Private ruling: Capital gains tax
Date of advice: 16 October 2024
Published: 25 November 2024
Ruling period: DDMMYYYY
Date scheme commenced: DDMMYYYY

Ruling: Q1: Did you have a CGT event A1 when you sold Lot X DP X in YYYY? | A1: Yes. | Q2: Can the cost base of Lot X DP X be determined by apportioning the purchase price and stamp duty of the Property between Lots X and X DP X on an area basis; including the cost of the residence and other improvements? | A2: Yes. | Q3: Are you entitled to a partial main residence exemption under Subdivision 118‐B of the Income Tax Assessment Act 1997 in relation to the disposal of Lot X DP X in YYYY? | A3: Yes.

Relevant facts and circumstances: X, X and Child A (The three family members) purchased X (the Property) in DDMMYYYY for $X as tenants in common in equal shares. The land area of the Property was X acres or X hectares. However, a meeting was later held with your solicitor and the transfer title was prepared and lodged as tenants in common but with unequal shares. The decision at the time was that Child A was to hold less than a one third share for asset protection purposes should they marry and divorce. This was despite the initial contract to purchase the property being tenants in common in equal shares (one third each) and the contribution to the purchase price that each individual paid towards the Property. On DDMMYYYY, settlement occurred and $X was paid using a bank home loan in joint names of the three family members (Account number X). The loan was secured with a mortgage over the Property. Stamp duty charges were $X and each paid one third. The three family members were also in a partnership and each shared partnership income and assets in thirds, however they did not have a written partnership agreement. Rental income was received from renting out the old fibro house on the Property. The rental income was treated as partnership income and the interest on the housing loan was treated as a partnership expense. The partnership was not in the business of buying, holding or selling land. It did not own land. The property was not purchased as a partnership asset or in the course of carrying on the partnership. The three family members held a joint bank account (number X) and it was not a partnership account. The housing loan repayments were paid from this account. Each paid one third. Council rates for the Property were paid from the partnership account (number X). In YYYY Child A obtained approval from the Council to build a new dwelling on the Property. The dwelling had to be completed before the Council would allow subdivision approval. Construction started in YYYY and the cost was $X. Child A used their money to pay for the dwelling. They borrowed from the bank and from family which they repaid all the repayments for. The Child A married on DDMMYYYY and moved onto the Property the next day in a caravan. They lived there continuously, while construction was completed on the home. Development consent was sought with the Council based on tenants in common in equal shares. A surveyor was engaged and the plan of subdivision was registered as DP X on DDMMYYYY which created Lot X DP X and was considered a separate asset to Lot X DP X. In MMYYYY, Lot X DP X was sold. All three family members were on the legal title and signed the sales contract. On DDMMYYYY, X and X received the sale proceeds of $X for Lot X DP X to their bank. Child A did not receive any of the Lot X sales proceeds. The Partnership between the three family members was subsequently terminated after the sale of the Property. Child A remained living on Lot X DP X where they had built their main residence. An area larger than 2 hectares adjacent to the house was fenced and occupied as a house back yard for private and domestic purposes. In YYYY, Lot X DP X was also sold for $X with a contract dated DDMMYYYY. All three family members were on legal title and signed the sales contract. The net proceeds of the sale were paid to Child A. X and X did not receive any of the Lot X sales proceeds. However, the bank had a mortgage over Lot X to secure business loans made to Child A. As X and X were also registered proprietors of Lot X the bank required that $X of the sale proceeds be placed in a bank term deposit in the names of X and X, and that an offset agreement be entered to give the bank a security interest over the term deposit to secure the liability of X and X under their guarantee. NAB then agreed to release X and X from their guarantee and to transfer the $X term deposit to Child A. None of the three family members are land developers or engage in property speculation. A X signed by your Child A dated DDMMYYYY in support of this ruling application where a copy of X drafted by your lawyer in YYYY in relation to Lot X DP X was also submitted.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 112-25 | Income Tax Assessment Act 1997 section 112-30 | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 Subdivision 118-B

