Private ruling: Capital gains tax on the sale of property acquired through a deceased estate
Published: October 2011
Ruling period: Year ended 30 June 2006
Date scheme commenced: 1 July 2005

Ruling: Questions and Answers | 1. Is any capital gain or capital loss made on the sale of Lot 2 disregarded? | Yes. | 2. Is any capital gain or capital loss made on the sale of Lot 1 disregarded? | No. | 3. Did you acquire the property on the date of the deceased's death? | Yes. | 4. Is the first element of the cost base of the property the market value on the date of the deceased's death? | Yes. | 5. Are the costs that you incurred in legal fees, agents commission and fees and surveyors fees able to be included in the cost base of the property? | Yes. | 6. Are the costs that you incurred in council rates, water rates, insurance, land taxes and property maintenance and repairs able to be included in the cost base of the property? | Yes. | 7. Are the costs that you incurred in council rates, water rates, insurance, land taxes and property maintenance and repairs able to be included in the reduced cost base of the property? | No. | 8. Are the costs that you incurred in administering the estate able to be included in the cost base of the property? | No. | 9. Can the proceeds from the sale of the property that you were required to pay to person B be included in the cost base of the property? | Yes. | 10. Are the legal costs that you incurred in respect of validating the deceased's Will able to be included in the cost base of the property? | Yes. | 11. Can any costs incurred by person B be included in the cost base of the property? | No. | 12. Is the cost base of the property required to be apportioned on a reasonable basis between each Lot? | Yes. | 13. Can you apply the capital gains tax (CGT) 50% discount when calculating any capital gain? | Yes. | 14. Will non resident tax rates apply to any capital gain that you make? | Yes.

Relevant facts and circumstances: Some time prior to 20 September 1985, the deceased's spouse purchased a property (herein referred to as the property). The property was registered solely in their name. The property consisted of two separate Lots, Lot 1 and Lot 2. A dwelling was already constructed on Lot 2. Lot 1 always remained vacant land and contained a garage for use with the dwelling. The two Lots were never fenced by a common boundary. The dwelling became the main residence of the deceased and their spouse, throughout their lives. Some time later the deceased's spouse died. The market value of both Lots at that time is estimated at a certain amount. Shortly afterwards the deceased became the sole registered proprietor of both Lots by way of a transmission application as a beneficiary of their spouse's estate. The deceased continued to use the dwelling as their main residence. Some time later, you commenced living at the dwelling with the deceased. The dwelling became your main residence. Some time later the deceased died. They left a Will providing the whole of their estate, including the property, to you. You were the executor and beneficiary of their Will. You continued to reside in the dwelling as your main residence and used the adjacent land as a garage and for your private and domestic purposes. The market value of Lot 1 on the deceased's date of death was a certain amount. The estimated market value of Lot 2 on the deceased's date of death was a higher amount. A market appraisal of the two Lots combined as at the date of the deceased's death was a certain amount. Some time later probate was granted in respect of the estate in favour of you in your capacity as the executor. Shortly afterwards proceedings were commenced by another person (person B) in the Supreme Court challenging the validity of the Will of the deceased and seeking to revoke the grant of probate that was previously made. Person B obtained ex parte orders restraining you as the executor in carrying out any further administration of the estate until the completion of the proceedings. Person B and you (as executor for the estate and in your own capacity) then entered into contested litigation which was listed for hearing. Some time later you moved out of the dwelling and thereafter have been residing overseas. You had no other main residence and had chosen to continue to treat the property as your main residence in accordance with section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997). Some time later you and person B entered into a Deed of Settlement whereby you agreed to charge 50% of the property in favour of person B and person B would permit a transmission application to be registered in your name. The Deed then provided for mechanisms relating to the sale of the property and disbursements of the net proceeds of sale. The injunctions previously obtained were dismissed as was the Statement of Claim and the Supreme Court proceedings were disposed of in that fashion. Person B and you agreed to settle your differences on the basis of: · Consent orders filed in the Supreme Court primarily dismissing person B's claim, · A Deed of Settlement where primarily: o Person B agreed to withdraw the caveat in order to enable the transmission application to effect the transfer of the property into your name; and o Person B received a charge of 50% interest in respect of the property and o The solicitor is to arrange payment of taxes including capital gains tax and lodge any tax return in respect thereof and after payment of taxes and other expenses associated with the maintenance and sale of the property, 50% of the proceeds are payable to you and 50% payable to person B. Some time later the property was transmitted into your name by a transmission application. Shortly afterwards separate titles issued, thereby creating separate title deeds for Lot 1 and Lot 2. From the time of the deceased's death until settlement of the sale of the dwelling, the property was vacant (after you left the dwelling and moved overseas) and was not used for any income generating purpose and the expenses relating to the property (such as rates, repairs) were not claimed by any of the parties as a tax deduction. Prior to the sale of the property extensive and significant maintenance work was required because of the overgrowth and lack of maintenance to the property from the deceased date of death until sale. Some time later Lot 2 (the dwelling Lot) sold. You incurred costs of sale, such as legal costs, agent's commission and surveyor's fees for Lot 2. Some time later Lot 1 (the vacant Lot) sold. You also incurred costs of sale, such as legal costs, agent's commission and surveyor's fees for Lot 1. The rates, insurances, land tax, repairs and maintenance in respect of the property were incurred jointly in respect of both Lots. It is your understanding that there was one rate notice, one insurance policy and one invoice in respect of these expenses, but which related to the two Lots. Expenditure has been incurred by the legal personal representative of the estate including the following: · Grant of probate. The grant was required to transfer the property to you to enable the sale pursuant to the Deed of Settlement to proceed, · Contested litigation legal expenses concerning and defending the validity of the deceased's Will incurred by the executor, · Administration costs in the management of the estate, sale of the properties and ongoing management of the sale proceeds, · Costs of investigation advising and requesting this ruling. Person B has incurred the following expenditure: · Probate litigation plus counsel fees, · Valuation fees for valuation of Lot 1 as at the deceased's date of death and · Wreckers account - clearing metal and rubbish for sale. The estate had no other taxable income. You had no other taxable income.

