Private ruling: Capital gains tax
Date of advice: 25 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the capital gain or loss resulting from the sale of land held in the name of one partner be assessable to the partners in accordance with their partnership interests? | A1: Yes.

Relevant facts and circumstances: The partnership carried on a business. As one partner was working interstate at the time, a block of land was purchased with the legal title solely in the name of the other partner. The purchase was funded by a loan in the name of partner A and from funds beneficially owned by the partnership. The partnership has always treated the land as being a partnership asset, including all loan repayments, insurance, and rates being paid with partnership funds. In addition, all income derived from the land has been included as partnership income. The loan used to fund the purchase of the land was paid out using partnership funds from the sale of other land owned by the partnership. The land has been marketed for sale for some time when a sale contract was signed. Although the business has now ceased, partner A and partner B continue to jointly pay for the rates and insurance costs.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 108-05 | Income Tax Assessment Act 1997 section 118-130

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The block of land is a CGT asset. A CGT asset also includes an interest in land and an interest in an asset of a partnership (section 108-5 of the ITAA 1997). You have an ownership interest in land if you have a legal or equitable interest in it (section 118-130 of the ITAA 1997). Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. Any capital gain or capital loss from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually (subsection 106-50(1) of the ITAA 1997). Taxation Ruling IT 2540 Income tax: capital gains: application to disposals of partnership assets and partnership interests confirms that the partnership does not own property in its own right. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a property co-owned by husband and wife. The ruling states that the income/loss must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable or beneficial interest is different from the legal title. Where there is sufficient evidence to establish that the equitable interests are different from the legal title the net income or loss from that property must be shared according to the equitable interests in that property (paragraphs 6 and 38 of TR 93/32). Although your circumstances are different to those outlined in TR 93/32, the principles outlined remain relevant. In consideration of your arrangement as a whole, including the actions of the partnership in the income years after purchase, it is accepted that the individual partners in the partnership hold equitable interests in the land in accordance with their partnership interests, and the capital gain/loss arising from the sale of the land should be shared in accordance with these equitable interests, notwithstanding that the legal title is in the name of one partner solely.