Private ruling: Capital gains tax - company - disposal of asset - ownership interest
Published: September 2017
Ruling period: Income year ending 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Will you be entitled to disregard the capital gain made on the transfer of the Property pursuant to the court order under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are a private company. Your entire capital consists of XX,XXX shares, which were held by your sole shareholder (Person A). After 20 September 1985, you purchased the Property for $XXX,XXX. Person A's child (Person B) resided at the Property from the time you purchased it under and informal arrangement. A number of years later Person A (the deceased) passed away. After the deceased had passed away, another of the deceased's children (Person C) became your sole director. The deceased's will provided the following: ● Person C was appointed as the executor and trustee of the deceased's estate (the Trustee); and ● The shares in you would be held on trust for the benefit of Person B during their lifetime and to pay any income derived from the shares to Person C at the Trustee's discretion, and upon Person B's death the shares will become part of the deceased's residuary estate. The Trustee allowed Person B to continue residing at the Property rent free after the deceased had passed away. The Trustee did not apply for probation of the deceased's estate. Disagreements arose and a number of years after the deceased had passed away Person B commenced legal proceedings against the Trustee and the deceased's estate claiming further provisions be made for them out of the deceased's estate. In the following year court orders were issued that included the following: ● you would join the proceedings as a defendant; ● Person B would receive a half share in the Property; and ● Person D would receive a half share in the Property. Shortly after the court orders were issued, a deed (the Deed) was made between the Trustee, Person B, Person D and you which included the following: ● The deceased is the parent of Persons B and also the grandparent of Person D; ● As at the date of the Deed, the only assets in the deceased's estate were your shares and an entitlement to receive proceeds from an investment; and ● The Trustee will direct you to transfer the title to Persons B and D as tenants in common in equal shares. After a short period of time, the title in the Property was transferred from you to Persons B and D as tenants in common in equal shares. The market value of the Property has been estimated to be $XXX,XXX or $X,XXX,XXX with the capital gain arising as a result of the transfer of the title of the Property to Persons B and D being estimated to be around $XXX,XXX. Shortly after the title of the Property was transferred to Persons B and D, you and the Trustee lodged a caveat over the Property in accordance with your respective interests as charges as provided in the Deed. During the next month an application was lodged with the Australian Securities and Investments Commission (ASIC) for your deregistration under section 601 AA of the Corporations Act 2001. A number of months later you were deregistered. After a number of years you were relisted.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Summary: Summary You were the sole owner of the Property and will be assessable on any capital gain made on the sale of the Property. Detailed reasoning | Detailed Reasoning - Disposal of a capital gains tax asset: You make a capital gain or capital loss if a capital gains tax (CGT) event occurs. The most common CGT event is CGT event A1 which happens if you dispose of an asset to someone else. You are deemed to have disposed of an asset if a change in ownership occurs from you to another entity. If a taxpayer does not have ownership of the asset being disposed of, then CGT event A1 cannot occur to that taxpayer. 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. When considering the disposal of an interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. In absence to the contrary, property is considered to be owned by person(s) registered on the title. | Detailed Reasoning - Application to your situation: In this case, you are a private company whose sole shareholder was the deceased. You purchased the Property after 20 September 1985, and it was used by Person B under an informal arrangement from the time it was purchased. The deceased passed away a number of years after the Property had been purchased. Person B initiated legal proceedings a number of years after the deceased had passed away. In the following year the court issued orders which instructed you to join the legal proceedings and for you transfer ownership interests in the Property to Persons B and D. Shortly after the court orders were issued, a Deed was made between Persons B, C and D and you, which stated that Person C would direct you to transfer the title to the Property to Persons B and D as tenants in common in equal shares. In the same month the title of the Property was transferred from you to Persons B and D and a CGT event A1 occurred. A company is a separate legal entity distinct from its shareholders and officers. Shareholders hold shares in the company, but do not legally own the assets of the company as the shares do not give a proprietary right in the assets of the company. As outlined above, when considering the taxation implications under the CGT provisions in relation to the disposal of a CGT asset, the ownership interest in the property is relevant when determining who has made the capital gain or capital loss on the disposal. You owned the Property and it is viewed that you disposed of your ownership interest in the Property. While the deceased was your sole shareholder, they did not have any ownership interest or proprietary right to the Property. Accordingly, you as the sole owner of the Property disposed of the Property. While the transfer of the title in the Property was due to the court orders and the Deed, it does not alter the fact that you have disposed of your ownership interest in the Property. Therefore, you will be assessed on the capital gain that has arisen as a result of the disposal of the Property. | Detailed Reasoning - CGT exemptions: There are exemptions that apply that may allow you to reduce or disregard the capital gain. We have considered the following exemptions in relation to the disposal of the Property: ● Main residence exemption Under the main residence exemption a capital gain or capital loss made from the disposal of a dwelling is ignored under section 118-110 of the ITAA 1997 if: ○ you are an individual; ○ the dwelling was your main residence throughout your ownership period; ○ the property was not used to produce assessable income; and ○ any land on which the dwelling is situated is not more than two hectares. The main residence exemption is not available to a company or trust. Therefore, you will not be eligible to apply this exemption to any capital gain you made on the disposal of the Property. ● Dwellings acquired from deceased estates If you inherit a ceased person's dwelling, you may be exempt or partially exempt when a CGT event happens to it under sections 118-195 or 118-200 of the ITAA 1997. In your case, you had not inherited the Property from the deceased. Therefore this exemption will not apply. ● Deceased estates Division 128 of the ITAA 1997 outlines what occurs when you die and a CGT asset you owned just before you died devolves to your legal personal representative or passes to a beneficiary of your estate. There is a special rule that allows any capital gain or capital loss made on a post-CGT asset to be disregarded if, when a person dies, an asset they owned passes: ○ to their legal personal representative or beneficiary; or ○ from their legal personal representative to a beneficiary. As outlined above, it is viewed that the deceased did not have an ownership interest in the Property. Therefore, as they did not own the Property just prior to their passing away Division 28 of the ITAA 1997 will not apply. | Detailed Reasoning - Conclusion: We have determined that you were the owner of the Property. As outlined above, you as a company and not an individual owned the Property and the exemptions as discussed above will not apply to your situation. Therefore, you will be assessed on the capital gain made on the disposal of the Property.