Reasons for decision: Summary: Any capital gain or capital loss you made from the disposal of Lot X DP X in YYYY cannot be disregarded and must be included in your income tax return. This is based on your beneficial ownership being tenants in common in equal shares. As the CGT asset was held for longer than 12 months, as an Australian resident for tax purposes there is a 50% discount capital gain available when working out your net capital gain. | Detailed Reasoning - Detailed reasoning: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. CGT event A1, occurs with the disposal of a CGT asset. A CGT event A1 may arise when property is sold (section 104-10 of the ITAA 1997). When considering the sale of property it must be determined who had ownership of the property. The legal owner of the property is recorded on the title deed for the property issued under that state's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset. To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other. Trusts may be of three kinds: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title. | Detailed Reasoning - Express trust: An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. It is created by express declaration, which can be effected by some agreement or common intention held by the parties to the trust. For an express trust to be created it is necessary that there is certainty of the intention to create a trust, subject matter and the object of the trust. While trusts can be created orally, all state property law acts contain provisions that preclude the creation or transfer of interests in land except if evidenced in writing. | Detailed Reasoning - Constructive trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is dependent upon the order of the court. | Detailed Reasoning - Resulting or implied trusts: On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price. A resulting trust arises by operation of law. The evidence of the actual intention of the purchasers at the time of purchase is important. | Detailed Reasoning - Application to your circumstances: The X drafted by your lawyer in YYYY, and submitted to us in MMYYYY, is not contemporaneous written evidence of the three family members intentions in YYYY when the Property was first purchased. It does not evidence any intention in YYYY to hold separate identifiable portions of the whole X acres, in contrast to the ownership interests on the legal title. Because of a lack of contemporaneous written evidence from YYYY, it is also insufficient to establish that an express trust was created at that time and that X and X held any of the Property, or after subdivision Lot X or Lot X of DP X on formal trust Child A as beneficiary. As there is not a valid trust on the purchase of the Property, the requirements of section 106-50 of the ITAA 1997 cannot apply to your circumstances as Child A was not absolutely entitled to the CGT asset. There is no existence of a constructive trust as this would be dependent solely upon the order of a court. No such evidence has been provided from a court. We accept the beneficial ownership is different in your case to the legal ownership on the title deed with subdivision creating Lot X and Lot X of DP X, however it is based on tenants in common with an equal ownership share of the whole. All three family members were on legal title since YYYY so in this case it is only the percentages of ownership interest that can be adjusted when calculating any capital gain or capital loss on the disposal of the lots. You each held a one third ownership interest in the Property the entire ownership period, including after subdivision in YYYY. This is evidenced by the contributions to the initial purchase price which each of the three family members paid, being one third each. Subdivision is not a CGT event. The sale of Lot X DP X in YYYY was a CGT A1 disposal event and the capital gain or capital loss should have be reported based on the beneficial interest of tenants in common with an equal ownership (one third) share of the X acres. The sale of Lot X DP X in YYYY which is the subject of this ruling, was a separate CGT A1 disposal event and the capital gain or capital loss should also be reported based on the beneficial interest of tenants in common with an equal ownership (one third) share of the X acres. | Summary: The cost base can be apportioned as per section 112-25 and section 112-30 of the ITAA 1997 to the extent that these cost base elements have not already been included in the cost base when Lot X DP X was sold in YYYY. | Detailed Reasoning - Detailed reasoning: Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)? discusses apportioning costs on the basis of market values, or on a reasonable basis. For example, on an area basis. Apportion in a reasonable way, each element of the original cost base to each new asset that was created on subdivision. | Summary: A partial main residence exemption is available under section 118-185 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: This will be for a maximum of 2 hectares (XXX acres) and can apply from the point in time that you moved into the Property in the caravan on DDMMYYYY, until the sale in YYYY while the dwelling was your main residence for CGT purposes.