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Edited version of your written advice
Authorisation Number: 1012791384286
Ruling
Subject: CGT event A1 - disposal of a CGT asset
Question
Does the company have to pay capital gains tax if the property title is transferred from the company name to your name?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015.
Year ending 30 June 2016.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
In 20XX you bought a property in your name.
In 20YY you transferred the title of the property to your company's name ('your company' or 'the company').
You are planning on closing or selling your company. You are planning on retiring in within the next year.
You are considering transferring the property title back to your name from the company.
The property value has increased considerably since the property was transferred to the company.
There is still also a considerable outstanding amount left on the property loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20.
Income Tax Assessment Act 1997 section 112-20.
Income Tax Assessment Act 1997 Subdivision 118-B.
Income Tax Assessment Act 1997 section 152-10.
Income Tax Assessment Act 1997 section 152-40.
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital loss or gain is made as a result of a capital gains tax (CGT) event. The most common event is CGT event A1 which happens when an entity disposes of a CGT asset to another entity. The time of the event is when a contract of sale is entered in to, or if there is no contract, when the change of ownership occurs. CGT assets include real estate acquired on or after 20 September 1985.
Market Value substitution rule
If you receive nothing in exchange for a CGT asset, for example, you give it away; you are taken to have received the market value of the asset at the time of the CGT event A1.
Similarly if the company's asset is not disposed of at arm's length, then section 112-20 of the ITAA 1997 also applies so that you are taken to have received the market value of the asset at the time of the CGT event.
In your situation, the company will be deemed to have received market value for the property at the time the property transfers to you even if the company receives no capital proceeds.
Main residence exemption not applicable
Subdivision 118-B of the ITAA 1997 can generally disregard a capital gain or capital loss that happens to a dwelling that is a main residence, subject to certain conditions.
Although the property is your main residence, the company is the entity disposing of the interest in the asset. Subsection 118-110(1)(a) of the ITAA 1997 provides that the entity disposing of the interest must be an individual. Therefore, the company is not exempt under this provision from paying capital gains tax on any capital gains realised.
Small business CGT concession eligibility and the active asset test
Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. One of these conditions is that the CGT asset being disposed of satisfies the active asset test.
Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Further, an asset whose main use is to derive rent, cannot be an active asset.
In your case, the company asset (the property) was used by you as your private and domestic residence and not in the course of carrying on a business. Accordingly the property is not considered an active asset of the business and the small business CGT concession is not available.
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