ap_cgt05

Effect of death

Death is NOT the ultimate capital gain tax event - the deceased assets are deemed to have been acquired by the person winding up the deceased's affairs or his beneficiary

What did all these assets cost the beneficiary or trustee? - Cost Base modifications

When did the beneficiary acquire the assets?

What if the deceased was not the sole owner of the assets?

Inherit a house - sell it within 2 years, or as long as it takes to evict the survivors and the gain will be disregarded

If you inherit a house but don't qualify for full exemption, you might get a partial exemption based on how long the deceased and his designated survivors lived in the house

What happens if the person who inherited the house dies, and his heir inherits the house?

Does the trustee make a capital gain?

Section 128-10 makes it clear that dying is not a capital gains tax event.

Any event that results to an asset you owned just before you died is disregarded.

However section 128-15 says

the person who winds up your affairs after you die (the legal personal representative)

or your beneficiary (the person(s) who inherit your assets

is taken to have acquired the asset on the day you died.

What did all these inherited assets cost the beneficiary or trustee?

It all depends on WHEN the deceased person acquired the asset (and whether it was a dwelling)

Section 128-15 (4) sets out the modifications to the cost base and reduced cost base of the CGT asset in the hands of the legal personal representative or beneficiary.

Assets acquired after 20/9/85

Cost base of CGT assets = deceased's cost base

'Cost' of assets acquired by the deceased after 20 September 1985 to beneficiary who inherits them = cost base in the hands of the deceased person on the day of death

Assets acquired before 20/9/85

Cost base of pre CGT assets = market value

'Cost' of assets acquired by the deceased before 20 September 1985 to beneficiary who inherits them = market value of asset on the day of death

Cost base of deceased's dwelling = market value

'Cost' of deceased person's dwelling to beneficiary who inherits it = market value of dwelling on the day of death

Modifications to cost base and reduced cost base
Item	For this kind of CGT asset:	The first element of the asset’s cost base is:	The first element of the asset’s reduced cost base is:
1	One you *acquired on or after 20 September 1985, except one covered by item 2 or 3	the *cost base of the asset on the day you died	the *reduced cost base of the asset on the day you died
2	One that was *trading stock in your hands just before you died	the amount worked out under section 70-105	the amount worked out under section 70-105
3	A dwelling that was your main residence just before you died, and was not then being used for the purpose of producing assessable income	the market value of the *dwelling on the day you died	the market value of the *dwelling on the day you died
4	One you *acquired before 20 September 1985	the market value of the asset on the day you died	the market value of the asset on the day you died

When did the beneficiary acquire the assets?

When the beneficiary becomes the owner of the asset!

Section 128-20 says you 'acquire' the asset when you become the owner of the asset if

You inherited it under a will
There was no will and you were the nearest kin
Because the executor gave it to you
Under some deed of arrangement that settled your claim on the estate

(This is a simplified version - you should check section 128-20 now for full details.)

What if the deceased was not the sole owner of the assets?

Section 128-50deals with the situation in which the deceased was a joint tenant (where the property was owned jointly by the deceased and other person(s) )

The surviving owners are taken to have acquired the asset on the date of the death

If 2 or more persons own an asset jointly we can say they are tenants in common.

Neither of them owns the asset - all they own is an interest in that asset.

The survivor(s) are taken to have acquired the dead person's share of the asset on the day of his/her death. If there are 2 or more survivors, they are taken to have acquired that interest in equal shares. Joint tenants are treated as owning a CGT asset in equal shares: see section 108-7

How much did they 'pay' for the deceased person's interest?

It all depends on WHEN the deceased person acquired the interest!

acquired after 20/9/85

Section 128-50 (3) gives this formula for working out the cost base of the asset

Cost base of the interests of the individual who died (worked out on the day the individual died)

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Number of survivors

In 1999 2 individuals buy land for $50,000 as joint tenants. Each one is taken to have a 50% interest in it. On 1 May 2001 one of them dies.

The survivor is taken to have acquired the interest of the individual who died on 1 May 2001. If the cost base of that interest on that day is $27,000, the survivor is taken to have acquired that interest for that amount.

It all depends on WHEN the deceased person acquired the interest!

acquired before 20/9/85

Section 128-50 (4) gives this formula for working out the cost base of the asset

Market Value of the interests of the individual who died (worked out on the day the individual died)

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Number of survivors

There is a special indexation rule for surviving joint tenants: see section 114-10

Dwellings acquired from deceased estates:

full exemption on sale by heir

You can also inherit the deceased owner's principal residence exemption if you

Sell it within 2 years (post 20 September 1985 asset)

Let the

surviving spouse,

or those whom it was the will of the deceased should inhabit it, or

the inheritors

live in it and then sell it. (pre 20 September 1985 asset)

If you inherit a residence of a deceased person, section 118-195 allows you to also inherit the principal residence exemption if

you are an individual and

the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

at least one of the items in column 2 and at least one of the items in column 3 of the table are satisfied. (We have set it out in a rather more exotic way below, but check the table in section 118-195 if you prefer a more formal approach)

