Private ruling: Capital Gains Tax
Date of advice: 9 February 2017
Published: July 2017
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 January 2016

Ruling: Question and answer: | If Person 1 disposes of both properties in one transaction can section 118-120 of the ITAA 1997 apply to cover both properties with the main residence exemption? | Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Person 1 purchased two properties after September 1985, Property A and Property B. Property A and Property B are neighbouring properties adjoining each other with a common shared fence line. Both are residential properties. Person 1 has occupied Property A as their main residence since the date of purchase and continues to do so. Person 1 and their family lived in Property B as an extension of Property A since the date of purchase to the present. Property B was and is being used as family sleeping quarters and for storage with the meals being eaten by the family in Property A. Currently, Property A is being used by a child of Person 1 as sleeping quarters. While there is a shared fence line, there is nothing preventing free movement between the properties. Person 1 transferred legal ownership of Property B to Person 2. (Legal title to the property was changed at this time). Person 2 is the adult child of Person 1. At the time of purchase Person 2 was not earning income. Person 1 transferred the property as an 'asset protection' strategy. No consideration was paid by Person 2 to Person 1. While Person 1 has been paying the expenses of Property B, there is no evidence that this is the case. Person 1 and Person 2 intend that Property B will be transferred back to Person1. Once this happens Person 1 intends to sell both properties. Neither property has been rented out. Both Person 1 and Person 2's Wills are silent on the treatment of the property.

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 118-110 | Income Tax Assessment Act 1997 Section 118-115

Reasons for decision: Summary: You make a capital gain or capital loss if a CGT event happens to a CGT asset under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Property is considered to be a CGT asset. Under section 104-10 of the ITAA, CGT event A1 occurs if you dispose of your ownership interest in a CGT asset. You dispose of that interest if a change of ownership occurs from you to another entity. The timing of the event is when you enter into the contract for the disposal or if there is no contract, when the change of ownership occurs. Subsection 104-75(1) of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee, (disregarding any legal disability the beneficiary is under). The time of the event is when the beneficiary becomes absolutely entitled to the asset. It is possible for legal ownership to differ from beneficial ownership. A beneficial owner is defined in Taxation Ruling IT 2486 and Taxation Determination TD 92/106. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. A legal owner is the individual who has their name on the legal documents associated with the CGT asset, an example would be the title deed for a property. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner of a CGT asset that is liable for CGT upon sale of the asset. 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 Where an individual purchases and pays for a property but legal title is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them. However where the property is transferred between spouses or from parents to children, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (that is, an absolute gift). The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests unless they can rebut the presumption of advancement. In your situation the presumption of advancement is not rebutted as there is no evidence that beneficial ownership remained with Person 1. The title to the property was transferred into person 2's name, while you state that Person 1 is paying the expenses of the property, there is no evidence that this is not merely an arrangement whereby Person 2 recovers expenses relating to the property or evidence that Person 1 actually pays for the expenses. You state that the property was transferred as an 'asset protection' strategy, if this is the case, then beneficial ownership would transfer to Person 2. Accordingly, Person 2 became the legal and beneficial owner of the property when ownership was transferred. Section 118-110 of the ITAA 1997 states that you disregard any capital gain or loss realised on the disposal of a dwelling that was your main residence for your entire ownership period. The term “dwelling” is defined in section 118-115 of the ITAA 1997 as a unit of accommodation that is a building, or contained in a building and which consists wholly or mainly of residential accommodation. Taxation Determination 1999/69 (TD 1999/69) considers whether more than one unit of accommodation can constitute a dwelling for the purposes of the main residence exemption. This is possible in circumstances where both units of accommodation are being used together as one place of residence or abode. Factors relevant in considering whether units of accommodation are used together as one place of residence or abode include: a. whether the occupants sleep, eat and live in them; b. the distance between and the proximity of the units of accommodation; c. whether the units are connected; d. whether the units are capable of being sold separately; e. the extent to which the daily activities of the occupants in the units are integrated; f. how the units are shared by the occupants; and g. how costs of the units are shared by the occupants. The two dwellings have been used by Person 1 as one place of accommodation or abode; therefore they are entitled to the main residence exemption for both properties.