Published: February 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: CGT on acquisition of the life interest 1. Did the taxpayer acquire an asset, being a life interest in assets A, B and C at the time at which the Deed Granting Life Estate Interest is entered into in accordance with section 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A6: 

Relevant facts and circumstances: The grantors propose to grant a life interest in assets A, B and C to the taxpayer for a specific period of time measured by the life of an individual (Life in Being). The proposed rights of the taxpayer in relation to assets A, B and C under the arrangement will be referred to as the life interest. The proposed rights to be retained by the grantors in relation to assets A, B and C under the arrangement will be referred to as the remainder interest. The market value of assets A, B and C have been determined by an independent registered valuer applying the methodology set out in valuation report. The market value of the life estate interest is calculated by reference to the market value of the assets multiplied by the life interest factor. The consideration payable by the taxpayer to the grantors will be the market value of the life estate interest at the time it is granted. The life interest will come to an end by mutual agreement or when the 'life in being' dies. During the term of the life interest, assets A, B and/or C may be sold or otherwise dealt with subject to the mutual consent of the taxpayer and the grantors. If assets A, B and/or C are sold during the term of the life interest, the net sale proceeds are to be held on the same terms as the terms on which the assets are held. The proposed life interest will be brought into effect in accordance with a Deed Granting Life Estate Interest. The rights created under this Deed will constitute the creation of a legal life estate interest rather than an equitable life estate interest. When the 'life in being' dies all rights in relation to assets A, B and C will revert to each of the grantors.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-20 | Income Tax Assessment Act 1997 - Section 109-5 | Income Tax Assessment Act 1997 - Section 110-25 | Income Tax Assessment Act 1997 - Section 112-20 | Income Tax Assessment Act 1997 - Section 116-20

Reasons for decision: Detailed Reasoning - Question 1: Taxation ruling TR 2006/14 states that CGT event A1 happens if an original owner of real property disposes of a legal life interest to another person, that is, there is a change of ownership of part of the original asset from the original owner to the life interest owner. Section 109-5 of the ITAA 1997 states, in general, you acquire a CGT asset when you become its owner. For an A1 event, an entity disposes of a CGT asset to you when the disposal contract is entered into or, if none, when the entity stops being the asset's owner. Therefore, the taxpayer is taken to have acquired the asset, being a life interest in assets A, B and C, at the time at which the Deeds Granting Life Estate Interest are entered into. | Detailed Reasoning - Question 2: Under section 110-25 of the ITAA 1997, the cost base of the asset will include the money you paid, or are required to pay, in respect of acquiring it. The market value substitution rule in subsection 112-20(1) of the ITAA 1997 can apply where you did not incur any expenditure to acquire the asset or did not deal at arm's length. In this case, the market value of the life interests, as determined by an independent registered valuer, will be the amount paid, therefore, this will be cost base of the assets | Detailed Reasoning - Question 3: As discussed above, if an original owner of real property disposes of a legal life interest to another person, there is a change of ownership of part of the original asset from the original owner to the life interest owner. At that point, the life interest is a separate CGT asset that may be disposed of to a third party by the taxpayer (subject to the consent of the grantors). CGT event A1 will happen on disposal of the life interest. However, there will be no disposal of the remainder interest unless the grantors also dispose of the remainder interest, in which case, CGT event A1 will also happen to the remainder interest. | Detailed Reasoning - Question 4: Where the taxpayer disposes of any of its life interests, the market value of the asset will be the value of the life interest at that time. Where the taxpayer and the grantor dispose of their respective life and remainder interests to a third party at the same time, the capital proceeds will need to be apportioned to reflect that part of the total proceeds as is reasonably attributed to the life estate interest at that time. | Detailed Reasoning - Question 5: TR 2006/14 states (at paragraph 102) that, on the death of the life interest owner, CGT event C1 in section 104-20 of the ITAA 1997 happens. | Detailed Reasoning - Question 6: On the death of the life in being, the taxpayer will receive no money or property nor will it be entitled to receive any money or property. Therefore, the capital proceeds from the event will be nil.

2. Is the cost base of the life estate interest acquired by the taxpayer the consideration paid by the taxpayer to acquire the life estate interest? | CGT if assets A, B and C are sold or transferred: 3. Does CGT event A1, under subsection 104-10(1) of the ITAA 1997 happen to the remainder interest in assets A, B and C when the taxpayer sells or transfers the life estate interest? | 4. Are the capital proceeds under subsection 116-20(1) of the ITAA 1997 from the sale of the life estate interest in asset A, B and C that part of the total proceeds as is reasonably attributed to the life estate interest at that time? | CGT if life in being dies: 5. Does CGT event C1 under subsection 104-20(1) of the ITAA 1997 happened to asset A, B and C on the death of the life in being? | 6. Are the capital proceeds received by the client as a consequence of CGT event C1 occurring nil in accordance with section 116-30(1) of the ITAA 1997?