Acquired after 20 September, 1985

The deceased acquired the ownership interest on or after 20 September 1985, the dwelling was the deceased's main residence just before the deceased's death and was not then being used for the purpose of producing assessable income

your ownership interest ends within 2 years of the deceased's death

Acquired before 20 September, 1985

The deceased acquired the ownership interest on or before 20 September 1985,

the dwelling was, from the deceased's death until your ownership interest ends,

the main residence of one or more of:

the spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or

an individual who had a right to occupy the dwelling under the deceased's will; or

if the CGT event was brought about by the individual to whom the ownership interest passed as a beneficiary-that individual

Dwellings acquired from deceased estates: partial exemption (or no exemption at all) on sale by heir

If you don't qualify for the full exemption you use the formula

	Non main residence days
Capital gain (or loss) *	---------------------------------
	Total days

To calculate how much of the gain is exempt

If you inherit a residence of a deceased person, section 118-200 might allow you a partial principal residence exemption when you sell it if

you are an individual and

the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate; and

you are not entitled to the full exemption.

Under section 118-195 you can recalculate the capital gain (or loss) using the formula

	Non main residence days
Capital gain (or loss) *	---------------------------------
	Total days

Total days

Total days will be worked out according to when the residence was acquired by the deceased

Before 20 September 1985	Period *from death* *until* your *ownership* interest *ends*
On or after 20 September 1985	Period *from acquisition* of dwelling *until* your *ownership* interest *ends*

Non main residence days

If the deceased acquired the ownership interest in the dwelling on or after 20 September 1985 then the non-main residence days will be the number of days when

the *dwelling* was *not* the *deceased's main residence*
Days from the death until your ownership interest ends, when the dwelling was not the main residence of spouse of the deceased immediately before the death (except a spouse who was living permanently separately and apart from the deceased); or
Days from the death until your ownership interest ends, when the dwelling was not the main residence of an individual who had a right to occupy the dwelling under the deceased's will; or
Days from the death until your ownership interest ends, when the dwelling was *not* the main residence of ,if the CGT event was brought about by the *individual to whom the ownership interest passed as a beneficiary*-that individual

A possible discount for a relatively quick sale!

Section 118-200 (3) says, if

the deceased acquired the ownership interest on or after 20 September 1985 and

your ownership interest ends within 2 years of the deceased's death

and you get a more favourable result by doing so, you can adjust the formula by ignoring any

non-main residence days and

total days in the period from the deceased's death until your ownership interest ended.

Section 118-200 (4) says, you ignore any non-main residence days before the deceased's death if:

the dwelling was the deceased's main residence just before the death; and

the dwelling, or any adjacent land, garage, storeroom or other structure to which the exemption extends under section 118-120, was not being used for the purpose of producing assessable income just before the death, or any use for that purpose just before the death was ignored because of subsection 118-190(3).

What happens if the person who inherited the house dies, and his heir inherits the house?

Section 118-205 says that any gains or losses of individuals earlier in the inheritance chain are included in the gain or loss you would have made apart from this Subdivision. This section adjusts the formula to take account of times when the dwelling was the main residence of the individuals.

	Non main residence days
Capital gain (or loss) *	---------------------------------
	Total days

Total days

Add to the component total days in the formula the fewer of:

the number of days between 20 September 1985 and the day when the interest passed to or was acquired as trustee by the most recently deceased; and

the number of days between the time when an ownership interest in the dwelling was last acquired on or after 20 September 1985 by an individual except as a beneficiary in a deceased estate or as trustee of a deceased estate and the day when the interest passed to or was acquired as trustee by the most recently deceased.

Non-main residence days

Add to the component non-main residence days in the formula the number of days in the period applicable under subsection (2) that the dwelling was not the main residence of one or more of:

an *individual who owned the dwelling at the time of the individual's death*; or
an individual who, immediately before the death of an individual referred to above, was the *spouse* of that individual (except a spouse who was living permanently separately and apart from the individual); or
an *individual who had a right to occupy* the dwelling under a will; or
an *individual to whom an ownership* interest in the dwelling *passed as a beneficiary in, or who acquired an ownership interest in the dwelling as trustee of, a deceased estate*.

Does the trustee make a capital gain?

If a CGT event happens to the interest in relation to the individual and you receive no money or property for it:

a capital gain or capital loss you make from the event is disregarded; and

the first element of the dwelling's cost base and reduced cost base in the hands of the individual is its cost base and reduced cost base in your hands at the time of the event; and

the individual is taken to have acquired it when you did.

And if you do receive money or property for it and:

If the dwelling was the main residence of the individual from the time you acquired the interest until the time of the event you do not make a capital gain or capital loss from the CGT event.

However, if the dwelling was the main residence of the individual during part only of that period, you make a capital gain or capital loss worked out using the formula:

	Non main residence days
Capital gain (or loss) *	---------------------------------
	Total days