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 106-50, | Income Tax Assessment Act 1997 Section 110-25, | Income Tax Assessment Act 1997 Subsection 110-25(1), | Income Tax Assessment Act 1997 Subsection 110-25(2), | Income Tax Assessment Act 1997 Subsection 110-25(3), | Income Tax Assessment Act 1997 Subsection 110-25(4), | Income Tax Assessment Act 1997 Subsection 110-25(5), | Income Tax Assessment Act 1997 Subsection 110-25(6), | Income Tax Assessment Act 1997 Section 110-55, | Income Tax Assessment Act 1997 Section 112-25, | Income Tax Assessment Act 1997 Section 115-5, | Income Tax Assessment Act 1997 Section 115-10, | Income Tax Assessment Act 1997 Section 115-15, | Income Tax Assessment Act 1997 Section 115-20, | Income Tax Assessment Act 1997 Section 115-25, | Income Tax Assessment Act 1997 Section 115-100, | Income Tax Assessment Act 1997 Section 118-110, | Income Tax Assessment Act 1997 Section 118-120, | Income Tax Assessment Act 1997 Section 118-145, | Income Tax Assessment Act 1997 Section 118-165, | Income Tax Assessment Act 1997 Section 128-15, | Income Tax Assessment Act 1997 Subsection 128-15(1), | Income Tax Assessment Act 1997 Subsection 128-15(2), | Income Tax Assessment Act 1997 Subsection 128-15(3), | Income Tax Assessment Act 1997 Subsection 128-15(4) and | Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision: Detailed Reasoning - Lot 2: You make a capital gain or capital loss when a CGT event happens to a CGT asset that you own. The most common event, CGT event A1, happens when you dispose of an asset to someone else. CGT event A1 happened once when you sold Lot 2 and again when you sold Lot 1. Generally, if you dispose of a dwelling that was your main residence for your entire ownership period and the dwelling was not used to produce income, any capital gain or capital loss that you make on its disposal is disregarded. This is referred to as the main residence exemption. In certain circumstances, you can make a choice to continue to treat a dwelling as your main residence even if you are no longer living in it. Where the dwelling is not used to produce assessable income you can continue to treat is as your main residence for an unlimited period. In your situation, you made the choice to continue to treat Lot 2 as your main residence. As Lot 2 was your main residence for your entire ownership period and was not used to produce income, you are entitled to a main residence exemption and any capital gain that you made on the sale of Lot 2 is disregarded. | Detailed Reasoning - Lot 1: The main residence exemption is extended to up to two hectares of adjacent land to the extent that you use the land primarily for private or domestic purposes in association with the dwelling. However, the main residence exemption does not apply to a CGT event that happens in relation to adjacent land if the event does not happen in relation to the dwelling or your ownership interest in it. If you dispose of adjacent land separately from the main residence, the main residence exemption will not apply. In your situation, you disposed of Lot 2 in one transaction and you then disposed of Lot 1 in a separate transaction. You are entitled to a main residence exemption in respect of Lot 2. While we acknowledge that Lot 1 was used primarily for private or domestic purposes in association with the dwelling, as it was sold in a separate transaction, the main residence exemption cannot apply and you are unable to disregard any capital gain or capital loss that you made on its disposal. | Detailed Reasoning - Acquisition of property from a deceased estate: Where you acquire an asset owned by a deceased person as their legal personal representative or beneficiary, you are taken to have acquired the asset on the day the person died. Where a property passes to you after 20 August 1996 and the dwelling was the deceased's main residence just before they died and was not then being used for income producing purposes, the first element of the cost base of the property is its market value on the date of the deceased's death. In your case, you are taken to have acquired the property (Lot 1 and Lot 2) for its market value on the date of the deceased's death. | Detailed Reasoning - Cost base: You make a capital gain if your capital proceeds are more than the assets cost base. You make a capital loss if your capital proceeds are less than the assets reduced cost base. Capital proceeds is the term used to describe the amount of money that you receive, or are entitled to receive when a CGT event happens. The cost base of a CGT asset consists of five elements. You need to add together all of these elements to calculate the cost base. Briefly they are: 1. Money paid or required to be paid for the asset such as the money that you paid to acquire the property. 