Private ruling: Capital gains tax
Date of advice: 14 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2015.
Date scheme commenced: 1 July 2014

Ruling: Q1: For CGT purposes, is the sale of the property considered to be an act done by your family member? | A1: No. | Q2: Will you be exempt from paying capital gains tax on the disposal of the property under the main residence exemption? | A2: No.

Relevant facts and circumstances: During the process of your family member's migration to Australia, they wished to purchase their own property to live in. They entered into a sales contract to purchase a property. They then contacted the Foreign Investment Review Board to gain approval for the sale and they were advised that there was insufficient time for them to process an application for the purchase of the property before the settlement date. You were advised by the board that your family member needed approval to purchase the property as they were not yet in the country. As a result, you obtained a statutory declaration to change the purchaser of the property on the contract from your family member's name into joint names with yourself and your spouse. This was in order to avoid having to draw up another contract for the sale of the property. The funds used to purchase the property were provided solely by your family member. They were responsible for all bills and expenses associated with the property. Your family member arrived in Australia prior the settlement date as a temporary resident. You advise that your family member moved into the property as soon as practicable after settlement. You advise that they were not happy with the property. Sometime later, you entered into a contract to sell the property in order for your family member to move into a more expensive property as their main residence. The proceeds from this sale were used to purchase a new unit which was purchased in the name of your family member after receiving the necessary approval.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-10, | Income Tax Assessment Act 1997 - Section 118-110, and | Foreign Acquisition and Takeovers Act 1975 - Subsection 12A(1)

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. The most common CGT even, event A1, occurs when you dispose of a CGT asset. CGT event A1 occurred when the property was sold. When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property. An individual can be a legal owner but have no beneficial ownership in an asset. Under subsection 104-10(2) of the ITAA 1997, a change of ownership is not deemed to have occurred if you stop being the legal owner of the asset but continue to be its beneficial owner. As a result, it is the beneficial owner of a CGT asset that is liable for capital gains tax upon the sale of the asset if they are deemed to be absolutely entitled to it. An entity may hold a legal interest in property for another individual in trust. Application to your circumstances The property was acquired in your name and your spouse's name. Your family member provided the funds for its purchase and was liable for all bills and expenses associated with the property. However, as a temporary resident, your family member was unable to hold an interest in Australian property without the prior approval of the Foreign Investment Review Board. An 'interest' is defined under subsection 12A(1) of the Foreign Acquisitions and Takeovers Act 1975 as a legal or equitable interest in property. Therefore, it is not possible for you to have held the property on trust for them as this would have conferred an equitable interest in the property on them Consequently, the disposal of the property is considered to be an act done by you and not your family member. | Detailed Reasoning - Main Residence Exemption: Under section 118-110 of the ITAA 1997, you can disregard any capital gain or capital loss from a CGT event that happens to a dwelling you owned if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as trustee of, the estate of a deceased person. Because the disposal of the property was considered to be an act done by you, and the property was never your main residence, the exemption is not available to you. Consequently, on the disposal of the dwelling you incurred a CGT liability.