Private ruling: Capital gains tax
Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: A10: 

Relevant facts and circumstances: The Company owns a commercial property, Asset C. Asset C was acquired prior to 20 September 1985 and there has been no change in the shareholding in the Company since that date. The Company owns no other assets and no longer operates a business. The Company proposes to grant a life interest in Asset C to the Super Fund for a specific period of time measured by the life of an individual (Life in Being). The proposed rights of the Super Fund in relation to Asset C under the arrangement will be here on in referred to as the life estate interest. The proposed rights to be retained by the Company in relation to Asset C under the arrangement will here on in be referred to as the remainder interest. The market value of Asset C has been determined by an independent registered valuer applying the methodology set out in valuation report. The market value of the life estate interest is calculated by reference to the market value of the assets multiplied by the life interest factor. The consideration payable by the Super Fund to the Company will be the market value of the life estate interest at the time it is granted. The life estate interest will come to an end by mutual agreement or when the 'life in being' dies. During the term of the life estate interest, Asset C may be sold or otherwise dealt with subject to the mutual consent of the Company and the Super Fund. If Asset C is sold during the term of the life estate interest, the net sale proceeds and any asset or assets acquired with those proceeds are to be held on the same terms as the terms on which Asset C is held. The proposed life estate interest will be brought into effect in accordance with a Deed Granting Life Estate Interest. The rights created under this Deed will constitute the creation of a legal life estate interest rather than an equitable life estate interest. When the 'life in being' dies all rights in relation to Asset C will revert to the Company.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-10 | Income Tax Assessment Act 1997 - Section 104-20 | Income Tax Assessment Act 1997 - Section 110-25 | Income Tax Assessment Act 1997 - Section 112-20 | Income Tax Assessment Act 1997 - Section 112-30 | Income Tax Assessment Act 1997 - Section 116-20 | Income Tax Assessment Act 1997 - Section 116-30