2. Incidental costs of acquiring the asset, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc. 3. You can include non capital costs of ownership only in the cost base of assets acquired after 20 August 1991, such as land taxes, insurance premiums, rates etc. These costs cannot be used to calculate a capital loss. 4. Capital expenditure you incur to increase the value of the asset such as construction of a shed. 5. Capital expenditure you incur to preserve or defend your title or right to the asset. First element As previously stated above, as the property passed to you after 20 August 1996 and the dwelling was the deceased's main residence just before they died and was not then being used for income producing purposes, the first element of the cost base of the property is its market value on the date of the deceased's death. Second element The costs that you incurred in legal fees, agents commission and fees and surveyors fees are able to be included in the second element of the cost base as they relate to the disposal of the property. Third element The costs that you incurred in council rates, water rates, insurance, land taxes and property maintenance and repairs are non capital costs of ownership and accordingly form part of the third element of the cost base. However, these costs are not able to be included in the reduced cost base when calculating a capital loss. Please note that only the amounts that relate to the period after the deceased's death are able to be included in the cost base of the property. Fourth element The proceeds from the sale of the property that you were required to pay to person B is considered to be capital expenditure that you incurred to increase the value of the asset. This is because if you had not incurred the expense you would not have been able to dispose of the property and the saleability of the property is considered to increase its value. Accordingly the amount you paid to person B will form part of the fourth element of the cost base. Fifth element The legal costs that you incurred in respect of validating the deceased's Will were incurred to preserve or defend your ownership of or right to the property. Therefore they are able to be included under the fifth element of the cost base. Costs that are not able to be included in the cost base of the property The costs that you incurred in the administration of the estate are not able to be included in the cost base of the property as they relate to the dealings within the estate and do not relate directly to the property. Only costs that you incur are able to be included in the cost base. Costs incurred by other people in relation to the asset are not able to be included. The costs that have been incurred by person B are not able to be included in the cost base of the property. Apportionment of cost base between Lot 1 and Lot 2 Where a CGT asset (the original asset) is split into two or more assets (the new assets) and you are the beneficial owner of the original asset and each new asset, you work out the cost base and reduced cost base of each new asset as follows: Step 1: Work out each element of the cost base and reduced cost base of the original asset at the time of the split. Step 2: Apportion in a reasonable way each element to each new asset. The result is each corresponding element of the assets cost base and reduced cost base. In determining the extent to which it is reasonable to attribute each element of the cost base and reduced cost base of the original land to the corresponding element of the cost base and reduced cost base of each new block, we would accept any approach that is appropriate in the circumstances of the particular case, e.g. on an area basis or relative market value basis. In your situation, you will need to apportion the cost base of the property between Lot 1and Lot 2 on a reasonable basis at the time that they were separated into two titles. Where you incur a cost that relates only to one particular Lot it would be reasonable to attribute the cost solely to the cost base of this Lot. | Detailed Reasoning - CGT 50% discount: As you are an individual, and the CGT event happened after 21 September 1999 and you owned the property for at least 12 months prior to the CGT event happening, you are able to use the CGT 50% discount when calculating your net capital gain. You are not able to use the indexation method as you acquired the property after 21 September 1999. | Detailed Reasoning - Lodgement of income tax returns and non resident tax rates: As you have not resided in Australia for a substantial period of time, you are considered to be a non resident taxpayer. The property was sold in the 2005-06 income year therefore any capital gain that you made will need to be included in your 2005-06 income tax return and non resident tax rates will apply. Should you make a capital loss, you will not need to lodge an income tax return however you will need to keep a record of it so that you may apply it against any future capital gains that you may make. The general rates of tax are set out in Schedule 7 of the Income Tax Rates Act 1986 (ITRA 1986). The non resident tax rates for the 2005-06 income year are: Taxable income Tax on this income $1 - $21,600 29 cents for each $1 $21,601 - $63,000 $6,264 + 30 cents for each $1 over $21,600 $63,001 - $95,000 $18,684 + 42 cents for each $1 over $63,000 $95,001 and over $32,124 + 47 cents for each $1 over $95,000 | Detailed Reasoning - Absolute entitlement: It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is: · absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset, and · able to direct the trustee how to deal with the asset. In your situation, the issue of when you became absolutely entitled to the property will have no impact on any taxation consequences. However, you would have become absolutely entitled to the property when you entered into the deed of settlement. For more information in respect of calculating your capital gain or capital loss please refer to the Guide to capital gains tax 2011 - NAT 4151 which is available on our website www.ato.gov.au.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.