Private ruling: Capital gains tax
Date of advice: 18 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did capital gains tax (CGT) event A1 occur in respect of C's interest in the property? | A1: Yes. | Q2: If CGT event A1 occurred, was any resulting capital gain for C fully disregarded pursuant to the CGT main residence exemption? | A2: Yes. | Q3: If C now transfers their legal title in the property to A and B, will CGT event A1 now occur? | A3: No. | Q4: In respect of the third share of the property which A and B acquired from C in 19XX, is the first element of A and B's cost base the relevant percentage of the market value of the property at the time that the beneficial interest was transferred? | A4: Yes.

Relevant facts and circumstances: Person A, person B and person C jointly purchased a property. The property was financed by a contribution from each purchaser and a bank loan. From the very outset, persons A, B and C occupied the property as their main residence. Some years later, persons A, B and C agreed that person C would sell their interest in the property to persons A and B. The bank determined a payout figure for person C's interest. Persons A and B made a payment to person which was in effect person C's net equity in the property. Persons A, B and C did not seek legal advice regarding this transaction, nor did they seek tax or stamp duty advice. Nothing was done at the time to formalise the transaction. Therefore, person C remained on the title as a registered proprietor of the property, together with persons A and B. Person C has not contributed to the mortgage repayments and did not contribute to any of the expenses of the property since they moved out of the property. Persons A and B re-financed in order to payout the joint home loan by acquiring a new loan facility. Persons A, B and C have now become aware of the need to legally document the transfer of the property and notify the State Revenue Office that persons A and B are the beneficial owners of the property. Person C now proposes to transfer his legal title in the property to persons A and B for nil further consideration.

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 104-55 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 118-110

Reasons for decision: Summary: You make a capital gain or capital loss if a CGT event happens to a CGT asset under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Property is considered to be a CGT asset. CGT event A1 happens if you dispose of your ownership interest in a CGT asset (Section 104-10 of the ITAA 1997). You dispose of that interest if a change of ownership occurs from you to another entity, including a change in beneficial ownership. CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement (Section 104-55 of the ITAA 1997). Section 102-25 of the ITAA 1997 provides that if more than one CGT event can apply, the one the taxpayer uses is the one that is most specific to their situation. In this case CGT event A1 is considered to be the most appropriate event because there was no declaration or settlement of a trust. We consider that although person C continued to be a legal owner of the property, they transferred the beneficial ownership of the property when they moved out. Therefore, CGT event A1 happened at that time to person C when beneficial ownership of his share of the property passed to persons A and B. Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss made from a CGT event to a CGT asset that is a dwelling or the taxpayer's ownership in it is disregarded if: a) the taxpayer is an individual; b) the dwelling was the taxpayer's main residence throughout their ownership period, and c) the interest did not pass to the taxpayer as beneficiary in or was not acquired by the taxpayer as trustee of a deceased estate. Between the time when the property was purchased and the time of transfer of beneficial ownership, person C treated the property as their main residence and the property did not produce income. Therefore, person C is entitled to the main residence exemption for their share of the property and any resulting capital gain upon transfer of the beneficial ownership is disregarded. Subsection 104-10(2) of the ITAA 1997 states that a change in the legal ownership of an asset without a change in the beneficial ownership will not constitute a disposal for CGT purposes. In this case, persons A and B remain the beneficial owners of the property and no CGT event will happen when the legal title of the property is transferred from person C to Persons A and B. The first element of the cost base of a CGT asset is generally the money to acquire it and the market value of any other property given to acquire it (subsection 110-25(2) of the ITAA 1997). Subsection 112-20(1) of the ITAA 1997 substitutes the CGT asset's market value (at the time of acquisition for the first element of the cost base where the taxpayer did not deal at arm's length with the other entity in connection with the acquisition. Section 995-1 defines 'arm's length' as: in determining whether parties deal at arm's length , consider any connection between them and any other relevant circumstance. An individual is said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them. On the facts provided, the transaction was not conducted at arm's length as it was between related parties. In these circumstances it is appropriate to use the relevant percentage of the market value as the cost base for the share in the property acquired by persons A and B.