Edited version of private advice

Authorisation Number: 1051778265732

Date of advice: 8 December 2020

Ruling

Subject: Legal and beneficial ownership of a rental property

Question 1

Can the capital gains and rental income/loss on the property be split according to the beneficial interest of the property?

Answer

Yes

Question

What is the first element of cost base under subsection 110-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997) for the 25 percent interest acquired in the property?

Answer

Under subsection 110-25(2) of the ITAA 1997 the first element of cost base would be the amount of money you paid to acquire the 25 percent interest in the property.

Taxation Ruling TR 93/32 Income Tax: rental property - division of net income or loss between co-owners explains that the loss or income from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

An equitable interest is an "interestheld by virtue of an equitable title (a title that indicates a beneficial interestin property and that gives the holder the right to acquire formal legal title) or claimed on equitable grounds, such as the interest held by a trust beneficiary."

A legal title refers to the responsibilities and duties the owner has in maintaining, using, and controlling a property. Legal title is the actual ownership of the property. The documented name of the property owner, as visible through the public records, typically describes the person with legal title.

The difference between an equitable interest versus a legal interest is that the latter is the only one that gives actual ownership of the property. Equitable interest establishes the person's financial interest in the property.

You provided evidence that:

•         you and your sibling purchased the property as tenants in common for $XXX in 20XX;

•         your sibling in 20XX intended to sell her 50 percent ownership of the property to yourself and to Person A;

•         the valuation of the apartment at the time of the sale was $XXX;

•         an error by your solicitor recorded the sale price of the apartment as $XXX which reflected 50 percent of the apartment's value;

•         the solicitor also incorrectly recorded that you and Person A were joint tenants rather than tenants in common which was how the property was held between yourself and your sibling;

•         you and Person A reported rental income in your individual tax returns on the basis of the 75 percent/25 percent split that you believed the property was owned;

•         once the error was identified you and Person A have taken steps to change the legal ownership to the 75 percent/25 percent ownership that was always assumed.

The Commissioner will accept that the beneficial interest of the property from when it was sold in 20XX was held 75 percent by you and 25 percent by Person A

Section 110-25 of the ITAA 1997 explains the cost base of an asset. Subsection 110-25(2) states that the first element of the cost base is:

a)         the money you paid, or are required to pay, in respect of acquiring it; and

b)         the market value of any other property that you gave, or are required to give, in respect of acquiring it (worked out as at the time of acquisition).

Therefore the $XXX that you paid for 25 percent of the property and the $XXX that Person A paid for the 25 percent of the property would be considered part of the first element of the cost base amount for CGT purposes.

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XXX and sibling XXX purchased an apartment on XX/XX/XXXX for $XXX.

They purchased it as tenants in common with a 50/50 ownership split.

In XX/XX/XXXX XXX advised that she wanted to sell her 50 percent of the apartment to the sibling and parent.

This sale was to be in the ratio of 25 percent to XXX and 25 percent to XXX as tenants in common.

A valuation of the property was undertaken and a value of $XXX was assigned to the apartment as a whole.

This reflected an ownership valuation of 50 percent $XXX for XXX and a sale price of $XXX to both XXX and XXX.

XXX and XXX then rented out the empty room and reported rental income/loss in their respective tax returns with a 75 percent and 25 percent ownership percentage.

XXX moved out of the apartment and the whole apartment was rented from XXX.

XXX, during XXXX, decided to sell her 25% ownership of the apartment to XXX.

During this sale process, you identified the following:

•         The transfer form back in XX/XX/XXXX was completed incorrectly, listing XXX and XXX as the transferors, instead of just XXX

•         The transfer sold 100% of the apartment for $XXX to both XXX and XXX as joint tenants, instead of 50% of the apartment with 25% being sold to XXX and 25% to XXX as tenants in common.

You contacted the previous lawyer who advised that they could lodge a section 68(14) of the Act with Revenue NSW, to show the correct ownership percentage and type without occurring additional stamp duty.

They will then lodge the transfer with Land Registry Services to correct the ration of the apartment ownership to XXX as 75% and XXX as 25% as tenants in common.

You have been advised that this transfer cannot be backdated to XX/XX/XXXX so will have an effective date of XX/XX/XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

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