Private ruling: CGT - disposal of ownership interest
Date of advice: 14 March 2023
Published: 1 May 2023
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will only capital gains tax event A1 occur when you transfer of the title of the Property? | A1: Yes.

Relevant facts and circumstances: You have been with your current partner for several years and view their child (Person A), Person A's partner (Person B), and their children as your family. Person A and their family had been living in rental accommodation for several years but wished to purchase a property. Person B is a self-employed who had to be able to provide the financial institutions with two years of suitable business financial statements, or income tax returns, to meet their home loan criteria, which they couldn't do. You offered to purchase a suitable property for Person A and their family to live in, having enough funds to pay a deposit and the ability to obtain a loan to pay for the balance on the purchase of a property. Person A and Person B chose the Property as it was located close to the primary school their children attended. You made a verbal agreement (the Agreement) with Person A and Person B prior to the purchase of the Property for the sole purpose of helping them have a family home to live in without the insecurity of renting. Then once they were able to meet the home loan criteria as being self-employed, and first home buyers, they would buy the Property from you. Under the Agreement: • Person A and Person B could renovate the Property to suit their needs as a growing family up until they purchased the Property • The agreed timeframe for Person A and Person B to purchase the Property was within a specified period of years (Date 1) for a specified amount • Was to end when Person A and Person B purchased the Property • Nothing was provided in relation to any understanding of what would occur if Person A and Person B did not purchase the Property as it was never an expected outcome. You entered a contract to purchase the Property. The keys for the Property were given to Person A and Person B on the settlement date. You obtained a fixed term mortgage for a specified number of years in relation to the Property as you considered that would be a reasonable time for Person B to build up the appropriate financial history so that they and Person A would qualify for a first homeowners home loan. Person A and their family moved into the Property several months after settlement had occurred. A tenancy agreement was agreed upon under which Person A and Person B paid you a specified amount per week, which increased overtime, with the utilities for the Property being in Person A's name. A contract for the sale of the Property to Person A and Person B was entered into. Person B was able to meet the loan criteria and they and Person A applied for a bank loan, which was approved. You commenced the process of transferring the title of the Property to Person A and Person B. However, when you realised the potential capital gains tax implications for you in relation to the transfer of the Property title during the conveyancing process you stopped the transfer process until you received a ruling decision on the issue. You lodged a private ruling application seeking a ruling decision on the capital gains tax implications for you in relation to the Agreement, and the transfer of the title of the Property to Person A and Person B. A Notice of Decision was issued in which it was outlined that a capital gains tax event B1 had occurred when the Agreement was entered which provided Person A and Person B with the use and enjoyment of the Property given that the title of the Property would be transferred to them within the conditions of the Agreement. The approval for the bank loan for Person A and Person B expired prior to the issuing of the Notice of Decision and interest rates have risen since then. The title of the Property was not transferred to Person A and Person B in accordance with the Agreement by Date 1. Person B is experiencing health issues which has resulted in them having reduced capacity to work and available funds. Person A and their family continue to reside at the Property. You, as the seller, and Person A and Person B as the buyers, signed a termination of contract of sale document having mutually agreed to terminate the contract due to the finance clause not being satisfied. It is anticipated that a new contract in relation to the sale of the Property will be drawn up once Person A and Person B are able to obtain mortgage approval. For the purpose of this ruling, you will dispose of your ownership interest in the Property to Person A and Person B during the ruling period.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 102-25 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-15

Reasons for decision: Summary: Capital gains tax (CGT) event B1 occurred when you entered into the Agreement with Person A and Person B for their use and enjoyment of The Property. The Property was not transferred to them by the specified date in accordance with the Agreement and the Agreement ended when you did not transfer the Property. As a result, the effects of CGT event B1 will be disregarded and CGT event A1 will occur if: • you dispose/transfer your ownership interest to the Property to Person A and Person B as it will take place under a separate agreement to the Agreement; or • you dispose/transfer your ownership interest in the Property to any other party either during, or after, the ruling period. | 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. There are two CGT events which should be considered in relation to the situation on which the ruling is being sought are discussed below: | Detailed Reasoning - Use and enjoyment of asset before title passes: 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 ATO Interpretative Decision ATO ID 2005/216 I ncome Tax Capital gains tax: CGT event B1: right to use property before title passes states that, 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. CGT event B1 effectively brings forward the time of a disposal (and the time of a capital gain or loss) under such an agreement from the time when the actual disposal takes place to the time when the use and enjoyment of the asset changes hands. The asset is treated as if it was disposed of when the use and enjoyment of the asset changes rather than waiting until the time when there is an actual disposal. The time of the CGT event B1 is when the other entity first obtains the use and enjoyment of the asset. The capital gain, or capital loss, made when the CGT event B1 occurred should be included in your income tax return in the income year in which the CGT event B1 occurred. If the asset does not pass to the other entity that has had the use and enjoyment of the asset during the period of the agreement as at the end of the agreement, any capital gain or loss previously made by the taxpayer as a result of CGT event B1 is disregarded because there has not been a disposal of the asset. This ensures that a taxpayer's assessment can be amended at any time to reverse the effect of the capital gain or capital loss being included in their income tax return as a result of the CGT event B1 occurring in an earlier income year. If the title of the asset does not pass under the agreement, and CGT event B1 is disregarded, the relevant CGT event will be CGT event A1 if the ownership interest in the asset is transferred/disposed of at a later date. | Detailed Reasoning - Disposal of ownership interest in a CGT asset: CGT event A1 occurs when you dispose your ownership interest in a CGT asset to another entity, which includes the transfer of your ownership interests in an asset to another party. | Detailed Reasoning - Application to your situation: The previous private ruling accepted that CGT event B1 occurred due to the Agreement you entered into with Person A and Person B in relation to the Property which provided Person A and Person B with the use and enjoyment of the Property and expected that the title of the Property would be transferred to them. The terms of the Agreement provided that Person A and Person B would purchase the Property from you within a specified period, by Date 1, for a specified price. However, that did not occur due to issues Person A and Person B had experienced in obtaining a loan to purchase the Property. We consider that the Agreement ended when the title of the Property was not transferred in accordance with the terms contained in the Agreement. As a result, any CGT consequences occurring as a result of CGT event B1 occurring are disregarded as the Property was not disposed of under that Agreement. Therefore, any transfer of the Property to Person A and Person B after the ending of the Agreement will be under a separate and distinct agreement. When you transfer the legal title of the Property to any party, whether to Person A and Person B or to another party, this will constitute a CGT event A1 only. Accordingly, you will need to consider any capital gains or capital loss received on the disposal of the Property due to CGT event A1 occurring under the general CGT provisions. Note: You will be able to reduce any capital gain made on the disposal of your ownership interest in the Property by 50% if you meet the conditions to be eligible for the CGT discount. Further information about the CGT discount can be viewed on our web site ato.gov.au by searching for 'QC 66019'.