Private ruling: Capital gains tax
Date of advice: 17 November 2016
Published: April 2017
Ruling period: Year ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Did a capital gains tax (CGT) event occur in 199X in respect of B's interest in the property? | A1: Yes. | Q2: If a CGT event occurred in 199X, was any resulting capital gain for B fully disregarded pursuant to the main residence exemption (in conjunction with the absence rule in section 118-145 of the Income Tax Assessment Act 1997 )? | A2: Yes | Q3: If B now transfers legal title in the property to A, will CGT event A1 occur? | A3: No. | Q4: In respect of the half share of the property which A acquired from B in 199X, would the first element of A's cost base be 50% of the market value of the property? | A4: Yes.

Relevant facts and circumstances: A and their relative, B became registered proprietors (as joint proprietors) of a property. A mortgage was taken out in joint names. The property was a post-CGT asset. A and B occupied the property as their main residence. B moved out of the property in 199X however continued to contribute to the mortgage repayments. The mortgage was paid off in 199X. In 199X, A and B agreed that B would sell their interest in the property to A, and A would purchase that interest. In 199X, A acquired B's beneficial interest in the property by making payment of $XX,XXX to B. There was no written agreement and no trust deed. From 199X, all services to the property have been in A's name. A continues to reside in the property as their main residence. B has not lived at the property since 199X. Between 199X and 199X, B did not treat any other property as their main residence. A and B now want to transfer B's legal title in the property to A.

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 | Income Tax Assessment Act 1997 section 118-145

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. The Commissioner does not consider CGT event E1 to be appropriate as there was no declaration or settlement of a trust. The Commissioner is satisfied that CGT event A1 happened in 1997 when beneficial ownership of the share of property passed from B to A. 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. Section 118-145 of the ITAA 1997 provides that you can continue to treat a dwelling as your main residence during periods of absence. If the dwelling is not used to produce income it can be treated as your main residence indefinitely (subsection 118-145(3) of the ITAA 1997). Between 199X, when B moved out of the property and 199X, the time of transfer of beneficial ownership, B treated the property as their main residence and the property did not produce income. Any resulting capital gain upon transfer of 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 your case, A remains the beneficial owner of the property and no CGT event will happen when the legal title of the property is transferred from B to A. 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 50% of the market value as the cost base for the half share in the property acquired by A.