Reasons for decision: Detailed Reasoning - Question 1: Taxation ruling TR 2006/14 states that CGT event A1 happens if an original owner of real property disposes of a legal life interest to another person, that is, there is a change of ownership of part of the original asset from the original owner to the life interest owner. Section 109-5 of the ITAA 1997 states, in general, you acquire a CGT asset when you become its owner. For an A1 event, an entity disposes of a CGT asset to you when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. Therefore, the Super Fund is taken to have acquired the asset, being a life interest in Asset C, at the time at which the Deed Granting Life Estate Interest is entered into. | Detailed Reasoning - Question 2: Section 116-20 of the ITAA 1997 states that the capital proceeds from a CGT event includes the money and market value of any property you receive or are entitled to receive in respect of the event happening. The market value substitution rule in section 116-30 of the ITAA 1997 will only apply if there are no capital proceeds or the proceeds are more or less than the market value of the asset and the parties are not dealing with each other at arm's length. In this case, the proceeds received from the CGT event will be the market value of the life estate interest, as determined by an independent registered valuer. | Detailed Reasoning - Question 3: Under subsection 104-10(5) of the ITAA 1997, any capital gain or capital loss made is disregarded if you acquired the asset prior to 20 September 1985. As Asset C was acquired prior to 20 September 1985, any capital gain or loss made on the disposal of the life interest will be disregarded. | Detailed Reasoning - Question 4: TR 2006/14 states, at paragraph 85: Bringing a legal life interest into existence involves a disposal of part of an existing CGT asset in a similar way to the disposal of a percentage interest in it. The part of the original asset that is not disposed of to the life interest owner is the legal remainder interest. Under subsection 112-30(2) of the ITAA 1997, the cost base and reduced cost base of a CGT asset is apportioned if a CGT event happens to part of an asset but not the remainder of it. Subsection 112-30(3) of the ITAA 1997 provides the formula for working out the cost base in these situations as follows: Cost base of the asset × Capital proceeds for the CGT event happening to the part Those capital proceeds plus the market value of the remainder of the asset In this case, as the legal life interest involves the disposal of a part of the existing CGT asset, the cost base will need to be apportioned in accordance with subsection 112-30(3) of the ITAA 1997. | Detailed Reasoning - Question 5: As stated above, TR 2006/14 provides that bringing a legal life interest into existence involves the disposal of part of an existing CGT asset with the part not disposed of being the remainder interest. In this case, as there has been no change to the remainder interest, the remainder interest will continue to be pre CGT assets after the grant of the life estate interest | Detailed Reasoning - Question 6: As discussed above, if an original owner of real property disposes of a legal life interest to another person, there is a change of ownership of part of the original asset from the original owner to the life interest owner. At that point, the life interest is a separate CGT asset that may be disposed of to a third party by the Super Fund (subject to the consent of the grantors). CGT event A1 will happen on disposal of the life interest. However, there will be no disposal of the remainder interest unless the Company also disposes of the remainder interest, in which case, CGT event A1 will also happen to the remainder interest. | Detailed Reasoning - Questions 7 & 8: TR 2006/14 states, at paragraph 103, that, The death of the life interest owner has no CGT consequences for the remainder owner. The remainder owner does not acquire any asset from the life interest owner, their existing interest is merely enlarged. Consequently, no additional amount can be included in the first element of the cost base of the remainder owner's asset (now a fee simple interest unencumbered by the life interest). In this case, the Company's remainder interest in Asset C becomes enlarged (a fee simple interest no longer encumbered by the life interest) on the death of the life in being. No additional amount would be included in the first element of the cost base as a result. | Detailed Reasoning - Questions 9 & 10: TR 2006/14 states, at paragraph 104, that, The transfer of a legal life interest or remainder to the owner of the other interest (commonly called a surrender or release) results in CGT event A1 in section 104-10 happening. The market value substitution rule section in 116-30 may apply to determine the capital proceeds from that event. Also, the market value substitution rule in section 112-20 may apply to determine the cost base of the acquired interest. On surrender of the life interest by the Super Fund, the Company will be taken to have acquired the life interest for market value pursuant to section 112-20 of the ITAA 1997. The Company would then hold the remaining life interest and the remainder interest. This situation was covered in example 9 of TR 2006/14 as set out below: | Detailed Reasoning - Example 9: surrender of legal life interest: Hilda owns a legal life interest in a property and Henry owns the legal remainder interest. Hilda agrees to surrender her life interest to Henry for its market value. 173. CGT event A1 will happen at the time the contract between Hilda and Henry was made. Hilda may make a capital gain or loss from the event happening. 174. Henry acquires the life interest for its market value. Henry does not register a merger of the life and remainder interests on the title to the property. Henry sells the property to Hermione. 175. CGT event A1 will happen in respect of the disposal of the life interest and also in respect of the disposal of the remainder.

CGT on the Grant: 1. Does capital gains tax (CGT) event A1, under subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the Company grants a life interest in Asset C to the Super Fund? | 2. Are the capital proceeds under subsection 116-20(1) of the ITAA 1997 received by the Company the market value of the life interest in Asset C at the date of the grant of the life interest? | 3. As a pre CGT asset, will any capital gain on Asset C be disregarded? | 4. Will the cost base of Asset C need to be apportioned in accordance with subsection 112-30(3) of the ITAA 1997? | 5. Will the remainder estate interest in Asset C continue to be pre CGT assets after the grant of the life estate interest? | CGT if Asset C is sold or transferred: 6. Does CGT event A1, under subsection 104-10(1) of the ITAA 1997 happen to the remainder interest in Asset C when the Company sells or transfers the life estate interest? | CGT if life in being dies: 7. Does the Company's interest in Asset C become enlarged on the death of the life in being? | 8. Do the CGT cost base provisions in Division 110 or 112 of the ITAA 1997 apply to Asset C on the death of the life in being so there is an uplift in the cost base of the asset? | CGT if the Super Fund surrenders its life estate interest: 9. Does the Company's interest in Assets C become enlarged on the surrender of the life estate interest by the Super Fund? | 10. Do the CGT cost base provisions in Division 110 or 112 of the ITAA 1997 apply to Asset C on the surrender of the life in being so there is an uplift in the cost base of the asset?