ATO ID 2005/216: Capital gains tax: CGT event B1: right to use property before title passes
Date of decision: 22 July 2005
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if a taxpayer transfers a property to their adult children if it had been agreed that the children could use and enjoy the property for a specified period after which title to the property would be transferred to them?

Decision
No. In these circumstances, CGT event B1 in section 104-15 of the ITAA 1997 happened at the time the taxpayer entered into the agreement with their children.

Facts
A taxpayer's child and their spouse (the children) wanted to purchase a home but were unable to obtain finance. In the 1999-2000 income year, the taxpayer agreed to obtain a loan for the full amount of the purchase price, so that the children could purchase a property. However it was a loan requirement that the property be registered in the name of the taxpayer. The children agreed to meet all outgoings in relation to the property including the taxpayer's loan repayments. As the children expected that they would be in a position to obtain their own finance in five years it was also agreed that the taxpayer would transfer title to the property to the children in five years if the children paid the amount outstanding on the taxpayer's loan at that time. In the 2004-05 income year, the taxpayer transferred the property to the children in accordance with the agreement. The value of the property increased considerably during the period it was owned by the taxpayer.

Reasons for decision
Summary: There is a special rule in the CGT provisions which provides that if more than one CGT event can apply in a particular situation, the event you use is the one that is most specific to your situation: subsection 102-25(1) of the ITAA 1997. There are two CGT events which may apply in these circumstances. These events are CGT event A1 in section 104-10 of the ITAA 1997 and CGT event B1 in section 104-15 of the ITAA 1997. CGT event A1 happens if you dispose of a CGT asset. CGT event B1 happens if you enter into an agreement with another entity under which: In order for CGT event B1 to happen the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified time in the future. In this case, the taxpayer entered into a formal agreement with their children to grant them the right to use and enjoy the property. Under the agreement title to the property would pass to the taxpayer's children in five years. In these circumstances, CGT event B1 happened in the 1999-2000 income year as it is the most specific event that applies. As CGT event B1 happened when the taxpayer's children were granted the right to use and enjoy the property, there will be no CGT consequences for the taxpayer when the title to the property is ultimately transferred to them.

Legislative references: Income Tax Assessment Act 1997 subsection 102-25(1) section 104-10 section 104-15 subsection 104-15(1) paragraph 104-15(4)(a)
Subject references: Capital gains Capital gains tax CGT assets CGT capital proceeds CGT capital proceeds modification market value substitution rule CGT event A1-disposal of a CGT asset CGT event B1-use & enjoyment before title passes CGT events