Edited version of private advice

Authorisation Number: 1051657233816

Date of advice: 08 April 2020

Ruling

Subject: CGT - D1 - creating rights - market value substitution

Question 1

Will entering into the legally binding Deed between you and M trigger capital gains tax (CGT) event D1?

Answer

Yes

Question 2

Will entering into the non-legally binding Deed between you and M trigger capital gains tax (CGT) event D1?

Answer

Yes

Question 3

If the answer to Questions 1 or Question 2 (or both) is Yes, will the Commissioner accept that you and M would not be dealing with each other at arm's length in connection with the CGT event D1 and the consideration you would be taken to have received from M would be the market value of M's Rights?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

M is the owner of a property (the property).

M acquired the property jointly with their late spouse in 19XX. M acquired her late spouse's interest in the property upon their death in 19XX.

The property has been M's main residence since acquisition.

M is X years of age and in receipt of the Age Pension.

B, C, D, E and F (collectively referred to as 'You') are M's family members.

D has been living with M since 19XX.

You and M intend to enter into either a legally binding Deed or a non-legally binding Deed.

Under both Deeds, M will transfer their ownership of the property to you on the agreement that you will look after M by allowing them to continue to live in the property (and if unable to continue to live there, finding suitable accommodation for them) and provide them with the level of care they need for the remainder of their life.

Under both Deeds, M will be obliged to contribute to the extent of any Government funded financial assistance, care or related benefits of the like that are received or reasonably able to be procured by them in respect of the relevant cost and you will meet any shortfalls.

After the property is transferred, you will be responsible for outgoings as detailed below:

(a)  Rates, taxes and the like;

(b)  Charges for utilities (for example: electricity, telephone, internet, gas, water, sewerage, waste disposal;

(c)  Compliance with requirements made by an authority with jurisdiction to make the requirement;

(d)  Maintenance, repair and replacement necessary to keep the accommodation in good order and condition;

(e)  The control and eradication of pests;

(f)   Maintenance, servicing and monitoring of all safety and emergency equipment;

(g)  Insurance against all reasonable risks;

(h)  Any excess or deductible payable under any insurance policy.

The terms of the two Deeds are basically the same except for clause 1 of the non-legally binding Deed which provides:

"This Deed is not intended to create legal relations or enforceable obligations and the parties intend to allow the demands of justice and good conscience to prevail if there is ever a need to resolve a dispute or issue that concerns the matters dealt with in the operative part of this Deed."

You have engaged an Actuary to provide an estimate of the costs of the obligations provided for under the two Deeds. The net value of the obligations for the remainder of M's life, after offsetting pension benefits has been estimated by them to be $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 subsection 116-30(2)

Income Tax Assessment Act 1997 subsection 116-30(4)

Reasons for decision

Creating contractual or other rights: CGT event D1

CGT event D1 happens under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) 'if you create a contractual right or other legal or equitable right in another entity.' The time of the CGT event D1 will be when the right is created.

In your case, both Deeds are basically the same with the exception of clause 1 of the non-legally binding Deed, which provides that it is not intended to create any legal relationship between them.

Under both Deeds, M would transfer their property to you and in return you would look after M by allowing them to continue to live in the property (and if unable to continue to live there, finding suitable accommodation for them) and provide them with the level of care they need for the remainder of their life.

This is more than a mere family or social arrangement. The arrangement is formal and documented in writing to provide evidence of the creation of the right created, irrespective of which version of the Deed is entered into.

It is considered that by entering into either of the Deeds you would be creating a legal and/or equitable right. Accordingly it is considered that CGT event D1 would happen at the time you enter into either version of the Deeds.

Capital proceeds from a CGT event D1

The capital proceeds from creating a contractual or other right are determined in accordance with the normal capital proceeds rules. There are a number of modifications to the application of the general rules when a CGT event D1 occurs, such as the market value substitution rule under section 116-30 of the ITAA 1997.

Under subsection 116-30(2) of the ITAA 1997, The capital proceeds from a CGT event are replaced with the market value of the CGT asset that is the subject of the event if:

(a) some or all of those capital proceeds cannot be valued

(b) those capital proceeds are more or less than the market value of the asset and either:

- the taxpayer and the entity that acquired the asset did not deal with each other at arm's length in connection with the event, or

- the CGT event is CGT event C2.

The 'CGT asset that is the subject of the event' is specified in the table provided in subsection 116-30(4) of the ITAA 1997. For CGT event D1, the CGT asset that is subject of the event is specified as 'the right you created'.

In your case, the capital proceeds you will receive are more than the market value of the CGT asset that is the subject of the event and it is considered that you and M did not deal with each other at arm's length. Therefore, the capital proceeds from the CGT event (the property valued at $X) will be replaced with the market value of the CGT asset that is the subject of the event which is the right you created.

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