Private ruling: Gifting of land - deductibility and capital gains tax implications
Published: July 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers | 1. Will you make a capital gain or capital loss on the signing of the deed of settlement? | Yes. | 2. Will you be entitled to a deduction for the donation of the land? | No.

Relevant facts and circumstances: Several years ago, you and your partner moved to a town with your child to pursue the dream of community and to be nearer to a friend who had inspired you with her spiritual work. Your friend lived in a mobile home on a property. They rented the property on which they lived. When you initially visited the town you stayed on a house on that property. This property was considered to be a sacred site and the "centre" of a forming community. At some stage a little while later you became aware that the owner of the property wished to sell it. You began to assist in organising a group to purchase the property. As you became involved in the purchase of the property your time spent in the town increased. The house next door to the property on which your friend lived became available for rent and you and your spouse and children took up the tenancy of that house. The group that were purchasing the land went by the name Group A. During discussions with the group it was agreed that: · Group A would become an incorporated association, · Group A would purchase the property that your friend was living on and · The money for the purchase would be generated by both members and non members of the group making contributions to Group A and by taking a mortgage. You and another person in the group approached a financial institution and arranged for a mortgage. You believe this occurred some time after 20 September 1985. You became the Public Officer of Group A and arranged its incorporation. The property on which your friend lived was purchased and placed into the name of Group A. You and your spouse donated an amount of money. You recall that the mortgage was paid from rent paid by persons who stayed in the house on the property and by your friend. You and the group called the property property A. Group A operated on a consensus model and before any decisions were made everyone had to agree. The group organised two spiritual festivals at property A and found that the available room was inappropriate. Group A began discussing obtaining land to develop as a community. The group came up with the concept of a residential community which had a different purpose from property A. As the residential community was a different concept, it was agreed that a separate organisation should be established. The group decided that the organisation was to be a trust to be called the "Group B Trust". Group discussions focused on the land next door to property A. You took on the role of finding out the position in relation to this land with a view to either arranging to purchase it or lease it. Discussions with a number of owners of the land next door to property A resulted in the land being sold under a number of separate contracts. The land was purchased after 20 September 1985. The land comprised many titles. The group continued work on producing a trust document. The group intended to use this document as a prospectus that would explain the concept and would result in persons joining up which would in turn produce money to buy the property. You came up with document which was printed and circulated to people that the group considered to be interested in the venture. At the time the prospectus was formulated the group agreed that the remaining structure and detail would be formulated in due course. Various members of the group, including you and your spouse, contributed financially towards the cost of the land. Some of the land was placed in yours and another member of the groups names as "tenants in common". The rest of the land was purchased in the name of Group A. You attempted to get the bank to make the loan out to the "Group B Trust" but they refused. A bank account for the "Group B Trust" was established. The members of Group A were involved in ongoing discussions as the land was purchased. While all members were included in discussions, there were two groups. Those who were interested in furthering the residential community concept and those that were not but were happy to remain included in the spiritual and awareness objectives of Group A. Some time later the group involved in the "Group B" concept had new people. Various members began residing on the land. Despite many meetings the group was unable to produce further documentation upon which you had consensus with respect to the legal structure. Due to several reasons no official trust was ever created. Shortly afterwards, more properties were purchased pursuant to the concept of the "Group B Trust". The titles of the land were placed into Group A's name. Some time later, financial contributions, made by members, towards the cost of the land had reduced and interest rates had increased. You believed that in order to prevent the project from collapsing, the whole project needed to be revitalised and refinanced. You contacted various members of the group and put forward a proposal. Under the proposal: · you and your spouse would take title to the "Group B" land and refinance its purchase, · in order to effect the refinancing you would take out a personal loan using the land as collateral. This arrangement would allow property A to be released from the mortgage, · once a legal body capable of holding the land in perpetuity for the Group B purposes was formed, you and your spouse would transfer the land to that appropriate body and be reimbursed, · you and your spouse would approach the local council in order to obtain approvals. The members of Group A agreed to the proposal and the land was transferred to you and your spouse as tenants in common. After this took place and property A was released from the mortgage, you regarded you and your spouse's role as holding the land for the purposes of the "Group B Trust". The ownership of the land was financed through various mortgages and loans from family or friends. Various members of the group contributed towards the costs and repayments of contributions were made to various members upon their request. Various members resided on the land for intermittent periods of time. Contributions from members were paid into the "Group B" account. You and your spouse paid expenses, including rates and mortgage payments, from this account. You and your spouse made significant contributions to the development of the land, repayment of the mortgage and payment of expenses that needed to be reimbursed. Differences occurred within the group and relationships were strained. Group A was deregistered. The title