Capital gain tax implications
Scenario:
A life tenant of a property passed away (testamentary trust) (20 years occupancy). I (the beneficiary) have inherited the property and am considering selling it. The property was valued at the time of the original owner's death (main residence acquired after 1985 and no other details).
Would capital gain tax applies if I sell this property? If so, do the capital costs paid by the life tenant (not the one inherited) form part of the cost base?
Explanation:
It does not apply on your inheriting as the CGT event is disregarded under Div. 128 of the Income Tax Assessment Act 1936 (ITAA 1936). The situation is comparable to example 1 in Taxation Ruling IR 2006/14;
It is understood that the original owner acquired the dwelling as a post-CGT asset, and it was the original owner's main residence at his/her death. Therefore, Item 3 in the table in s128-15 appears to be applicable. So, market value is the first element of the cost base in the CGT event arising on the sale of the dwelling by the inheriting beneficiaries. There is scope under s 128-15(5) for the fourth element during the occupancy of the life tenant to be included in the cost base of the remainder beneficiaries. However, the rule is focused on expenditure by the trustee of the estate of the original owner. The circumstances might support the proposition that the life tenant made the capital improvements as the agent of the trustee of the estate who owned the dwelling.