CGT on properties acquired by the deceased pre-September 1985

The introduction of Capital Gains Tax (CGT) in September 1985 drew a line in the sand for any assets acquired by a taxpayer prior to this date.

Current at 1 November 2021

CGT on properties acquired by the deceased pre-September 1985

The introduction of Capital Gains Tax (CGT) in September 1985 drew a line in the sand for any assets acquired by a taxpayer prior to this date.

Current at 1 November 2021

Essentially, the Income Tax Assessment Act 1997 (ITAA 1997) classifies these assets as a ‘pre CGT assets’. When a tax payer disposes of an asset they acquired pre-September 1985, the disposal will be exempt from capital gains tax. This includes real estate.

For a deceased estate, paragraphs (2) and (4) of section 128-15 of ITAA 1997 deem both the LPR and beneficiaries as having acquired the deceased’s pre CGT asset as at the deceased’s date of death. In practice, this means that the pre CGT status of the property is essentially lost and converts to a post CGT status from the date of death of the deceased. The cost base becomes the property’s market value as at the deceased’s date of death.

Where the property is transferred to the LPR or to a beneficiary, a capital gain or loss will be disregarded. See section 128-10 of ITAA 1997. A capital gain or loss would be recognised (subject to any exemptions) when property is subsequently sold by the LPR or the beneficiary.

Tax Tip

It is worth noting that under section 118-195, the LPR or beneficiary of the deceased would have a period of two years to dispose of any number of pre-CGT properties of the deceased without incurring any capital gains tax, so long as the settlement occurred within the required two-year timeframe for all properties.

Worked Example

  • Jenny purchased a residential investment property in 1980.
  • Jenny passed away on 1 May 2017.
  • Jenny’s daughter Pauline was the sole beneficiary of her mother’s estate.
  • The market value of the investment property was $400,000 at Jenny’s date of death.
  • Pauline decided to hold on to the property and the LPR transferred the property to Penny’s name.

What are the tax implications?

  • Pauline will be deemed to have purchased the property at Jenny’s date of death, that is, on 1 May 2017.
  • The first element of the cost base will be the market value of the property at Jenny’s death, that is $400,000.
  • A capital gain or loss will not be recognised until Pauline disposes of the property down the track.

Tax Caution

It is a popular misconception that section 118-195 applies to vacant land. It is important to note that this is not the case. The property must have a dwelling on the land for the exemption to apply.

 

 

Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.

 

 

This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning.  Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.