Private ruling: Capital gains tax - surrender of life interest
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer: | Will there be a capital gains tax event as a result of you surrendering your life interest in the property? | Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your spouse bought a property before 1985. You and your spouse lived on the property for many years. You have not been living on the property for several years. Your child is now using the property to earn income. Your spouse (the deceased) died recently. You are residing in an aged care facility. In their will, the deceased left a life interest in the property to you, with you and your child being the remainderman. You were entitled to reside in or occupy or enjoy the property and receive income from the property. You do not rely on the property for any income. You wish to surrender your life interest in the property. The title of the property has been transferred in trust to your child.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 103-25. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 110-25. | Income Tax Assessment Act 1997 Section 112-20. | Income Tax Assessment Act 1997 Section 116-30.

Reasons for decision: Summary: You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property. A life interest in a property is a CGT asset. CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if no contract, when the change of ownership occurs. | Detailed Reasoning - Life Interest in Asset: As a result of your spouse's death, two separate interests in the property were created: · Your interest as a life tenant; and · Your child's interest in the remainder. For CGT purposes, these separate interests in the property are assets in their own right. Taxation Ruling TR 2006/14 deals with the capital gains tax consequences of creating and dealing in life and remainder interests. It states that life interests and remainder interests are terms used to describe the interest that an entity has as either a beneficiary of a trust (equitable interest) or, less commonly, as the owner of a freehold estate in land (legal interest). In this case you had a lifetime right to the rent free use, occupation and enjoyment of the property held in trust and also the right to receive income earned from the property. The trust was created from the will of your deceased spouse, and the will names the remainder beneficiary who will receive the benefit of the property on your death or surrender of the interest. It is therefore considered that you have an equitable life interest, being an interest in a trust. | Detailed Reasoning - CGT consequences for the surrender of a life interest: When a life interest owner surrenders or releases their interest in a deceased estate CGT event A1 happens. This is because there is a change of ownership of the interest from one party to another, rather then a mere ending of it. Thus when you surrender your life interest in the property to your child, there will be CGT consequences. CGT event A1 will take place. The surrender of a life interest in a property is different to transferring the legal title of a property to someone. The title of the property in your case has been transferred to your child. | Detailed Reasoning - How to calculate the capital gain or loss on surrender of a life interest: You will make a capital gain if the capital proceeds of the asset at the time of the disposal is more than their cost base and conversely you will make a capital loss if the capital proceeds is less than the reduced cost bases of the assets. Thus you will need to work out your cost base and capital proceeds. | Detailed Reasoning - Cost base: The cost base is made up of five elements: Briefly, these are: 1. The actual amount you paid to acquire the asset (see below). 2. Any incidental costs of acquiring the asset, and costs in relation to its disposal; including cost of transfer, stamp duty, legal fees, agent, valuer, accountant fees. 3. Non-capital costs you incur in connection with your ownership, e.g. interest on money borrowed to acquire an asset, costs of maintaining, repairing or insuring the asset, rates and land tax. However, you can only include non-capital costs of ownership if they could not have also been claimed as a deduction. 4. Capital expenditure you incur to preserve or increase the value of the asset. 5. Capital expenditure you incur to establish, preserve or defend your title to the asset. | Detailed Reasoning - First element of cost base on surrender of life interest: The first element of the cost base and reduced cost base of an equitable life interest is the sum of any money and the market value of any property given to acquire it. Also if as is generally the case, no money or property is given to acquire an equitable life interest, the first element of the cost base and reduced cost base of the interest is its market value at the time it was acquired. In your case you acquired an asset, your life interest in the trust, at the time when the testamentary trust was created. This could be the date of administration of the deceased's will (eg at probate date). | Detailed Reasoning - Capital Proceeds for Surrender of Life Interest: If the surrender or release of the life interest is for no capital proceeds, the market value substitution rule applies to determine the amount of capital proceeds from the event. In your case, you will not receive any proceeds from the surrendering of your interest in the property to your child, so you are deemed to have received the market value of your interest at the date of transfer. The market value of the life interest you intend to surrender will depend upon a number of factors including your life expectancy and the future income to be derived from the life interest. A professional actuary may assist in determining this value. | Summary: There will be CGT consequences as a result of surrendering your life interest in the property. CGT event A1 will happen as there will be a disposal of a CGT asset. The first element of cost base or reduced cost base for CGT Event A1 is the market value of your life interest in the property on the date of administration of deceased's will (e.g. normally probate date) The capital proceeds for CGT Event A1 is the market value of your life interest in the property on the date of surrender of your life interest (e.g. date of written agreement). A copy of TR 2006/14: Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests is enclosed for your further information. We refer you to Example 7 on page 24 of the Ruling.