Private ruling: Capital gains tax - disposal of capital gains tax asset
Date of advice: 21 September 2015
Published: September 2015
Ruling period: Income year ending 30 June 2017.
Date scheme commenced: 1 July 1999.

Ruling: Q1: Will a capital gains tax event happen during the income year in which you transfer your ownership interest in the property? | A1: No.

Relevant facts and circumstances: Your child (Child A) wanted to purchase a property. The provider of the finance to purchase the property, the Mortgagee, had insisted that the property be purchased in the names of Child A and you and your spouse, as tenants in common due to Child A's age and level of income. A property was purchased (the property) after 20 September 1985, with Child A's and you and your spouse's names put on the title of the property. A number of years later a family agreement (the Agreement) was drawn up to formalise the intentions of you and your spouse and Child A. with the Agreement bringing forward a part of what Child A could expect to receive under you and your spouse's wills. The Agreement outlined that: • Child A would be entitled to treat the property as if they were the sole owner of the property • Child A was to meet all of the payments due under the Mortgage loan and to pay for all municipal and water rates and insurance premiums for the property • Child A could request you and your spouse to transfer your ownership interests in the property to them at any time • Child A could sell the property with you and your spouse transferring any entitlement you have to the sale proceeds to Child A; and • you and your spouse will ensure that your wills provide that your ownership interests in the property will pass to Child A. For the purposes of this private ruling, you and your spouse will transfer your ownership interests in the property to Child A during the period covered by this private ruling. You have provided a copy of a document, which should be read in conjunction with and forms part of the scheme of this private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Subsection 104-10(1) | Income Tax Assessment Act 1997 Subsection 104-10(2) | Income Tax Assessment Act 1997 Subsection 104-10(3)

Reasons for decision: Detailed Reasoning - Disposal of a capital gains tax asset: You can make a capital gain or capital loss when a capital gains tax (CGT) event occurs. The capital gain or capital loss will be made at the time when the CGT event occurs. A CGT event A1 occurs when you dispose of your ownership interest in an asset to another entity. The time 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. The time when a contract is entered into is the time when it comes into existence for general law purposes. To determine how the timing rules in CGT event A1 apply, it is necessary to consider whether a taxpayer's situation satisfies the description for a 'contract for the disposal'. Generally, the words "contract for the disposal" of a CGT asset refers to a contract that is the source of the obligation to make a specific disposal. The Federal Court has held that the contract under which an asset is acquired or disposed of is the contract through whose operation the asset changes ownership. A contract is a legally binding agreement. Once an offer has been accepted, there is an agreement, but not necessarily a contract; and the element that converts any agreement into a true contract is "intention to create legal relations". There must be evidence that the parties to the agreement intended that it should be governed by, and subject to, the law of contract; so that the agreement gives rise to legal consequences. In a contract, each party accepts a legal obligation, and each may seek a remedy in the event of breach. Family agreements are presumed not to give rise to legal relations, unless there is clear evidence to the contrary. | Detailed Reasoning - Application to your situation: You and your spouse had become tenants in common with Child A to enable them to obtain finance to purchase the property. A number of years later, you entered into an agreement (the Agreement) with your spouse and Child A in relation to the property. The following submissions have been made in the private ruling application: • You and your spouse have no entitlement to the property, nor have you ever lived in it • For the purposes of your estate planning, you and your spouse want to remove your names from the title of the property • The property is, and has always been, the principal residence of Child A; and • The property has not been used to produce assessable income. In the Agreement it is stated that the provisions of the Agreement shall bind each party and their legal personal representatives. This would support that the parties of the Agreement had an intention to be legally bound. Therefore, it could be viewed that the parties had a clear intent to be contractually bound by the Agreement. The Agreement supports that it was always the intention that you and your spouse's ownership in the property would be transferred to Child A, either while you were alive or after you had passed away, and that Child A was treated as the sole owner of the property from the time the Agreement was signed. Based on the information and documentation provided with the private ruling application, it is the Commissioner's view that you, your spouse and Child A were legally bound to fulfil the terms of the conditions contained in the Agreement from the time that the Agreement was entered into, which involved ensuring that you and your spouse's ownership interests in the property were transferred to Child A. Accordingly, it is viewed that you, your spouse and Child A had entered into a contract when you signed the Agreement. Therefore, CGT event A1 occurred when you signed the Agreement. The fact that you and your spouse will not transfer your ownership interests to Child A until a date much later than the date the Agreement was signed does not alter that CGT event A1 occurred when you signed the Agreement. For CGT purposes, the time of the CGT event was when you signed the Agreement and you disposed of your ownership interest in the property. Despite there being a delayed transfer of your ownership interests to Child A, the timing of the CGT event A1 remains when the Agreement was signed. Accordingly, any capital gain made on the disposal of you and your spouse's ownership interests in the property would have arisen in the income year in which the Agreement was signed. Therefore, no capital gain will arise when you and your spouse transfer your ownership interests in the property to Child A.