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Edited version of your written advice
Authorisation Number: 1012741356278
Ruling
Subject: Capital gains tax
Question 1
Will you make a capital gain on the transfer of 50% share of a rental property to your partner?
Answer
Yes
This ruling applies for the following period
Income year ended 30 June 2014
The scheme commences on
On or after 1 July 2001
Relevant facts and circumstances
In X you purchased a rental property.
The property was purchased in your name.
The property was purchased form a bank loan from an account you hold jointly with your partner.
Repayments for the property were made from a joint bank account.
The property was and still is tenanted and you have reported the income and claimed the deductions relevant to the property in your relevant as the sole owner.
In X your partner applied to have their name included in the title.
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 106-50
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if, and only if, a capital gains tax (CGT) event happens to a CGT asset.
Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) defines a disposal as:
You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
Where you do not receive consideration for the transfer subsection 116-30(1) of the ITAA 1997 will apply. It states:
If you received no *capital proceeds from a *CGT event, you are taken to have received the *market value of the *CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)
The combined effect of the above subsections is that where a party transfer any part of the title of an asset it legally owns it will trigger a CGT event. Where no consideration is received, if the capital proceeds including the market value of the relevant share of the property are greater than the cost base of that share of the property, you will make an assessable capital gain.
The only instance of where you dispose of legal title to a CGT asset that will not give rise to a CGT event are where you continue to be the beneficial owner of the property or where you are a trustee and there is a beneficiary that is absolutely entitled to the property (see section 106-50 of the ITAA 1997).
Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:
The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.
Further, at paragraphs 21 and 22 of TR 2004/D25 it states;
A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).
Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.
Application to your circumstances
When you transferred title of the property to joint names you disposed of half of your interest in the property under the meaning of section 104-10 of the ITAA 1997. Consequently CGT event A1 occurs and you will be deemed to have received 50% of the market value of the property as capital proceeds.
You have provided insufficient evidence to demonstrate that there was any sort of trust arrangement implied or otherwise which would result in you remaining the beneficial owner of the property or that your partner was absolutely entitled to the asset against you as a trustee. Any such finding would be rebutted by the presumption or the fact that you have declared the income and claimed the deductions as the sole owner of the property for a period of X years.
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