Edited version of private ruling

Authorisation Number: 1011667630796

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax (CGT) - sale of property

Are you required to pay CGT on 50% of the total capital gain made on the sale of a property you own as tenants in common with someone else?

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You and a friend purchased a property in 1988.

You own the property as tenants in common (50/50).

The property is more than two hectares.

Your friend built a house on the property and lived in the house for some time and then rented it out.

You did not contribute any money to the building of the house.

You did not receive any income from the rental of the house.

At all times the house has been considered to be your friend's house.

You consider 50% of the income and expenses in regard to the land are your responsibility, and your friend has 100% responsibility in regard to the house and 50% of the land.

You do not have a written agreement regarding the arrangement with the house and land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 104-10.

Reasons for decision

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 property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.

In certain circumstances, agreements between co-owners may alter the equitable interest of the co-owners from the date of that agreement. Their legal interests in the property would not change until the relevant legal title is transferred.

In your situation, you do not have a written agreement with your friend in regard to the house and land. In the absence of a written agreement the legal title on the property determines the proportion of ownership.

When you disposed of the property you were legally entitled to half of the proceeds as you have 50% ownership on the title. For CGT purposes you will make a capital gain or loss of 50% of the total capital gain made on the sale of the property and must complete your 2010 to reflect this.

Calculating your capital gain or loss

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

You make a capital gain if your capital proceeds from the sale of your CGT asset are greater than your cost base for the purchase of that asset, for example, if you received more for an asset than you paid for it.  

You make a capital loss if your reduced cost base for the purchase of that asset is greater than your capital proceeds resultant from the sale of that asset.

Capital proceeds 

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 to a CGT asset that you own.  

Cost base

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. 

In order to work out how much your capital gain or capital loss is, you must first establish the cost base or reduced cost base of your ownership interest in the property. 

Section 110-25 of the ITAA 1997 states that the cost base of a CGT asset is made up of five elements. 

The first element of your cost base includes money or property given for the asset.  

The second element includes incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.  

You do not include costs if you: 

· have claimed a tax deduction for them in any year, or  

· omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.  

The third element of your cost base includes non-capital costs of your ownership of the CGT asset, which include:  

· interest on money borrowed to acquire the asset; and costs of repairing, maintaining, or insuring it, and

· interest on money you borrowed to refinance the money you borrowed to acquire the property; and

· interest on the money you borrowed to finance the capital expenditure you incurred to increase the assets value. 

You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you:

· have claimed a tax deduction for them in any year, or  

· omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.  

The fourth element is capital expenditure that you incurred to increase the assets value.  

The fifth element is capital expenditure you incurred to establish, preserve or defend your title to the asset, or a right over the asset.

You can claim a deduction for certain expenses you incur for the period of time your property is rented or is available for rent. However, you cannot include expenses in your cost base calculation that have previously been claimed as rental property deductions.

In your case, you have advised that your friend is now living overseas. To work out your cost base correctly you will need to obtain information relating to the rental property.