Private ruling: Capital gains tax
Published: September 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the retention of each life interest trigger capital gains tax (CGT) event A1? | A1: No. | Q2: Will the disposal of each remainder interest be treated as a partial disposal of a CGT asset? | A2: Yes. | Q3: Will the main residence exemption apply to the disposal of the remainder interest in property A? | A3: Yes. | Q4: Will the cost base of the remainder interest in property A be equal to the market value of the remainder interest at the time the remainder interest is created? | A4: Yes. | Q5: Will the cost base of the remainder interest in property B be equal to the market value of the remainder interest at the time the remainder interest is created? | A5: Yes. | Q6: Can property A be treated as the main residence of the remainder man from the date the remainder interest was first acquired? | A6: No.

Relevant facts and circumstances: Individual A is the registered proprietor of two properties. Individual intends to transfer both the properties to individual B. Individual A will retain a legal and equitable life interest in the properties. Individual A resides at property A and is eligible to elect this property as their main residence for the purposes of the main residence exemption. On individual A's death, individual B intends to reside at property A when 'first practicable' to do so. Individual A also intends to transfer certain personal possessions comprising both personal use assets (such as, furniture, motor vehicle, electrical equipment) and collectables (such as, jewellery, artworks, antiques) to individual B. Individual A will retain an equitable life interest in the possessions until their death.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 section 118-135

Reasons for decision: Detailed Reasoning - Question 1 & 2: Taxation Ruling TR 2006/14 deals with the capital gains tax consequences of creating life and remainder interests in a property. The grant of a life interest in real property creates an estate which entitles the holder to possession of the real property for the lifetime of the measuring life. Paragraph 85 specifically deals with legal life and remainder interests and states: Bringing a legal life interest into existence involves a disposal of part of an existing CGT asset in a similar way to the disposal of a percentage interest in it. The part of the original asset that is not disposed of to the life interest owner is the legal remainder interest. CGT event A1 in subsection 104-10(1) happens if a CGT asset is disposed of. If an original owner of real property disposes of a legal life interest to another person CGT event A1 will happen. This is because there is a change of ownership of part of the original asset from the original owner to the life interest owner. In this case, as individual A will retain the life interest in both properties, there will be no CGT event in relation to the life interests. However, the disposal of the remainder interest in each property is considered a partial disposal of a CGT asset. Therefore, CGT event A1 will occur when the remainder interests are disposed of. | Detailed Reasoning - Question 3: Generally, you ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: • the dwelling must have been your home for the whole period you owned it • you must not have used the dwelling to produce assessable income, and • any land on which the dwelling is situated must be two hectares or less. You may be eligible for a partial main residence exemption if: • the dwelling was your main residence for only part of the period you owned it • your partner or dependents have separate homes • you have used part of the property (either the dwelling or the land) to produce assessable income, or • the land is more than 2 hectares. In this case, property A is the main residence of individual A. When the remainder interest is disposed of the capital gain (or loss) from the CGT event can be disregarded. | Detailed Reasoning - Question 4 & 5: The cost base of a CGT asset is made up of five elements. You need to add together all these elements to work out your cost base for each CGT asset. The first element of the cost base is money paid or property given for the CGT asset. In some cases, the general rules for calculating the cost base and reduced cost base have to be modified. For example, you substitute the market value for the first element of the cost base and reduced cost base if: • you did not incur expenditure to acquire the asset • some or all of the expenditure you incurred cannot be valued • you did not deal at arm's length with the previous owner in acquiring the asset. This is known as the market value substitution rule for cost base and reduced cost base. In this case, the cost base of the remainder interest in both properties will be equal to the market value at the time the interests are created. | Detailed Reasoning - Question 6: A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time (section 118-135 of the ITAA 1997). If you purchased the dwelling, this would generally be the date of settlement of the purchase contract. However, if there is a delay in moving in because of illness or other unforeseen circumstances and you move into the dwelling as soon as the cause of the delay is removed - for example, you recover from the illness - the exemption may still be available from the time you acquired your ownership interest in the dwelling. If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest. ATO ID 2001/744 considers the application of section 118-135 of the ITAA 1997. In this scenario the taxpayer acquired a dwelling that was occupied by a protected tenant. The taxpayer then sought to obtain possession through court proceedings. Some years later the taxpayer was successful in obtaining possession and the dwelling became their main residence. In this situation it was considered that the taxpayer did not move into the dwelling when it was first practicable to do so within the meaning of section 118-135 of the ITAA 1997. The Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998) explains that: The rewritten provision takes account of situations where, for example, there is a delay in moving in because of illness or other reasonable cause. The exemption does not extend to cases where an individual is unable to move into the dwelling because it is being rented out. However, it would cover a period after the end of the tenancy if the owner could not take up residence immediately because of the nature of repairs required to the dwelling. In this case, individual B will not move into property A until individual A passes away. While we acknowledge that individual A holds the life interest, we consider they are akin to a 'protected tenant' as discussed in ATO ID 2001/744. Section 118-135 of the ITAA 1997 takes into account of situations where there is a delay in moving in because of illness or other reasonable causes. The exemption does not extend to circumstances where a life tenant is occupying the property. Therefore, section 118-135 of the ITAA 1997 will not apply to individual B.