Private ruling: CGT - disposal
Published: March 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will capital gains tax (CGT) event A1 be triggered upon the transfer of your share of ownership in the property to Person C? | A1: Yes | Q2: Are you entitled to an exemption from capital gains tax in relation to the transfer of ownership of the property? | A2: No | Q3: Will you be liable for any capital gains tax liability in relation to the change in ownership of the property? | A3: Yes

Relevant facts and circumstances: The contract for the purchase of the property listed Person A, Person B and Person C as joint purchasers. At the date of contract, Person C was under 18 years of age and therefore was not legally able to obtain finance for the purchase. Person A and Person B obtained finance for $XXX,XXX for the purchase of the property and Person C was listed as guarantor on this loan. You state that you provided Person C with an undocumented, unsecured personal loan for $XX,XXX. This loan was to cover the following costs which you paid in relation to the purchase of the property: • Deposit $XX,XXX • Stamp Duty $X,XXX • Residual amount to make up purchase price $XX,XXX The property settled on May 20XX. The Title of Deed for the property lists Person A, Person B and Person C as joint tenants. The property was used as a rental property from May 20XX to January 20XX. During the property's rental period income and losses were declared in all three person's income tax returns for the relevant financial years. In January 20XX Person C moved in to the property as his main residence. In October 20XX, the property was transferred into the name of Person C as sole owner of the property. You received no consideration upon transfer of the property to Person C. You have stated that the rental income was used to pay off the housing loan and Person C made any shortfall payments required. You also stated that Person C repaid the full amount of the undocumented unsecured personal loan.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 116-30

Reasons for decision: Summary: Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). When considering the disposal of your 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 owner of the property. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title. Taxation Ruling TR 93/32 (TR 93/32) deals with the division of net income or loss between rental property co-owners. If the equitable interest does not follow the legal title, there is some basis for the profit or loss to be distributed on the equitable and not the legal basis. However, paragraph 41 of TR 93/32 states the following: We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title. While this ruling deals with net income or loss from a rental property, paragraph 42 explains that any capital gain or loss should be apportioned on the same basis. In your case, legal title to the property was in all three names. Net income or losses were declared in income tax returns of each of the owners for the financial years during which the property was being used as a rental property. This income or loss was divided between each of the owners in equal one third proportions. As such, each of the owners of the property will be responsible for their portion of any capital gains tax liability. It is the ownership of the asset when it is disposed of that determines the CGT liability, not whether any proceeds are received at the time of disposal. CGT event A1 occurred in October 20XX as the change in ownership occurred with the issue of the Title of Deed for the property stating that Person C is the sole owner. Any capital gain or loss from this change in ownership will need to be included in your income tax return for the 20XX-XX financial year. There is no allowance within the legislation in relation to your entitlement to an exemption from CGT, nor are you able to transfer your CGT liability to a third party.