Therefore, CGT event C1 will happen on the demolition of the dwelling. Subsection 104-20(3) of the ITAA 1997 provides that a taxpayer makes a capital gain from CGT event C1 if the capital proceeds from the loss or destruction are more than the asset's cost base. A capital loss is made if those capital proceeds are less than the asset's reduced cost base. In this case, we note that the executors of the estate will not receive any capital proceeds in relation to the demolition of the dwelling. Further, section 116-25 of the ITAA 1997 provides that the market value substitution rule does not apply to CGT event C1. As a CGT event will happen to only part of each of the blocks of land the dwelling is situated on, the cost base apportionment rules in section 112-30 of the ITAA 1997 will apply. However, as there will not be any capital proceeds in relation to the demolition, the combined effect of these provisions is that no amount is apportioned to the cost base or reduced cost base of the dwelling. Consequently, as the capital proceeds from the demolition will be nil and the cost base attributed to the dwelling will be nil, the executors will not make a capital gain or capital loss in relation to the demolition. The demolition costs will need to be apportioned to the cost base of each of the relevant blocks. | Detailed Reasoning - Discount capital gains: Under Division 115 of the ITAA 1997, a discount of 50% can be applied to a capital gain if a CGT event happens after 11:45am on 21 September 1999 and the CGT asset was acquired at least 12 months before the CGT event. In this case, the executors are taken to have acquired the subdivided blocks at the date of death of the deceased. Consequently, any blocks disposed of 12 months or more after the acquisition date will be eligible for the 50% discount on any capital gain.