1 Were you considered to have acquired your X% gifted portion of property 2 for Australian tax purposes when it was gifted to you?
1 Yes Question 2 Does Capital Gains Tax (CGT) apply to you on the sale of property 2 in relation to the portion that was owned by parent A's deceased estate? Answer 2 No Question 3 Is your X% gifted portion subject to CGT? Answer 3 Yes Question 4 Is a CGT exemption available for your X% gifted portion given the use of the property was dictated by parent A's will? Answer 4 No Question 5 Did a CGT event happen in the 20XX-XX income year on the sale of the property in relation to your X% gifted portion? Answer 5 Yes This ruling applies for the following period : 1 July 20XX to 30 June 20XX The scheme commenced on: 1 July 20XX
On XX/XX/XXXX, a property in Country Z (property 1) was acquired by your late parent A and your late parent B as tenants in common. They lived there as their main residence. Property 1 is less than 2 hectares You and your sibling, S were nominated as executors/trustees of your late parent A's final Will and testament. Clause 6(3) of the Will notes that the trustees will divide your late parent A's interest equally amongst three of their children (including the trustee). That is, your late parent A's 50% ownership interest was left to three of their children, including yourself. Clause 6(1) of the Will provides that your late parent B will have the 'free use, income, occupation and enjoyment of the home during their lifetime' and will pay rates, taxes, interest, insurance, premiums and other outgoings. The property was not used to produce income. Clause 7 of the Will also allowed for the property to be sold, and the proceeds used in the purchase of another home to be held on the same trust terms, or alternatively, for the proceeds of sale of the estate's interest in the property to be invested and the income arising therefrom to be paid to your late parent B during their life.
On XX/XX/XXXX, your late parent A passed away and their ownership interest in the property became part of their deceased estate. On XX/XX/XXXX, the Will was recorded with the High Court of Country Z. In XX/XXXX property 1, held by your late parent A's deceased estate and your late parent B, was sold. OnXX/XX/XXXX, using the proceeds from property 1, another property in Country Z (property 2), was purchased. Property 2 is less than 2 hectares. The Record of Title for property 2 shows it was co-owned by your late parent B (50%), and S and yourself (50%, jointly). A letter from the estate's lawyers dated XX/XX/XXXX explained the ownership by S and yourself should have been recorded as 50% owned as executors (that is, the replacement property was owned 50% by your late parent A's deceased estate and 50% by your late parent B). The letter also states that as the sale was in XXXX, the relevant government department in Country Z that recorded land information may not have had the capability to record executors. You and your family moved to Australia to live in XX/XXXX due to your spouse taking up a work contract in Australia.
On XX/XX/XXXX, the 50% share of property 2 held by your late parent B was transferred in equal shares, as a gift, to their four children. You and S continued to hold 50% of property 2 as trustees of your parent A's estate and you personally held X% of the property being the portion of your late parent B's share that they gifted to you. On XX/XX/XXXX, you became an Australian citizen. Your late parent B lived in property 2 from the date of purchase until XX/XXXX when they vacated the property to move into an aged care facility. Your late parent B paid all expenses of the property before it was sold. Property 2 did not earn any income at any time. On XX/XX/XXXX property 2 was sold and your late parent A's deceased estate's portion of the sale proceeds were held in trust by the estate's lawyers with the interest earned used to support your late parent B. For the income year ended XX/XX/XXXX, you reported the capital gain on your X% portion gifted from your late parent B and paid approximately $X,XXX in CGT.
On XX/XX/XXXX your late parent B passed away and the sale proceeds from the portion owned by your late parent A's deceased estate was distributed according to the terms of their Will (that is, X% of the total property proceeds were transferred to you). On XX/XX/XXXX, your late parent A's estate was closed with the Revenue Department in Country Z.
