Private ruling: Capital gains tax event A1 - transfer of property
Date of advice: 14 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will Capital Gains Tax (CGT) event A1 be triggered upon the transfer of the property to D? | A1: Yes | Q2: Will you be assessed on any capital gain made in relation to the change in ownership? | A2: Yes

Relevant facts and circumstances: You acquired the property in 20XX jointly with your spouse. You acquired the property with the intention of providing a home for D and their family. You made an agreement with D that they would make payments directly into your mortgage to assist meeting the mortgage repayments. Payments into your mortgage have been made by you, D and D’s partner over the period of your ownership. You declared net rental losses relating to the property in your 20XX-XX to 20XX-XX income tax returns. You paid the property rates, maintenance and upkeep costs for the property. In 20XX you contemplated selling the property, however it did not eventuate. In 20XX your D and their family went overseas to live with their partner’s family. Whilst overseas, D did not make payments to the mortgage. You resided at the property during the time D was overseas. Upon D’s return from overseas in 20XX, D recommenced making payments to the mortgage. You intend to transfer the title of the property to D. You have not decided what consideration D will be required to pay in relation to the transfer.

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. A legal owner is the individual who has their name on the legal documents associated with the CGT asset, an example would be the title deed for a property. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner of a CGT asset that is liable for capital gains tax upon sale of the assets. A beneficial owner is defined in Taxation Ruling IT 2486 and Taxation Determination TD 92/106. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust. In your case, you became the legal owner of the property in an effort to assist D to obtain a home. A family agreement was made allowing D and their family to live in the property, paying you an amount to assist meeting the mortgage payments. You have made financial contributions to the purchase and upkeep of the property including the payment of property rates and maintenance costs. You declared net rental losses in your income tax returns for the 20XX-XX to 20XX-XX income years. Although you allowed D to reside in the property, it is considered that you maintained the beneficial entitlement to the property. Therefore you are both the legal and beneficial owner of the property and upon the transfer of the property to D, CGT event A1 will trigger. Any capital gain or loss from this change in ownership will need to be included in your income tax return for that financial year. | Detailed Reasoning - Further issues to consider: Market value substitution rule Where you receive consideration that is more or less than the market value of the asset and you and the entity that acquired the asset from you did not deal with each other at arm’s length, subsection 116-30(2) of the ITAA 1997 provides that you will be taken to have received the market value of the asset of the time of the CGT event.