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Hi. My mother (93) recently passed. She and my father jointly purchased a rental property in about 1970. Dad passed in 1993 and therefore his share of the property passed to my mother. The property was not listed on his Grant of Probate (I would think this is because it was a joint tenancy). My mother sold the property before she died. Is CGT applicable? There is another investment property that will form part of her estate which was purchased in 1952. I have heard of Right of Survivorship but am getting conflicting answers on CGT. Please advise as I need to lodge returns.
Answer
From your other email I have accepted that the 1952 property was owned by both your parents. Fortunately, as it is a pre 1985 property it does not matter whether the property was held as tenants in common or joint tenants. Right of survivorship suggests joint tenancy but I will give you the relevant sections for both. I am assuming neither of these properties were their home at DOD and if they did ever live in them it was before 1993.
Joint Tenancy – Survivorship:
https://www.ato.gov.au/law/view/document?docid=PAC/19970038/128-50
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If the property was owned as tenants in common then it is technically inherited not acquired by survivorship but for pre 1985 assets the result is the same
https://www.ato.gov.au/law/view/document?docid=PAC/19970038/128-15
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So we need to consider each property to be two assets, the half originally owned by your mother and the half originally owned by your father that your mother acquired after 1985.
1970 property that your mother sold before she died:
Her half will be CGT free but the half she received from your father would be subject to CGT in your mother’s tax return, not the estate’s tax return because she sold it before she died. Though of course the estate would be responsible for paying the CGT. It would start with a cost base of market value in 1993. That is half the market value of the entire house. This cost base can be increased by half the holding costs that have not otherwise been claimed as a tax deduction since 1993, half the selling costs, half improvements since 1993, possibly legal fees associated with putting the property into your mother’s name. The difference between this cost base and half the selling price is the taxable gain on which there would be a 50% CGT discount. Please note there is more to this if your mother was a non resident at any time.
1952 Property that the estate will sell:
Treated the same as above for the that is exposed to CGT from 1993 and as more than 12 months since 1993 50% CGT discount is available. Both halves may have some increases in their cost base for the legal costs in the estate that directly relate to them.
The clock has now started ticking on the half owned by your mother. Its cost base starts with half the market value at her death plus holding cost etc, since then. It is also deemed to be acquired by the estate or the beneficiary at date of death so the 12 months to qualify for the 50% CGT discount will not kick in until more than 12 months from DOD. The good news is, that if this was a dwelling you have two years to sell without triggering any CGT on the half that was owned by your mother since 1952. But if it was a commercial property this carve out will not apply.
https://www.ato.gov.au/law/view/document?docid=PAC/19970038/118-195
The question is whose tax return does it go into. Assuming none of the beneficiaries are non residents. It is a question of how advanced the winding up of the estate is when the property is sold. If the estate has got to the stage of everything being so clear that the executor feels they can distribute the sale proceeds to the beneficiaries and they do so before the end of the financial year then the beneficiaries are considered presently entitled to the funds and will be the ones to pay the tax. Likewise, if it is sold within the final year of the estate the beneficiaries will be the ones to pay the tax even if they have not actually received the sale proceeds. If the property is passed onto the beneficiaries in specie there is a rollover which means the changing of the names on the deed will not trigger CGT but the cost bases discussed, for each half of the property will continue with the CGT payable when the property is eventually sold.
A consideration here is that the estate is taxed as a normal individual for the first 3 tax returns after death. If the 1952 property is sold early in the administration of the estate and there is not much other income it will benefit from the tax free threshold and step up tax brackets that the beneficiaries may have already used up in their personal tax returns with their other income.