of property A was transferred to your friend. Some time later, an opportunity arose to purchase additional adjoining land and the group agreed to the purchase. In order to affect the purchase, you and your spouse changed the property investment loan with financial institution A to a housing loan with financial institution B. You and your spouse opened a new account with financial institution B in your names "trading as Group B". You then transferred any monies from the financial institution A's "Group B" account into the new account and closed any previous accounts. All contributions received went into the new account and any repayments due on the loan were paid from this account. The loan was in you and your spouse's names. You saw the purchase of the new land as being outside and different to the then existing arrangement where you believed you held the land in trust for the "Group B Trust" and saw this land as providing security for you and your spouse should the "Group B" concept not eventuate. You inquired into the taxable position of the "Group B" venture with the Australian Taxation Office and were made aware that all monies received by you and your spouse for "Group B" was income that had to be treated as your personal income as the "Group B Trust" was not a legal entity. Prior to this you had not thought that you and your spouse would have to pay tax. You began reporting all income received and expenses paid in your income tax returns. Some time later, a number of people were still interested in furthering the "Group B" concept. You formed a new organisation called "Group C Incorporated". This was to be the financial arm of the "Group B Trust" which was to be properly established. You opened an account in the name of "Group C" and for a short period you and your spouse made payments into this account which were used to repay the mortgage. The venture was abandoned and the collapse of this group set about a total rethink of the ability to form a trust. You and your spouse separated and your spouse moved off the land a short time later. Some time later, you ceased residing on the land. A group of former Group A members formed a new group called "Group D". Negotiations regarding the ownership of the "Group B" land began between Group D and you and your spouse. These negotiations were not successful. Some time later, you and your spouse placed some of the land on the market. Group D removed the for sale sign and placed a caveat on each and every title. Group D continued to make contributions into you and your spouse's financial institution B account "trading as Group B" for a period of time. Their contributions eventually ceased. Since then you and your spouse have paid the mortgage, land taxes and rates. The issue of the ownership of the land is now the subject of Supreme Court legal proceedings. In order to come to a resolution the parties involved have come to an agreement. A draft deed of settlement has been drawn up. Under the draft deed of settlement: · you as a "trustee" will approach a Land Conservancy (herein referred to as the Conservancy) to obtain agreement that: _ the Conservancy will accept a transfer of some of the land by way of gift, _ the Conservancy will hold this land as a permanent reserve under one of its programs, _ that you as a trustee will within a number of days of obtaining agreement with the Conservancy either pay the Conservancy an amount of money or will transfer to the Conservancy further land titles, _ that Conservancy will apply the money paid by you as a trustee or the further land titles towards the cost of establishing and managing the permanent reserve. The draft deed of settlement also contains various other clauses and provisions. One of the clauses implies that no trust will be created over the land. You have provided a copy of the draft deed of settlement and it is to be read in conjunction with, and forms part of, this private ruling. You have also provided affidavits provided by members of the former group called Group A, as well as various other documents that pertain to the Supreme Court action. These too are to be read in conjunction with, and form part of, this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 30, | Income Tax Assessment Act 1997 Section 104-55 and | Income Tax Assessment Act 1997 Section 116-30.

Reasons for decision: Detailed Reasoning - Capital gain or capital loss: When you enter into the deed of settlement, a trust will be created over the land. While there is a clause in the draft deed of settlement that implies that no trust will be created, we consider that in entering into the deed of settlement, the land will be placed into trust. The use of the term "trustee" throughout the draft deed of settlement supports this view. Section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event E1 happens when you create a trust over a CGT asset by declaration or settlement. The time of the event is when the trust over the asset is created. You make a capital gain if the capital proceeds from the creation are more than the assets cost base. You make a capital loss if the capital proceeds are less than the assets reduced cost base. Capital proceeds is usually the amount that you receive as a result of a CGT event happening however, section 116-30 of the ITAA 1997 provides that were you do not receive any capital proceeds from the CGT event, you are taken to have received the market value of the asset on the day the CGT event happened. As you, in conjunction with your former spouse, currently hold title of the land, CGT event E1 will happen when you enter into the deed of settlement and you will make a capital gain or capital loss in accordance with your ownership interest of 50%. Your capital proceeds will be the market value of the land on the day that you enter into the deed of settlement. | Detailed Reasoning - Deduction: Division 30 of the ITAA 1997 provides that a deduction is available to an entity that makes a gift or donation to an organisation which is endorsed by the Commissioner as a deductible gift recipient under subdivision 30BA of the ITAA 1997. It is important to recognise that you and the trust are separate entities. You are one entity and the trust will be another completely separate and distinct entity. Once you enter into the agreement and the trust is created, the trust then becomes the owner of the land and the land will then be donated to the Conservancy by the trust. Therefore, the trust is the entity that is making the gift or donation to the Conservancy and accordingly, any potential deduction that may be available would be available to the trust rather than you. You are not entitled to a deduction as you are not the entity that is making the gift or donation of the land.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.