Issue
In working out under item 1 of the table in subsection 128-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997) the cost base or reduced cost base of an asset of a deceased person on the day they died, is each item of expenditure incurred by the deceased that forms part of the asset's cost base or reduced cost base converted into an equivalent amount of Australian currency at the time the expenditure was incurred by the deceased?
Decision
Yes. Section 103-20 of the ITAA 1997 requires each item of expenditure incurred by the deceased that forms part of the deceased's cost base or reduced cost base be converted into an equivalent amount of Australian currency at the time the expenditure was incurred by the deceased. The provision does not permit a single conversion of the deceased's cost base or reduced cost base on the date of death.
Facts
At the date of their death the deceased owned traditional securities. The deceased died in the 2002-03 income year.
The deceased was a resident of the United Kingdom. They acquired the securities in the 1999-2000 income year for GBP100 each. As at the acquisition date, this converted to AUD285.
On the date the deceased died, GBP100 converted to AUD208.
The deceased incurred no other expenditure in relation to the securities.
The beneficiary entitled to the securities under the deceased's will is an Australian resident.
Reasons for Decision
A CGT asset owned by a deceased individual when they die and that passes to a beneficiary of their estate is taken to have been acquired by the beneficiary on the date of death (subsection 128-15(2) of the ITAA 1997).
For assets the deceased acquired after 19 September 1985 (other than trading stock or a dwelling), the first element of the asset's cost base or reduced cost base in the hands of the beneficiary is the deceased's cost base or reduced cost base on the date of death (item 1 of the table in subsection 128-15(4) of the ITAA 1997). That is, the beneficiary inherits the deceased's cost base and reduced cost base.
Section 103-20 of the ITAA 1997 says that if a transaction or event involving an amount of money or the market value of other property is to be taken into account under the capital gains tax provisions in Part 3-1 or 3-3 of the ITAA 1997, and the money or value is in a foreign currency, the amount or value is converted into the equivalent amount of Australian currency at the time of the transaction or event.
This means that expenditure relevant to the calculation of cost base or reduced cost base must be expressed in Australian currency when the expenditure is incurred. That is, the conversion is done at the time of the transaction or event that gives rise to the expenditure. All relevant expenditure in relation to an asset expressed in Australian currency is then added together to arrive at the asset's cost base or reduced cost base.
Therefore, in this case, the deceased's cost base and reduced cost base for each security on the day they died was AUD285 (and not AUD208). That is, it is their acquisition cost as converted to Australian currency at the acquisition date (and not at the date of death). This means that the first element of the beneficiary's cost base and reduced cost base for each security is also AUD285. Note: The New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 repealed section 103-20 of the ITAA 1997 and replaced it with a similar translation rule that applies generally for the purposes of the Income Tax Assessment Act 1936 and the ITAA 1997. The new rule is now contained in item 5 of the table in subsection 960-50(6) of the ITAA 1997. This provision applies to transactions or events that happen on or after 1 July 2003.