Edited version of private advice

Authorisation Number: 1052403123517

Date of advice: 03 June 2025

Ruling

Subject: CGT - Main residence exemption

Question 1

Does sale of the Property trigger CGT event A1 for you under the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Can you apply the main residence exemption to disregard the capital gain or loss on the sale of the property?

Answer 2

No

Ttheir ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XXX the parents purchased the Property, which was their main residence.

When the Property was purchased the parents were operating a company which initially performed well.

Around mid-20XX the parent 1 reduced their work hours and ceased pursuing new contracts. This resulted in business income declining which impacted on the household's financial stability.

Around XXX the parents separated. The parent 1 moved out of the home and the parent 2 continued to reside in the home.

The parent 2 was left alone to manage the business debts and personal expenses which were initially covered by both parent's incomes in line with their planned budget.

When the home mortgage became unmanageable, parent 2 attempted to refinance but was not successful, so they explored alternative options to avoid selling the home.

The parent 2 received financial guidance and support from a organization dedicated to assisting individuals facing financial crisis, reflecting their efforts to manage their financial obligations and maintain the family home.

On XXX the parents divorced and in 20XX the parent 1 is deceased.

The parent 2 approached you to transfer the property into your names so you could refinance the loan with the following conditions:

•                     You would own the Property in name only

•                     parent 2 would continue to live in the Property and pay rent so you could make the repayments on the loan

•                     parent 2 would pay all additional amounts to cover expenses such as council rates, water rates, maintenance and other outgoings on the Property

•                     If parent 2 could not make any of their financial commitments, you would assist by making the payments, on the agreement that the parent 2 would pay back monies paid by you.

You understood that:

•                     Your half-siblings were entitled to their share of the Property if anything happened to the parent 2 during their agreement

•                     parent 2's other child from their previous marriage would not be entitled to any of the parent 2's estate

•                     If anything was to happen to either of you the Property would be transferred back to the parent 2 and if they could not obtain a loan to finance the Property, it would be sold, and the proceeds from the sale would belong to the parent 2.

You purchased the Property for $XXX and settlement was on XXX. A Conveyancing company was used for both the vendor and purchaser for their transaction.

You advised you obtained two loans for their transaction. One loan for Personal Investment of $XXX used for the Property settlement. The other for the purchase of a dwelling for rental/resale of $XXX.

After the sale of the Property, the parent 2 received an amount of $XXX which they used to pay off some debts.

You provided copies of statutory declarations and each of yours and the parent 2's Wills dated XXX indicating your intention that the Property be held on trust for the parent 2.

Your agreement with the parent 2 was that they would pay rent into an account that was in your names. The bills and expenses relating to the Property would be paid from that account.

You never lived in the Property.

The Property was made available for sale again in 20XX. In preparation for the sale, the parent 2 undertook significant alterations to the Property to secure the best possible sale price. These improvements were solely organized and funded by the parent 2, with no involvement from you.

The Property was sold to another party and the contract of sale signed on XXX with settlement on XXX.

You reported rental income from the Property on your tax returns from 20XX to 20XX. You claimed rental expenses which included loan interest, council rates, insurance, repairs and maintenance, water charges.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-10(2)

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Question 1

Does sale of the Property trigger CGT event A1 for you under the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

CGT event A1 occurs when you dispose of a CGT asset. In your case, we determine that you have legal and beneficial ownership in the property and the property was not held on resulting trust. Therefore, any capital gain or capital loss you made from the transfer of your interest in the property cannot be disregarded and must be included in your income tax return in the relevant income year.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset.

The property is a CGT asset under section 108-5 of the ITAA 1997.

CGT event A1 occurs when you dispose of a CGT asset under section 104-10 of the ITAA 1997. The time of an A1 event is when the disposal contract is entered into or, if none, when the entity stops being the assets owner.

Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity and specifies that a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

Trusts may be of three kinds: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title.

Application to your circumstances

You obtained a bank loan to purchase the property and became the registered legal owners of the property when it was purchased. We appreciate the intention was without any expectation of having any elements of beneficial ownership.

You set up a bank account in your name to receive money, including rental income from the property, which was used to pay the bills and expenses for the property.

Though your intention was only to have legal ownership, you declared rental income and expenses during the period you owned the property, establishing a benefit to you.

In consideration of all the facts we have determined that you obtained both legal and beneficial ownership of the property upon your purchase and acquisition of title. Therefore, any capital gain or capital loss you made from the sale of your interest in the property cannot be disregarded and must be included in your income tax return in the relevant income year.

As you have held the Property for longer than X months and are Australian residents for taxation purposes, you are eligible for the 50% CGT discount upon disposal of the property.

Question 2

Can you apply the main residence exemption to disregard the capital gain or loss on the sale of the property?

Summary

In your case you have legal and beneficial ownership in the property and did not reside in the property. You used the property to produce assessable income therefore, the main residence exemption does not apply to you.

Detailed reasoning

Section 118-110 of ITAA 1997 provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for the full exemption, the dwelling must have been your main residence throughout your ownership period and must not have been used to produce assessable income.

A partial exemption is available for a CGT event that happens to a CGT asset that is a dwelling, where the dwelling was your main residence for only part of your total ownership period (section 118-185 of the ITAA 1997).

The legislation does not allow you to treat the dwelling as your main residence unless you actually move in and reside in the property.

Application to your circumstances

In your case, as the legal and beneficial owners, you did not reside in the property. From the acquisition time until the time you sold the property you used it for income producing purposes. Therefore, you do not meet the legislative requirements detailed under the main residence exemption in section 118-110 of the ITAA 1997 that would allow for any capital gain to be fully disregarded.

You also do not meet the legislative requirements in section 118-185 of the ITAA 1997 that would allow for a partial exemption.

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