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Find out what your peers are asking – based on real-life questions submitted to TechConnect.
By Janet Manzanero-Caruana, Senior Technical Services Manager
Q: My clients’ parents purchased a block of land in 1977 for $52,000 including acquisition costs. The property was held in joint names and was used as a holiday home.
My father passed away in May 1990 and his interest in the property became my mother’s. At that time the property was valued at $95,000.
My mother passed away in January 2017. The property was valued at $200,000. The executor of my mother’s estate sold the block in 2021.
How is the cost base of the property worked out?
A: Cost base
The cost base of a property for the purpose of capital gains tax (CGT) may consist of five elements:
Cost base of a CGT asset that is inherited
The property was previously a pre-CGT asset as it was acquired prior to 20 September 1985. As the property was jointly owned, each joint owner holds their equal interest in the asset as separate pre-CGT assets, according to the Income Tax Assessment Act 1997 - SECT 108.7.
The capital gain from a pre-CGT asset is exempt from tax. The capital gain of a CGT asset is assessable income to its owner; however the capital gain may be reduced if the asset has been owned for at least 12 months by applying either:
Where the CGT asset was acquired as a legal personal representative or a beneficiary of a deceased estate, the 12-month requirement is met where the deceased acquired the asset 12 months or more before it was disposed.
Cost base of the father’s former 50% interest in the property
When your client’s father passed away in May 1990 his interest in the property passed on to the surviving joint tenant, your client’s mother. As she acquired his interest at the time of his death after 19 September 1985 it becomes a CGT asset. The first element of its cost base is $26,000 (50% of $52,000, the market value of the property at the date of death) plus any transfer costs (second element).
From that time, a proportional share of expenses relating to the property such as rates, land taxes, repair, insurance premiums or any non-deductible interest for borrowings used to acquire the property (third element) are added to its cost base. When your client’s mother died, the beneficiaries assumed her cost base for this interest. A proportional share of the selling costs of the property is also included in the cost base.
For the purposes of the 12 month period required to be eligible for either the indexation of the cost base or the 50% CGT discount this interest is deemed to have been acquired by the beneficiaries when the mother acquired it (May 1990).
Cost base of the mother’s former interest
The mother’s original interest in the property was a pre-CGT asset until her death (January 2017). At that time it became a CGT asset with the first element of the cost base being $100,000 (50% of $200,000, the property’s market value at that time). Similarly, a proportional share of expenses related to the interest falling under any of the five elements of the cost base started to be added to its cost base.
For the purposes of the 12 month period required to apply the CGT discount the interest was deemed to have been acquired by the beneficiaries when the mother passed away (January 2017)
50% CGT discount or indexation of the cost base
Each interest in the property will have a different cost base. The capital gain for each interest is equal to its capital proceeds less its cost base.
The 50% CGT discount can be applied to both interests in the property. Your client’s mother had held the father’s interest for longer than 12 months and the beneficiaries held the mother’s interest for more than 12 months before the sale.
Indexation may be applied to increase the cost base of the father’s former interest as it is deemed to have been acquired in May 1990 (before 21 September 1999). The beneficiaries may choose to either index the cost base of this interest or to reduce its assessable capital gain with the 50% CGT discount – but not both.
Tech tip: Records should be kept to calculate capital gains on the sale of an asset:
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.