Private ruling: Capital gains tax - use and enjoyment of capital gains tax asset before title passes
Published: September 2015
Ruling period: 30 June 2015.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Did capital gains tax event A1 occur when you transferred your ownership interest in the property? | A1: No.

Relevant facts and circumstances: You own a property (Property A) which has always been treated as a rental property. One of your children (Child A) and their spouse resided in the rental property (Property B). Child A and their spouse wanted to purchase a property but were unable to obtain a loan. Property B was put on the market, and you agreed to obtain a loan to cover the full amount of the purchase price of Property B so that Child A and their spouse could live in Property B and eventually inherit it. Your intention, and the understanding within your family was that Child A and their spouse would reside in Property B and that the title to Property B would pass to Child A and their spouse when you passed away (to be referred to as the arrangement). You had your will amended to reflect the arrangement at the time Property B was purchased. Your will evenly divides your wealth between various beneficiaries, with the value of Property B being disregarded for the purposes of the distribution. Property B was to pass directly to Child A and their spouse in addition to Child A's share of your estate, which was and is still equal to that of your other children. A codicil to the will now excludes any reference to Property B. You treated Property B as a rental property for taxation purposes. Child A and their spouse deferred to you and accepted your advice that Property B was theirs to use and enjoy until you passed away, at which point the title to Property B would be transferred into their names, unencumbered by capital gains tax (CGT) debt. The lease on Property A expired and you asked another child, Child B, if they would be interested in moving into the property. During discussions with Child B, you became aware that you had been under the misapprehension about how CGT would apply to the two properties. You had been of the belief that if your beneficiaries lived in either property for more than 12 months prior to, or subsequent to your death, that no CGT liability would arise on the sale of the properties after you passed away. The arrangement in relation to the Property B continued until the time when Child B had identified the taxation and inheritance treatment of both properties, and had discussed the CGT implications with you and your family. Child B had explained to you that there were no CGT advantages in you retaining your ownership interest in Property B and you transferred the title of Property B into the names of Child A and their spouse. Your submissions: You have made the following submissions in the private ruling application: • A Terms Contract came into being at the time you gained title to Property B, at which time Child A and their spouse first had the use and enjoyment of Property B in their capacity as future owners, thus triggering CGT event B1. • The Terms Contract is evidenced by the stated intentions of the parties, the subsequent behaviour of the parties, and by the terms of your will at the time Property B was purchased. • The terms of the agreement were that the title to Property B would be transferred upon your passing away. This was not a loose family arrangement that title might pass at some unspecified time in the future. The event was inevitable and quite easily identifiable as an occurrence. The fact that the title has transferred prior to the event is immaterial for the purposes of satisfying paragraph 104-15(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997); and • The terms of subsection 102-25(1) of the ITAA 1997 specifies that if more than one CGT event occurs, then you use the one that is the most specific to your situation. In this case, the CGT event that occurred when the agreement was entered into was CGT event B1. Document You have provided an extract from your will, 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 Subsection102-25(1) | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-15 | Income Tax Assessment Act 1997 Subsection 104-15(1) | Income Tax Assessment Act 1997 Subsection 104-15(2) | Income Tax Assessment Act 1997 Subsection 104-15(3)

Reasons for decision: Detailed Reasoning - Use and enjoyment of a capital gains tax asset before title passes: Subsection 102-25(1) of the ITAA 1997 provides that where more than one of the CGT events outlined in division 104 of the ITAA 1997 can apply in a situation, you use the CGT event that is most specific to your situation. CGT event A1 happens under section 104-10 of the ITAA 1997 if you dispose of an asset. You are taken to have disposed of an asset if a change of ownership occurs from you to another entity, whether because of some act or event; or because of an operation of law. Section 104-15 of the ITAA 1997 describes the circumstances under which a CGT event B1 may happen. Subsection 104-15(1) of the ITAA 1997 states that 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 passes to the other entity; and the title in the asset will or may pass to the other entity at or before the end of the agreement. Subsection 104-15(2) of the ITAA 1997 provides that the time of a CGT event B1 is when the entity to which the title will pass first obtains use and enjoyment of the asset. Subsection 104-15(3) of the ITAA 1997 states that you make a capital gain if the capital proceeds from the agreement are more than the asset's cost base. You make a capital loss where the capital proceeds are less than the asset's reduced cost base. The Guide to capital gains tax provides guidance on how CGT event B1 applies to real estate. It is recognised that CGT event B1 may happen where an agreement is made with a relative to use and enjoy a property for a specified period after which time the property passes to the relative that has been allowed the use and enjoyment of the property. However, it is stated that CGT event B1 will not happen where under the arrangement title to the property will 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 capital 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 changed hands. In other words, the asset is treated as if it was disposed of when the use and enjoyment of the asset changed rather than waiting until the time when the CGT event A1 takes place. In ATO Interpretative Decision ATO ID 2005/216 (ATO ID 2005/216), the Australian Taxation Office ruled that CGT event B1, rather than CGT event A1, applied in relation to an agreement under which a parent bought a house for their child and child's spouse to live in until they could obtain finance and repay the parent's loan, at which time title to the property would be transferred to the child and the child's spouse. In reaching the decision in ATO ID 2005/216 it is noted that CGT event B1 will not happen where title to an asset may pass at an unspecified time in the future under a loose family arrangement. | Detailed Reasoning - Application to your situation:: In your situation, your child, Child A, and their spouse, could not obtain a loan to purchase a property and you had obtained a loan to purchase Property B. Based on the information you have provided, it is the Commissioner's view that CGT event B1 is the most applicable CGT event in your circumstances for the following reasons: • you entered into an agreement with Child A and their spouse whereby the title of Property B would pass to them upon your death, being the specific occurrence for when the arrangement would end, • Child A and their spouse had exclusive use of Property B as soon as the agreement was made; and • the agreement allowed Child A and their spouse the use and enjoyment of Property B with intention that they would become legal owners when you passed away, at which point the title of Property B would be transferred into Child A and their spouse's names, as stated in your Will, and which has occurred prior to your passing. Therefore, CGT event B1 happened at the time when Child A and their spouse first obtained the use and enjoyment of the dwelling. This means that any capital gain or capital loss you made was at the time Child A and their spouse first obtained the use and enjoyment of the dwelling. In your situation this was at the time when settlement on the purchase of Property B occurred.