Private ruling: Capital gains tax
Date of advice: 3 January 2019
Published: April 2019
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a capital gains tax event occur when you transfer legal title to the property to your relatives? | A1: Yes

Relevant facts and circumstances: You purchased a property as a main residence for your relatives as they were unable to finance the property. The relatives paid some purchase expenses such as legal fees and inspection fees and have made all the payments on the mortgage since the time of purchase. All payments for improvements, rates and disbursements made toward the property have been made by the relatives. On XX/XX/XXXX, you entered into an agreement to grant an option to your relatives to purchase the property upon payment of the original purchase price. The relatives will obtain finance for the outstanding mortgage balance amount and have the legal title transferred to them prior to the expiration of the option agreement. Since acquiring the property, in your tax returns you have declared rental income and claimed rental deductions in relation to it which has resulted in you claiming net rental losses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-22 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-40 | Income Tax Assessment Act 1997 Section 116-20 | Income Tax Assessment Act 1997 Section 116-30 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Legal and Beneficial Ownership: Generally, the owner of a property is the person(s) registered on the title but it is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner. Contributions to the purchase cost of a property are relevant in examining whether the legal interest(s) in the property match the equitable interest(s) in the property. The purchase cost of a property may include the actual purchase price of the property ( Calverley v Green (1984) 155 CLR 242, at 257), legal fees, stamp duty and incidentals ( Currie v Hamilton [1984] 1 NSWLR 687, at 691; Ryan v Dries [2002] NSWCA 3, at [52] and [53]). The purchase cost will not include loan repayments ( Calverley v Green (1984) 155 CLR 242, at 257), or legal fees and bank fees if they are not paid in order to acquire the property ( Calverley v Green (1984) 155 CLR 242, at 257; Sivritas v Sivritas & Anor (2008) 23 VR 349, at 372-373). Where the purchase price was funded by borrowings the person considered to have contributed the borrowed amount towards the purchase price is the person who borrowed the funds, that is, the person who took out the loan. Where a person has contributed to the actual purchase cost of the property but is not on the legal title, the legal owner is holding the portion of the legal title that relates to that person’s share of the contribution to the purchase cost on trust for them. This is due to the presumption of a resulting trust ( Calverley v Green (1984) 155 CLR 242). Under the presumption of resulting trust you would be considered to hold a percentage of the property that corresponds with the contribution the relatives made to the purchase price for the relatives. However, in your case, the presumption of resulting trust is rebutted due to the option agreement you entered into. The option agreement is a contemporaneous document that acknowledges that you are the owner of the property. Therefore you hold 100% legal and beneficial ownership of the property. | Detailed Reasoning - Option to purchase: CGT event D2 occurred when you granted the option to your relatives (section 104-40 of the Income Tax Assessment Act 1997 (ITAA 1997)). The capital proceeds for this event will be the amounts you received or are entitled to receive for granting the option (section 116-20 of the ITAA 1997). You make a capital gain from CGT event D2 if the capital proceeds from the grant of the option are more than the expenditure you incurred in granting it (subsection 104-40(3) of the ITAA 1997). The amount of the capital gain is the amount by which those capital proceeds exceed the incurred expenditure (section 102-22 of the ITAA 1997). You make a capital loss from CGT event D2 if the expenditure you incur in granting the option is more than the capital proceeds from granting it (subsection 104-40(3) of the ITAA 1997). The amount of the capital loss is the amount by which the incurred expenditure exceeds those capital proceeds (section 102-22 of the ITAA 1997). Any capital gain or loss made from CGT event D2 will be disregarded when the option is exercised (subsection 104-40(5) of the ITAA 1997). | Detailed Reasoning - Exercising the option: As the exercising of the option by your relatives will result in the disposal of the property, CGT event A1 will happen. The time of the event will be when you enter into a contract for its disposal or if there is no contract – when the change of ownership occurs (section 104-10 of the ITAA 1997). Subsection 116-20(1) of the ITAA 1997 provides that the capital proceeds from a CGT event are the total of: (a) The money you have received, or are entitled to receive, in respect of the event happening; and (b) The market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out at the time of the event). However, the capital proceeds from a CGT event are replaced with the market value of the CGT asset that is the subject of the event if you and the entity that acquired the asset from you did not deal with each other at arm’s length in connection with the event (subparagraph 116-30(2)(b)(i) of the ITAA 1997). Whether the parties to a particular transaction were dealing with each other at arm’s length in any particular case must be determined by reference to the facts of the case. When determining whether parties deal at ‘arm’s length’ any connection between them and any other relevant circumstance must be considered (subsection 995-1(1) of the ITAA 1997). In your circumstances, in relation to the acquisition of your property by your relatives, not only are the parties not in an arm’s length relationship (rather you are in a familial relationship), you have stated that the price payable under the option agreement will be significantly lower than the market value of the property at the time of transfer. We consider that the market value substitution rule would apply to deem the capital proceeds you receive from the CGT event A1 to be the market value of the property at the time of the change in ownership to your relatives.