Edited version of private ruling

Authorisation Number: 1011437120569

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Ruling

Subject: CGT - Acquisitions and disposals

Questions and answers:

Will a capital gains tax (CGT) event occur during the income year in which you dispose of half of your ownership interest in a property to your spouse?

Yes.

Will you have a CGT liability when you dispose of half of your ownership interest in the property to your spouse?

Yes.

Can you defer any part of your CGT liability until you dispose of the entire property?

No.

Is a valuation provided by a qualified valuer; or a valuation based on reasonably objective and supportable data that has been determined by you considered to be an acceptable method of valuation for CGT purposes?

Yes.

Can you value the property and pay the entire CGT liability upon disposal of the half share in the property that you will gift to your spouse and the remaining half ownership interest in the property that you will retain?

No.

This ruling applies for the following period/s:

Income year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You purchased a property after 20 September 1985.

The property consisted of a dwelling and land.

You purchased the property in your name only.

You leased out the property.

You and your spouse sold your main residence at another location.

You and your spouse later moved into the dwelling that you hold in your own name and you have treated the dwelling as your main residence since then.

You now intend to transfer half of your ownership interest in the property to your spouse for no consideration.

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 110-25,

Income Tax Assessment Act 1997 Section 112-20,

Income Tax Assessment Act 1997 Section 115-100,

Income Tax Assessment Act 1997 Section 116-10 and

Income Tax Assessment Act 1997 Section 116-30.

Reasons for decision

You make a capital gain or a capital loss when a capital gains tax event (CGT) event happens to a CGT asset that you own.

Land and dwellings are CGT assets.

When a change of ownership in a CGT asset occurs from you to another entity a CGT event occurs. If you transfer a 50% ownership interest in your property to your spouse a CGT event A1 will be the applicable CGT event.

The time of the CGT event is when you sign the contract to dispose of the asset or if there is no contract, the time of the event is when you stop being the asset's owner.

You include any capital gains you have realised throughout an income year in your annual income tax return. CGT is not a separate tax; rather it is a part of your assessable income and is taxed at your marginal tax rate.

Capital proceeds

You make a capital gain when you receive more for the disposal of the asset than what you paid to acquire the asset.

Whatever you receive as a result of a CGT event is referred to as your capital proceeds.

Cost base

In order to determine whether you have realised a capital gain or a capital loss, you must work out your cost base.

The amount you paid to acquire a CGT asset is known as your cost base. The cost base of a CGT asset is made up of five elements:

First element: the money you paid or property you gave for the asset;

Second element: the incidental costs of acquiring or selling it;

Third element: costs of owning it;

Fourth element: costs associated with increasing or preserving its value, or with installing or moving it; and

Fifth element: what it has cost you to preserve or defend your title or rights to it.

You will need to determine the reduced cost base of a CGT asset if a capital loss has been realised.

The reduced cost base has five elements all of which are the same as those for the cost base, except the third one. The third element is instead any amount that is assessable because of a balancing adjustment for the asset, or would be assessable if certain balancing adjustment relief was not available.

Note: A balancing adjustment relates to depreciating assets. Eligible taxpayers can claim an assets decline in value over a set period of years and if they sell the asset before the whole amount has been claimed, a balancing adjustment is required.

Non-arms length transaction

There are special rules that apply if a CGT asset is given or sold to a related party for no cost or at a below market value price. Such a transaction is considered to be a non-arms length transaction and requires modifications to the relevant cost base and capital proceeds used to calculate your capital gain or loss.

The market value substitution rule takes effect if you did not deal at arms length with another entity in connection with the event.

The market value substitution rule, broadly, is when the capital proceeds are replaced with the market value of the asset.

Subsection 116-30(1) of the ITAA 1997 states that where you receive no capital proceeds from a CGT event, you are taken to have received the market value of the asset at the time of the event.

For example, if you proceed and transfer half of your ownership interest in your property to your spouse for no monetary consideration, it will be considered that you received market value at the date that you signed the contract to dispose of part of your ownership interest in the property; or when your ownership interest in the property is handed over if there is no contract.

The market value of the property is worked out at the time the CGT event happens.

Property valuations

In working out the market value of your property, Taxation Determination TD 10 lists what are acceptable valuation methods for CGT purposes.

Where the market value of a property needs to be determined, you can choose to:

- obtain a detailed valuation from a qualified valuer; or

- compute your own valuation based on reasonably objective and supportable data.

Main residence exemption

When a property has been used for income producing purposes and you have not used that property as your main residence at any stage during the period that you owned it, you will not be entitled to a full or partial main residence exemption from CGT upon disposal of the property.

To be entitled to a main residence exemption, you must have lived in the property and established the property as your main residence, any land on which the dwelling is situated must be less than two hectares in size and you must not have used the property to produce assessable income. You may only have one main residence at a time.

Application of the law to your circumstances

When you transfer part of the property that you own into your spouse's name, the change of ownership will trigger a CGT event A1. The date that the CGT event takes place is the date that you sign a contract to dispose of part of your ownership interest in the property or if there is no contract, when you stop being the asset's owner.

A capital gain that you realise from the sale or disposal of real estate in an income year must be included in that income year. When you transfer a part of your ownership interest in the property to your spouse, you include any capital gain realised in your income tax return in the income year in which the CGT event occurs.

You will realise a capital gain or loss on transfer of part of your ownership interest in the property to your spouse.

You cannot defer the inclusion of any capital gain you realise or are taken to have realised when you transfer part of your ownership interest in the property to your spouse. The only provision which allows a capital gain or loss in relation to real estate to be deferred is if an ownership interest is transferred to a spouse as a result of a marriage breakdown. Capital gains may be applied to offset current year capital losses and any carried forward capital losses from previous income years.

As you will be giving half of your ownership interest in the property to your spouse for no monetary consideration, you will have to use the market value substitution rule in order to determine your capital gain or loss as you have not dealt at arm's length with your spouse. The property will be deemed to have been sold for the market value on the date of transfer.

You will need to calculate your cost base and use the market value of the property at the time you transfer the property into your spouse's name as your capital proceeds amount.

If 50% of your cost base is less than 50% of the market value that you will be considered to have received for the property as at the date of transfer, then you will make a capital gain that must be included in your annual income tax return in the year in which the CGT event took place.

You leased the property out from when you acquired it until you and your spouse moved into the dwelling and established the dwelling as your main residence. From this date you will be entitled to a main residence exemption, provided that the land on which the dwelling is situated is less than two hectares and you are no longer using all or part of the property to produce assessable income. You calculate a partial main residence exemption as follows:

Total capital gain made from a CGT event

multiplied by

Number of days in your ownership period when the dwelling was not your main residence

divided by

Total number of days in your ownership period

As you have owned the property for more than 12 months and you acquired the property before 11:45am on 21 September 1999, you may choose to use the indexation method or the discount method to calculate your capital gain if you have realised one.

Further information on how to calculate your capital gain or loss, the Guide to capital gains tax (Nat 4151) is available to view and to order online at www.ato.gov.au

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