Private ruling: Capital gains tax - disposal
Date of advice: 9 February 2021
Published: March 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will CGT event A1 occur when legal title of The Property is transferred from you to your parents? | A1: Yes

Relevant facts and circumstances: Your parents and you are overseas-born Australian citizens. You came to Australia many years ago. Your parents visited Australia as tourists after you moved here to study and stayed in Australia. Several years ago, your parents gifted you an amount of money to purchase a property (The Property). This amount included money for stamp duty and legal fees. You purchased The Property as a home for them to live in upon their subsequent return to Australia. Your parents planned to move to Australia having visited you several times during your studies here. There were many reasons at the time for purchasing The Property in your name. Your parents lodged their application for permanent residency and were told by the Department of Immigration that they had the required characteristics to be granted permanent residency (parental visa, child sponsorship). However, they were also told that the queue was long, and the wait would take a few years. Your parents were relatively wealthy migrants who wished to avoid paying high rents if possible. You were already a Citizen of Australia, having studied in Australia for several years already and having gained citizenship. Your parents were granted permanent residency a short time after applying. At the time of purchase of The Property, you already owned a separate main residence. As you were already familiar with the land buying process in the relevant state, had a better command of the English language than your parents, and are an only child, you were used as a convenient vehicle through which to purchase The Property. At the time of purchase of The Property, you and your parents were unaware of the implications of The Property purchase in your name given that you already owned and lived in a separate main residence. To protect your parents' interest in The Property as real purchasers / equitable owners of The Property, they registered a mortgage over The Property a few weeks after the purchase settled. The mortgage was granted in your favour for an amount approximately equivalent to the purchase price of The Property. However, no funds ever flowed to you. They also entered into an agreement with you that legal ownership of The Property would pass to them when their application for permanent residency was approved. The agreement provided that The Property will pass "as soon as legally permitted and after the permanent residence in Australia will be granted to your parents". These measures were an attempt at asset protection given you had recently married. Specifically, your parents were concerned that they would lose their right to occupy The Property should you and your spouse divorce. There is a typographical error in the agreement. This was clarified and the correct wording included in this ruling. The wording of the agreement was reproduced in the ruling. Shortly after your parents were granted permanent residency, one of your parents was made aware that you received a land tax assessment for The Property for the previous year. Your parent paid this land tax assessment and then sought legal advice from the solicitors who handled the original conveyancing for The Property. Your parents were advised by the solicitors that nothing could be done to unwind the transaction and capital gains tax and full stamp duty would be payable by yourself on the transfer of The Property to your parents. In addition to this, the solicitor also mentioned that the mortgage caused some problems. As a result of this advice, you and your parents did not act on the earlier agreement to transfer The Property back to them. From the time of signing and exchanging contracts for the acquisition of The Property, you have not paid any money towards either the purchase or subsequent upkeep of The Property. All monies have historically and continue to flow from your parents' bank account to service the various expenses associated with The Property. You plan to transfer legal title of The Property from your name into your parents' names as joint tenants.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 102-25(1) | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-15(1) | Income Tax Assessment Act 1997 subsection 104-15(2) | Income Tax Assessment Act 1997 subsection 104-15(4)

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. CGT event B1 occurred when you entered into an agreement with your parents for their use and enjoyment of The Property. The Property was not transferred to them in accordance with the agreement and therefore the agreement ended when you did not transfer The Property upon receiving advice about the taxation consequences. CGT event A1 will occur if you transfer your ownership interest to the Property to your parents as it will take place under a separate agreement to the previous agreement. | Detailed Reasoning - Detailed reasoning: 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 should be considered in these circumstances. These events are CGT event A1 (section 104-10 of the ITAA 1997) and CGT event B1 (section 104-15 of the ITAA 1997). CGT event B1 happens if you enter into an agreement with another entity under which: the right to the use and enjoyment of a CGT asset you own passes to another entity; and title in the asset will or may pass to the other entity at or before the end of the agreement (subsection 104-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). Subsection 104-15(2) of the ITAA 1997 states that the time of the event is when the other entity first obtains the use and enjoyment of the asset. 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 your case it is accepted that the agreement you and your parents entered into did not constitute a 'loose family arrangement'. The agreement contained a provision that title would pass on the occurrence of a specific event - the granting of citizenship. Therefore, the Commissioner's view is that CGT Event B1 happened when your parents first obtained use and enjoyment of The Property through the agreement. Although title was not transferred, any CGT consequences arising from the event are disregarded, in accordance with subsection 104-15(4) of the ITAA 1997. Following your parents obtaining permanent residency, one of your parents was made aware that you had received a land tax assessment for The Property. Your parents sought legal advice from the solicitors who handled the conveyancing for The Property purchase. At this time, they were advised that nothing could be done to unwind the transaction and that full stamp duty and capital gains tax would be payable on transfer of The Property from yourself to your parents. As a result of this, transfer of The Property did not occur. We consider that the agreement to transfer The Property was brought to an end at this time as you didn't transfer The Property upon being made aware of the financial implications. The transfer of title from yourself to your parents now would constitute CGT event A1, as it would occur under a separate and distinct agreement. You will be responsible for any capital gains incurred on the sale of The Property.

Reasons for decision: These reasons for decision accompany the Notice of private ruling