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Edited version of your written advice

Authorisation Number: 1012918995109

Date of advice: 27 November 2015

Ruling

Subject: Capital gains tax: Transfer of dwelling/redemption of units

Question 1

Will capital gains tax (CGT) event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the Unit Trust when it transfers a greater than 50% interest in the property to a unit holder as consideration for the redemption of their units in the Unit Trust?

Answer

Yes.

Question 2

Will the arrangement whereby an individual and the Unit Trust (and subsequently the individual, the individual's spouse and the Unit Trust) own the property as tenants in common give rise to a partnership within the meaning of section 995-1 of the ITAA 1997?

Answer

No.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the Unit Trust in respect of this arrangement?

No.

This ruling applies for the following period(s)

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

1 July 2022 to 30 June 2023

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

The scheme commences on

1 July 2015

Relevant facts and circumstances

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

The Unit Trust was established in the 1990s.

The trustees of the Unit Trust are an individual and their spouse.

The Unit Trust owns a residential property, consisting of a dwelling on a block of land that is less than 2 hectares in area (the property). The property was acquired after 20 September 1985.

The unit holders of the Unit Trust are an individual and the trustee of a self-managed super fund (the Super Fund).

There are a number of units in the Unit Trust. The individual holds greater than 50% of the units and the Super Fund holds the remaining units (less than 50% of the units). This structure was set up pursuant to professional advice received at the time the property was acquired.

The members of the Super Fund at all relevant times have been the individual and their spouse.

The tenants of the property at all relevant times have been the individual and their spouse. The individual and their spouse as tenants have paid on a regular basis an arm's length amount of rent to the Unit Trust as the landlord. The Unit Trust then distributes on a regular basis the net income of the Unit Trust to the unit holders pursuant to the terms of the deed of the Unit Trust.

The property has at all relevant times been the main residence of the individual and their spouse.

The individual and their spouse now wish to simplify their tax affairs and acquire an ownership interest in their main residence, and as such propose to undertake the following course of action.

Stage 1:

In the 20XX income year, the Unit Trust will redeem the individuals units in the Unit Trust for their market value. Rather than the Unit Trust redeeming the units for cash, it will redeem the units for an in-specie transfer of a greater than 50% tenancy in common interest in the property. This interest will be equal to the value of the individual's units, i.e. greater than 50% of the total value of the property.

The individual would then have a greater than 50% tenancy in common interest in the property and the Unit Trust would own the rest of the property.

The individual and their spouse as tenants will then pay a percentage of the market value of the rent to the Unit Trust. The payments of rent will be made in respect of the percentage of tenancy in common interest that will be held by the Unit Trust. The percentage of the property that the individual will own will not be income generating.

It is anticipated that the Unit Trust will make a capital gain from the disposal of a greater than 50% interest in the property to the individual, and that the individual will make a capital gain from the redemption of their units in the Unit Trust.

The trust deed of the Unit Trust does not give the trustees the power to make any unitholder 'specifically entitled' to capital gains, as defined in section 115-228 ITAA 1997.

At the end of the 20XX income year, the Super Fund will be the sole unit holder and, as such, will be presently entitled to all the net income of the Unit Trust, which will include the capital gain from the disposal of the greater than 50% interest in the property.

Stage 2:

It is proposed that, following the redemption of the individual's units, they will transfer half of their interest to their spouse. At a later time, the property will be sold to an unrelated entity. That is, the individual and their spouse, together with the Unit Trust will sell their interests in the property to an unrelated entity.

The sale is anticipated to happen sometime in the next 10 years.

Relevant legislative provisions

Section 97 of the Income Tax Assessment Act 1936

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Section 118-20 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Part IVA of the Income Tax Assessment Act 1997

Anti-avoidance rules

Part IVA of the Income Tax Assessment Act 1936

Reasons for decision

CGT event A1 and CGT event C2

When a beneficiary redeems their units in a unit trust for an in-specie transfer of property from the unit trust's assets, there are consequences for both the trustee and the unit holders of the unit trust.

CGT event A1 in section 104-10 of the ITAA 1997 happens if the trustee of a trust disposes of a CGT asset of the trust via an in-specie transfer to a beneficiary to redeem a beneficiary's interest in the trust. The trustee will make a capital gain if the capital proceeds are more than the cost base of the asset at the time it is disposed of.

In addition, CGT event C2 in section 104-25 of the ITAA 1997 happens to the unit holder upon redemption of their units. The unit holder will make a capital gain if the capital proceeds from the redemption are more than the cost base of the unit in the unit trust.

In this case, the Unit Trust will make a capital gain under CGT event A1 upon the in-specie transfer of a proportion of the property to the individual. The individual will make a capital gain under CGT event C2 as a result of the redemption of the units in the Unit Trust.

Creation of a partnership interest

Taxation Ruling TR 93/32 provides guidance on the division of net income between co-owners. Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land.

Partnership is defined in the various State and Territory partnership acts as "the relation which subsists between persons carrying on a business in common with a view of profit"1. Subsection 6(1) of the ITAA 1936 defines partnership as 'an association of persons carrying on business as partners or in receipt of income jointly but does not include a company'.

An important ingredient of the definition is "carrying on a business". As noted at paragraph 15 of TR 93/32, without this ingredient, there can be no partnership at general law.

In your case, the individual, their spouse and the Unit Trust will hold their respective interests in the property as tenants in common. The individual and their spouse will pay rent to the Unit Trust at a percentage of the market value of the rental property reflecting their use and enjoyment of the dwelling in accordance with the Unit Trust's ownership interest. There is only one property owned by the parties as tenants in common.

Owning and renting one property does not amount to carrying on a business. Accordingly there is no partnership interest created between the individual and their spouse and the Unit Trust at general law.

Furthermore, as the individual and their spouse will be paying rent to the Unit Trust for the use and enjoyment of its interest in the property, the individual and their spouse and the Unit Trust will not be in receipt of income jointly, and therefore will not be a 'partnership' under the extended definition of that term in subsection 995-1(1) of the ITAA 1997.

Part IVA

Part IVA of the ITAA 1936 may apply to a transaction if it is determined that there is:

In the Unit Trust's case, the scheme consists solely of the disposal by the Unit Trust of an interest in the property for its market value. The Unit Trust will make a capital gain from this transaction, which will flow through to the Super Fund as sole unit holder of the Unit Trust. The outcome of the transaction for the Super Fund will be that it will be presently entitled to the capital gain resulting from the disposal of an asset by the Unit Trust for its market value.

No tax benefit arises to the Unit Trust from this transaction as compared to any reasonable alternative postulate or counterfactual. Accordingly, Part IVA will have no application.

1 The Partnership Act of 1891 (QLD, SA, TAS); The Partnership Act of 1892 (NSW); The Partnership Act of 1958 (VIC); The Partnership Ordinance of 1963 ACT.

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