Private ruling: Downsizer contributions
Date of advice: 27 March 2019
Published: May 2019
Ruling period: Period ending 30 June 2019
Date scheme commenced: Scheme has not commenced yet.

Ruling: Q1: Does the ‘meaning of ownership interest in land or a dwelling’ requirements under section 118-130 of the Income Tax Assessment Act 1997 (ITAA 1997) assist in establishing the ‘ownership test’ under subsection 292-102(2) of the ITAA 1997? | A1: Yes. | Q2: Will the 10-year ownership condition under subsection 292-102(2) of the ITAA 1997 be satisfied where the taxpayer built and occupied a house on land for which access, usage rights and purchase rights were granted by way of agreement with the landowner? | A2: Yes

Relevant facts and circumstances: 1. X and Y built a house in 2004. X and Y resided at this property, and have treated this property as their main residence since this time. 2. The land the house was built on was owned by the Parent of the Y. 3. Before construction a written agreement was entered into between the X and Y and Y’s Parent to have full use and enjoyment of a house site on the property for the purposes of constructing a house. Included in this agreement was a right to access this dwelling. 4. The consideration for the use of the house site by the X and Y will be equivalent to the price paid by the residential developer, when the property as a whole is subdivided in the future - for a similar house site in a nearby development. 5. The agreement was to continue for 80 years, or until the property owned by Y’s Parent is sub-divided and a portion of the property which the house would sit on is transferred to X and Y. The agreement was to bind any successors in title of the land. 6. In 2005, Y’s Parent passed away, and a testamentary trust was formed under the will through which the property was held. 7. There will be a realignment of an existing lot boundary to create a lot which will encompass the house and land. 8. X and Y will acquire the house and land from the testamentary trust at market value in accordance with the agreement. 9. Sometime after this acquisition X and Y will sell the house and land. They wish to make associated downsizer contributions to their respective superannuation funds.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-130 | Income Tax Assessment Act 1997 section 292-102 | Income Tax Assessment Act 1997 paragraph 292-102(1)(b) Treasury Laws Amendment (Reducing the pressure on housing affordability measures No.1) Bill 2017 – Explanatory Memorandum

Reasons for decision: Summary: ‘Ownership interest’ is a defined term for the purposes of the ITAA 1997. Accordingly the definition contained with section 118-130 of the ITAA 1997 is of assistance in assessing eligibility to make a downsizer contribution under both subsection 292-102(2) and subparagraph 292-102(1)(b) of the ITAA 1997, as these aspects of the downsizer law refer to the defined term of ‘ownership interest’. Provided that an ownership interest, in accordance with subsection 292-102(2) of the ITAA 1997, was held at all times preceding the disposal of the dwelling, the ten year ownership test will be met. | Detailed Reasoning - Detailed reasoning: 10. Subparagraph 292-102(2)(a) of the ITAA 1997 requires that, in order to make a downsizer contribution, at all times during the 10 years just before disposal: i. The old interest was held by you, your spouse or your former spouse; or ii. An ownership interest in the land on which the dwelling is situated was held by you, your spouse or your former spouse. 11. The ‘old interest’ is the ownership interest in the dwelling that is disposed of in accordance with 292-102(1)(b) of the ITAA 1997. 12. Subsection 118-130(1) of the ITAA 1997 provides that a person has an ownership interest in land or a dwelling if they have a legal or equitable interest in it or a right to occupy it. 13. We note that subparagraph 292-102(2)(a)(ii) of the ITAA 1997 does not require that the individual (or their spouse) has held an ownership interest of the same nature over the period of the ten years. For example, the relevant interest could be a right to occupy for part of that period, and a different kind of interest for the rest of the period, as long as an ownership interest is held at all times for the ten years preceding the disposal. | Detailed Reasoning - Right to occupy:: 14. In accordance with the above provisions relating to ownership interests, a right to occupy the land on which the dwelling is situated does convey the required ownership interest to count toward the 10 year ownership requirement. A person with a right to occupy the dwelling for a period will be entitled to take that period into account for the purposes of this requirement. 15. If an individual’s right to occupy is replaced seamlessly with an ownership interest in the dwelling itself, which is capable of being disposed of in accordance with 292-102(1)(b) of the ITAA 1997, they are able to aggregate these periods in respect of satisfying subparagraph 292-102(2) of the ITAA 1997. 16. For the purposes of assessing the satisfaction of the 10 year ownership test, it is apparent that a right to occupy was granted to X and Y by Y’s Parent as a result of the agreement in 2004. Clauses 2(c) and 3(a) of the agreement are relevant to this conclusion. 17. If, as proposed in the ruling request, the dwelling is purchased in accordance with the agreement by X and Y from the successors in title, they will also later have an ownership interest in the dwelling in the form of an estate in fee simple (a legal interest) pursuant to 118-130(1) of the ITAA 1997. 18. X and Y will be able to consider these combined ownership periods for the purposes of satisfying the 10 year ownership test in 292-102(2) of the ITAA 1997. Based on the facts provided, there is no reason to suggest that there will be a period in which there is no ownership interest held by X and Y as a result of the transition to the holding of the legal interest. 19. It should also be noted that the main residence element of the downsizer eligibility under 292-102 (1)(d) must be met in relation to the subsequent disposal of the interest in the dwelling held by X and Y in order for them to be eligible to make a downsizer contribution. Given that the dwelling was occupied from the date of construction, the main residence exemption can be applied to the eventual sale of the dwelling. | Detailed Reasoning - Conclusion:: 20. Based on the information provided, an ownership interest in the land underlying the dwelling is held at all times for the purposes of subparagraph 292-102(2)(a)(ii) of the ITAA 1997. As a result, the time in which the right to occupy was granted is able to be considered in assessing the 10 year ownership requirements of the downsizer law. Given that this interest was held at least 10 years prior to this advice, the ten year ownership test can be satisfied. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 118-130 Income Tax Assessment Act 1997 section 292-102 Income Tax Assessment Act 1997 paragraph 292-102(1)(b) Treasury Laws Amendment (Reducing the pressure on housing affordability measures No.1) Bill 2017 – Explanatory Memorandum