Private ruling: Capital gains tax
Published: May 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: On or after 1 July 1975

Ruling: Q1: Will section 106-50 of the Income Tax Assessment Act 1997 apply to the transfer of the property? | A1: No. | Q2: Will capital gains tax (CGT) apply to the initial transfer of your property that was purchased prior to 20 September 1985? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse purchased a property (the property) prior to 20 September 1985. You and your spouse used the property as security for a business loan with a bank. Your business failed. In 199X, the bank agreed to settle their debt. Due to the failure of your business and the consequential lack of income stability, you and your spouse were unable to obtain a loan to settle the debt. Your child agreed on your behalf to borrow funds to settle the debt. In 199X you and your spouse transferred the property to your child. It was agreed between the parties that upon repayment of the loan, your child would transfer the title back to you. You, your spouse and your child considered that you and your spouse were, and would remain, the beneficial owners of the property. You and your spouse have paid for all costs associated with the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 106-50. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 118-110 .

Reasons for decision: Summary: You and your spouse are not absolutely entitled to the property. The capital gains tax is disregarded on the initial transfer of the property to your child in 199X. | Detailed Reasoning - Absolute entitlement: Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property. Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if any only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss. Section 106-50 of the ITAA 1997 states that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the capital gains tax provisions in the ITAA 1997 apply to an act done by the trustee in relation to the asset as if you had done it. Draft Taxation Ruling TR 2004/D25 considers the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in the capital gains tax provisions in the ITAA 1997. In regards to the situation where more than one beneficiary has interests in a trust, TR 2004/D25 states at paragraph 24 that it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. The only circumstance where this would not be the case is where the trust assets are fungible. In your case, if a trust exists, the residential property legally owned by your child is the trust asset, and you are both the beneficiaries. As there is more than one beneficiary, the trust asset must be fungible. A residential property is not fungible: paragraph 94 of TR 2004/D25. Therefore, neither you nor your spouse can be considered absolutely entitled to the property. Because neither of you have either legal title to the property, or are absolutely entitled to the property if a trust exists, the capital gains tax provisions in the ITAA 1997 do not apply to you when a CGT event occurs in relation to the residential property. Rather, a capital gain or capital loss will be made by the legal owner of the property at such a time when a CGT event occurs | Detailed Reasoning - Capital gains tax: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. As you initially acquired the property prior to 20 September 1985, any capital gain or loss made on the transfer to your child is disregarded. Further issues for your consideration Generally, a capital gain from the disposal of your ownership interest in a dwelling that is your main residence can be disregarded. Section 118-110 of the ITAA 1997 provides that the following conditions must be met to qualify for a full main residence exemption (a partial exemption may be available in cases where any of the conditions are not met): · the dwelling must have been your home for the whole period you owned it, · you must not have used the dwelling (or the land on which it is situated and adjacent to) to produce assessable income, and the land on which the dwelling is situated must be 2 hectares or less.