Private ruling: CGT - main residence - legal v beneficial
Date of advice: 6 May 2022
Published: July 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a CGT event happen to Person A on the sale of the property? | A1: No. | Q2: Will a CGT event happen to Person B on the sale of the property? | A2: Yes. | Q3: Will Person B be entitled to a partial main residence exemption? | A3: Yes.

Relevant facts and circumstances: Several years ago, Person B who was living overseas at the time, wished to purchase a property in Australia which was to be their main residence. They had a relative living in Australia being Person A. It was thought easier for the property to be purchased in Person A's name as they could physically sign the necessary documents. Funds for the deposit and the balance were paid by Person B out of their private assets. No funds were ever transferred from Person A to Person B, as from their perspective, the property was Person B's, not Person A's, therefore no payment was necessary. Subsequently, in the same year the property was purchased, Person B arrived in Australia and started living in the property. Person B has, from that year, lived in the house as their sole place of residence. In that time, it has never been rented out nor vacant. Person B is currently hoping to sell the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20. | Income Tax Assessment Act 1997 section 104-10. | Income Tax Assessment Act 1997 section 118-110. | Income Tax Assessment Act 1997 section 118-135.

Reasons for decision: Detailed Reasoning - Questions 1 & 2: CGT event A1 occurs when there is a disposal of an ownership interest in a CGT asset. However, CGT event A1 does not occur if there is only a change of legal ownership and not a change of beneficial ownership. Person A became registered legal owner of the property when it was purchased, but without any expectation of having any elements of beneficial ownership. They did not fund the purchase of the property and there was no intention for them to benefit from any future sale of the property. Based on the facts, the Commissioner accepts that in your circumstances, although Person A is the legal owner of the property, it was never intended that they would have any beneficial ownership and the intention was that Person B would be the beneficial owner of the property. It can be reasonably concluded that at the time the legal ownership of the property is changed, that is, when the property is sold, Person B will not have a CGT event A1 or any other CGT event occurring to them when their legal ownership ends. As they are considered to be the beneficial owner, CGT event A1 will happen to Person B when the property is sold. | Detailed Reasoning - Question 3: Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, must not have been used to produce assessable income and is situated on land not exceeding two hectares. Section 118-135 of the ITAA 1997 provides that if you move in as soon as practicable after acquiring your ownership interest, then the dwelling is treated as your main residence from when the interest is acquired until it actually became your main residence. The Commissioner's view of the phrase "as soon as practicable" is presented in Taxation Determination TD 92/147. As soon as practicable means that, unless there are unforeseen circumstances, or events happen beyond your control you must move into the dwelling as soon as possible. If you do not move into the dwelling when it first becomes practicable to do so, the section does not apply to treat the dwelling as a main residence. This means that the dwelling will only be your main residence from the time you move in. In this case, there was a delay between when the property was acquired and when Person B established the property as their main residence. It is not considered that they moved into the property as soon as practicable after it was purchased. Therefore, Person B is not entitled to the main residence exemption for the period between when the property was purchased and when they established it as their main residence.