Edited version of your written advice

Authorisation Number: 1012771650898

Ruling

Subject: CGT - main residence exemption

Question 1

Will you be liable for any capital gains tax (CGT) liability relating to the change in ownership that occurred when the sole ownership of the property was transferred to you?

Answer

No

Question 2

Will you be liable for any capital gains tax liability when the property is eventually sold?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The contract for the purchase of the property, listing Person A, Person B and yourself as joint purchasers was signed in 20XX.

At the date of contract, you were under 18 years of age and therefore not legally able to obtain finance for the purchase.

Person A and Person B obtained finance of $XXX,XXX for the purchase of the property and you were listed as guarantor on this loan.

Person A and Person B state that they provided you with an undocumented, unsecured personal loan for $XX,XXX. This loan was to cover the following costs which were paid by Person A and Person B in relation to the purchase of the property:

• Deposit $XX,XXX

• Stamp Duty $X,XXX

• Residual amount to make up purchase price $XX,XXX

The property settled in 20XX.

The Title Deed issued in 20XX for the property, lists Person A, Person B and yourself as joint tenants.

The property was used as a rental property from 20XX to 20XX.

During the property's rental period net rental income and losses were declared in all three party's income tax returns for the relevant financial years.

In 20XX you moved in to the property as your main residence.

In 20XX, the property was transferred into your name as sole owner of the property.

You paid no consideration to Person A and Person B upon transfer of the property.

The rental income from the property was used to pay off the housing loan and you made any shortfall payments required. Person A and Person B also stated that you repaid the full amount of the undocumented unsecured personal loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 paragraph 118-110(1)(b)

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

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 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. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title.

Taxation Ruling TR 93/32 (TR 93/32) deals with the division of net income or loss between rental property co-owners. If the equitable interest does not follow the legal title, there is some basis for the profit or loss to be distributed on the equitable and not the legal basis. However, paragraph 41 of TR 93/32 states the following:

We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

While this ruling deals with net income or loss from a rental property, paragraph 42 explains that any capital gain or loss should be apportioned on the same basis.

In this case, legal title to the property was in all three names. Net income or losses were declared in income tax returns of each of the owners for the financial years during which the property was being used as a rental property. This income or loss was divided between each of the owners in equal one third proportions. As such, each of the owners of the property will be responsible for their portion of any capital gains tax liability. It is the ownership of the asset when it is disposed of that determines the CGT liability, not whether any proceeds are received at the time of disposal.

You acquired an interest in the property (one third) when the property was initially acquired in 20XX. As a result of Person A and Person B transferring the title into your name as the sole owner, you acquired a second interest (the remaining two thirds) in the property in 20XX.

In accordance with TR 93/32, Person A and Person B will make a capital gain or loss as a result of disposing of their interest in the property to you. As you did not dispose of any of your interest in the property at this time, you will not make a capital gain or loss. There is no allowance within the legislation to enable the transfer of a CGT liability to a third party.

When you eventually dispose of the property, CGT event A1 will occur in relation to both of your interests in the property. At this time you will make a capital gain or loss and will be liable for any resulting CGT.

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