Edited version of private ruling

Authorisation Number: 1011645692696

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Ruling

Subject: Capital gains tax (CGT) - disposal of dwelling - ownership interest

1. Do you have an ownership interest in the dwelling?

Yes.

2. Will you be eligible to disregard any capital gain or capital loss made on the disposal of your share in the dwelling?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

Your parents wanted to purchase a dwelling and you agreed to act as guarantor to enable the loan to be processed.

A dwelling was purchased after 20 September 1985.

A mortgage was obtained to enable the acquisition of the dwelling. You and your parents are listed as the mortgagees and that you held interest in the dwelling as joint tenants. The mortgage does not name anyone as a guarantor.

You and your parent's names were listed on the title of the dwelling.

The dwelling was your parent's main residence.

One of your parents passed away a number of years later, and after their death their name was removed from the title, leaving you and your surviving parent's names on the title.

Your surviving parent made the repayments on the loan and paid out the balance of the mortgage with monies from a retirement package.

You have never lived in the dwelling, nor contributed any monies towards its purchase or maintenance.

The dwelling was disposed of to your sibling.

In a letter to your parent's solicitor, you authorised that the balance of the sale proceeds for the disposal of the dwelling, after the deduction of the mortgage debt, be paid to your parent.

Your parent has made a payment of a sum on money to you in recognition that part of your inheritance has been disposed of. Your sibling has also paid you a sum of money, with a possible future payment.

You have provided a number of documents, and they form part of, and should read in conjunction with this private ruling.

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 116-25

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-130

Reasons for decision

Ownership interest in dwelling

A capital gain or a capital loss may occur when a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when you dispose of your ownership interest in a CGT asset to another entity.

The most important element in the application of the CGT provisions when dealing with the disposal of a CGT asset is determining who the legal owner of the CGT asset is when it was disposed of.

In the case of a dwelling, a person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or territory in which the dwelling is situated. The legal owner of the property is recorded on the title deeds for the dwelling issued under that legislation.

In the absence of any supporting evidence to the contrary, the Australian Taxation Office (Tax Office) views that dwelling will be owned by person(s) registered on the title. The Tax Office considers that there are extremely limited circumstances where the legal and equitable interests are not the same, or if they differ, that there is sufficient evidence to establish that the equitable interest is different from the legal title.

In your case, a mortgage was obtained to purchase the dwelling, with you and your parent's named as the mortgagees and joint tenants in the dwelling. You were not named as a guarantor on the mortgage.

You and your parent's were named on the title of the dwelling when it was acquired, and after one of your parents passed away, the title was changed to remove their name, leaving you and your surviving parent's names on the title.

As you have not provided any evidence to support that you did not have a legal interest in the dwelling, or that your legal and equitable interests were not the same, it is the view of the Tax Office that you owned 50% of the dwelling after your parent passed away, in accordance with the title deed. This is further evidenced by the fact that the solicitor involved with the sale of the property to your sibling insisted that you sign an authority stipulating that the sale proceeds be disbursed to your surviving parent.

The dwelling has been disposed of to your sibling and as you are viewed as being a co-owner of the dwelling, CGT event A1 happened when you transferred your 50% ownership interest in the dwelling to your sibling.

You have never resided in the dwelling; therefore, you are not eligible to either a full or partial main residence exemption. There are no other exemptions which would enable you to disregard any capital gain or capital loss that you have made on the disposal of your share in the dwelling. Therefore, you must amend your 2009-10 assessment to include the capital gain or capital loss made on the disposal of your share in the dwelling.

Capital proceeds for disposal of share in dwelling

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. Capital proceeds is the term used to describe the amount of money, or the value of any property you received, or are entitled to receive as a result of a CGT event happening.

There are special rules that apply for the sale of CGT assets when the amount of capital proceeds received are more or less than the market value of the CGT asset, and the transaction is considered to be a non-arms length transaction, such as a transaction between family members or related parties. In these cases, the market value substitution rule takes effect and the capital proceeds you have received are replaced with the market value of the CGT asset on the date it was disposed. 

In your situation, your sibling has purchased the dwelling from you and your parent, and you authorised the balance of sale proceeds to be paid to your parent. Although the sale proceeds were paid to your parent, rather than to you, this was done at your request. Therefore, they are still capital proceeds that you were entitled to receive from the disposal of your share in the dwelling, and must be included as capital proceeds in the calculation of your capital gain or capital loss.

You have received payments from your parent and sibling as part of a family arrangement. These amounts will be included in the capital proceeds you received for the disposal of your share in the dwelling.

If the total of your share of the sale proceeds, prior to being reduced by the mortgage debt, plus the amounts you received from your parent and sibling is less or more than the market value of your share in the dwelling on the date it was disposed, the market value substitution rules will apply, and you will be viewed as having received the market value for your share in the dwelling on the date it was disposed.