Income Tax Assessment Act 1997 Part 3.1 Income Tax Assessment Act 1997 Part 3.3 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 112-20 Income Tax Assessment Act 1997 Subdivision 118-B Income Tax Assessment Act 1997 section 118-110 Income Tax Assessment Act 1997 section 118-195
Question 1 Summary As you were a resident of Australia for tax purposes at the time you received your gifted portion of the property, this is when you acquired it for CGT purposes. Detailed reasoning Residency for tax purposes is different to citizenship. A person may become a resident for tax purposes before they become a citizen or without ever becoming a citizen. You and your family moved to Australia to live in XX/XXXX due to your spouse taking up a work contract in Australia. You later became an Australian citizen. As you and your family came to Australia with a settled purpose to live for a significant period, you are considered to be an Australian resident for tax purposes from the date of your arrival. For more information about residency for tax purposes, see Taxation Ruling TR 2023/1 Income tax: Residency tests for individuals . As you were a resident of Australia for tax purposes when you were gifted a X% interest in property 2 on XX/XX/XXXX, you are considered to have acquired that X% portion at that time. As you did not pay an amount to acquire the X% portion, its cost base is its market value at the time you acquired it (section 112-20 of the
Income Tax Assessment Act 1997 (ITAA 1997)). Question 2 Summary As the 50% portion of property 2 that had been owned by parent A was sold by you and S as trustees of parent A's deceased estate, the CGT event in relation to that portion happened to the deceased estate rather than the beneficiaries . Detailed reasoning If a legal personal representative of a deceased estate disposes of a CGT asset of the deceased estate, the CGT event happens to the deceased estate, not the beneficiary/ies. In your case your late parent A's portion of property 2 was held in their deceased estate as the owner and sold by you and S as the trustees of their deceased estate. The proceeds were then held in the deceased estate so the interest earned could be used to benefit your late parent B. It was only after parent B's passing that you received your portion of the proceeds from parent A's deceased estate. In these circumstances you are not liable for CGT on parent A's deceased estate's disposal of its share of property 2. Question 3 Summary As you are an Australian resident for tax purposes and your X% gifted interest in property 2 constitutes a CGT asset, it is subject to CGT. Detailed reasoning
Section 104-10 of the ITAA 1997 provides that a CGT event occurs when any disposal, sale or transfer of a CGT asset occurs. Generally, when you dispose of a CGT asset, a CGT event will result in a capital gain or capital loss which is included in your assessable income. A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as the disposal of a property. In your case you owned a X% portion of property 2 that had been gifted to you by parent B. As that property was sold, a CGT event occurred. As you were an Australian resident for tax purposes when the property was sold, you are liable for CGT on the capital gain in relation to your X% portion. Question 4 Summary No, as there is no provision that provides a CGT exemption in your situation. Detailed reasoning Subdivision 118-B of the ITAA 1997 deals with the main residence exemption from CGT. Generally, when you sell your main residence, section 118-110 of the ITAA 1997 provides that you will be entitled to a full main residence exemption if:
• you are an individual • the dwelling was your main residence throughout your ownership period • the property was not used to produce assessable income, and • any land on which the dwelling is situated is not more than 2 hectares. You must have lived in the property and used it as your main residence. As you did not live in the property, the main residence exemption provided by section 118-110 of the ITAA 1997 does not apply. Section 118-195 of the ITAA 1997 provides an exemption that may apply to inherited dwellings. It does not apply to your X% portion of property 2 as you did not inherit the X% portion, rather it was gifted to you. We acknowledge that parent A's will affected the use of property 2. However, there is no provision of taxation legislation that provides a CGT exemption in your circumstances. Question 5 Summary The CGT event in relation to your X% ownership interest in the property is considered to have occurred in the 20XX-XX income year, corresponding with the date of contract for the sale of the property. Detailed reasoning
You must report the capital gain or loss in your individual tax return for the income year in which the contract was signed, not the settlement date. Section 104-10 of ITAA 1997 defines CGT event A1, which is the most common CGT event and applies to the disposal of a CGT asset, such as real property. A CGT event A1 happens when you dispose of a CGT asset. The time of the event is when you enter into the contract for disposal, or if there is no contract, when the change of ownership occurs. This determines the income year in which the capital gain or loss must be reported. Subsection 6-10(2) of ITAA 1997 provides that the assessable income of an Australian resident includes statutory income derived directly or indirectly from all sources, whether in or out of Australia, during an income year. In your case, you advised the property you had a X% interest in, sold in the 20XX-XX income year. Therefore, the CGT event was in the 20XX-XX income year. You are required to report the capital gain on your X% portion of property 2 in your Australian income tax return for the 20XX-XX income year.