Private ruling: CGT – event C2
Date of advice: 25 October 2018
Published: January 2019
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the payments received by you and your spouse relating to the sale of the property not included in your assessable income as a gift? | A1: No | Q2: Are the payments received by you and your spouse relating to the sale of the property considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: Are the payments received by you and your spouse relating to the sale of the property assessable as a capital gains tax (CGT) event C2 under Part 3 of the ITAA 1997? | A3: Yes | Q4: Can you apply the CGT discount under Subdivision 115-A of the ITAA 1997 to any capital gain resulting from CGT event C2 happening? | A4: Yes

Relevant facts and circumstances: You are a partner in a partnership (the partnership) along with your spouse, A, B, C and D. The partnership carries on a business. You identified a property (the property) that you considered to be suitable for purchase by you and your spouse, the partnership or a related entity. You discussed the property with your partners and A, B, C and D decided to purchase the property through their self-managed superannuation fund (The Superannuation Fund). The Superannuation Fund had been established for A, B, C and D. You and your spouse are not members of The Superannuation Fund. The Superannuation Fund established a unit trust, The Unit Trust, which acquired the property. The property’s acquisition was funded partially by the partnership obtaining finance then permitting the four partners (A,B,C and D) to draw down on their capital accounts in the partnership, then make contributions to The Superannuation Fund. After acquisition, the property was leased to the partnership for use in the business. The trustees of The Superannuation Fund (A,B,C and D) along with you and your spouse, signed a document entitled “Acknowledgement” (the Acknowledgement) under which it was agreed that upon the sale of the property, you and your spouse would receive a percentage of the net sale proceeds. The relationship between the partners has since deteriorated. You and your spouse lodged a caveat over the property. In the Caveat it was stated that you had an interest in the property “pursuant to a resulting and/or constructive trust arising by operation of law from monetary contributions made by the Caveator towards the acquisition of the land”. You and your spouse commenced proceedings for the winding up of the partnership. You and your spouse then reached an agreement with A, B, C and D in relation to the property. The agreement reached was that A, B, C and D would undertake to do everything necessary to give effect to the Acknowledgement and in return you and your spouse would release the caveat over the property. The property was then sold. You and your spouse received a payment in satisfaction of the agreed one third of the net sale proceeds from the sale of the property. The payment was made in two instalments in the 2017 calendar year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 Part 3 | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 subsection 109-5(2)

Reasons for decision: Detailed Reasoning - Gift: Taxation Ruling TR 2005/13 provides guidance on whether the receipt of money constitutes a gift. The term ‘gift’ is not defined in the Income Tax Assessment Act 1997 (ITAA 1997), so it is taken to have its ordinary meaning. Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features: ● There is a transfer of the beneficial interest in property; ● The transfer is made voluntarily; the transfer arises by way of benefaction; and ● No material benefit or advantage is received by the giver by way of return. In doing so, the courts have recognised that the criteria may not be absolute and may involve a matter of degree. In determining whether a transfer is a gift, it is necessary to consider the whole set of circumstances surrounding the transfer. It is the substance and reality of the transfer that has to be ascertained. It is therefore necessary to take into account those acts, transactions, arrangements and circumstances that provide context and the explanation for the transfer. To qualify as a gift, the transfer of property has to be voluntary. The transfer must not have arisen from any obligation imposed by law, whether by contract or otherwise ( Leary v. Federal Commissioner of Taxation 80 ATC 4438 at 4439; 11 ATR 145 at 147 per Bowen CJ). In McPhail Owen J said: “it must appear that the property transferred was transferred voluntarily and not as a result of a contractual obligation to transfer it”. ( Federal Commissioner of Taxation v. McPhail 19 (1986) 11 CLR 11 at 116) In order to determine if the payment received was a gift, we need to look at the whole set of circumstances. The acquisition of the property was funded in part, by the partnership obtaining finance, then allowing M, D. A and U to draw down on their capital account to make contributions to the Superannuation Fund, which then acquired the property. Soon after the acquisition of the property, an agreement (the Acknowledgement) was entered into between you, your spouse, A, B, C and D, that at the time of disposal of the property you and your spouse would receive a percentage of the net sale proceeds. You and your spouse placed a Caveat on the property stating that you had an interest in the property “pursuant to a resulting and/or constructive trust arising by operation of law from monetary contributions made by the Caveator towards the acquisition of the land”. You agreed to release the caveat on the property after A, B, C and D agreed to undertake to do everything necessary to give effect to the Acknowledgement. In your circumstances, the payment you received from the net sale proceeds of the property is not considered a gift. The payment was not voluntary as there was a contractual obligation to transfer it, as per the written agreement (the Acknowledgement) made between all parties. | Detailed Reasoning - Ordinary income: Section 6-5(2) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, that is ordinary income. For an Australian resident taxpayer, assessable income includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: ● are earned ● are expected or relied upon ● have an element of periodicity, recurrence or regularity ● replace income. The payments you received were not earned as it does not relate to services performed. The payments were also one off payments and thus do not have an element of recurrence or regularity. Although the payments could be said to be expected, and perhaps relied upon, this expectation arises from the agreement made, rather than from a relationship to personal services performed. | Detailed Reasoning - Capital Gains Tax: Section 104-35 of the ITAA 1997 provides the circumstances in which a CGT event D1 happens. CGT event D1 happens if you create a contractual or other legal or equitable right in another entity. The time of the event is when you enter into the contract or create the other right. Section 104-25 of the ITAA 1997 provides the circumstances in which a CGT event C2 happens. CGT event C2 happens if your ownership of an intangible asset ends by the asset being satisfied. You make a capital gain as a result of a CGT event C2 happening if the capital proceeds from the ending are more than the asset’s cost base. At the time the Acknowledgement was created, you and your spouse acquired a right to receive a percentage of the net sale proceeds from the sale of the property, as a result of this right, CGT event D1 happened. Your right to receive a percentage of the net sale proceeds from the sale of the property as a result of the CGT event D1 happening is your CGT asset under section 108-5 of the ITAA 1997. You are taken to have acquired this right on entering the Acknowledgement agreement in accordance with subsection 109-5(2) of the ITAA 1997. You received two instalments in the 2017 calendar year in satisfaction of your right to receive a percentage of the net sale proceeds from the sale of the property. The CGT event C2 is taken to have happened when you received the second payment in full satisfaction of your right to receive payment (CGT event D1). Any capital gain or loss made from the CGT event C2 happening will need to be included in your assessable income for the year ending 30 June 2018. | Detailed Reasoning - Discount capital gains: A discount capital gain is a capital gain that satisfies the requirements of Subdivision 115-A of the ITAA 1997. To be a discount capital gain, a capital gain must: ● Be made by an individual, a complying superannuation entity, a trust, or by a life insurance company from a CGT event in respect of a CGT asset that is a complying superannuation asset. ● Result from a CGT event happening after 11:45am EST on 21 September 1999. ● Be worked out without the cost base being indexed, and ● Result from a CGT even happening to a CGT asset owned by the taxpayer for at least 12 months. In your case, you and your spouse are individuals, CGT event C2 occurred after 21 September 1999 and you have held the CGT asset (the right to receive one third of the net sale proceeds from the sale of the property) for over 12 months. As long as the cost base is not indexed you are able to apply the CGT discount to the capital gain made as a result of the CGT event C2 happening. The CGT discount applicable to individual taxpayers is 50%.