Edited version of private ruling

Authorisation Number: 1011689703770

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 fac 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

Questions and answers:

Does the agreement for your adult child and their partner to live in the house and therefore receive the use and enjoyment of the asset trigger CGT event B1?

No.

Will CGT event A1 happen when you dispose of your portion of the property to your child and their partner or to a third party?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

Your child and their partner are purchasing a house.

You intend to help them purchase a house by purchasing an interest in the property and you will borrow the relevant portion of the purchase price to fund this.

You do not intend to rent the property to your child and their partner.

You are not planning to claim a tax deduction on the interest charged on the amount borrowed.

If the property were to be rented to a third party n the future, you would take your proportionate share of the rental income and expenses.

You, your child and their partner have undertaken to enter into an agreement whereby your child and their partner would receive immediate use and enjoyment of the property as it would be their principal place of residence. They would have sole control over the property and all maintenance or renovations if undertaken would be at their discretion and expense.

You, your child and their partner have also agreed that if the property were sold to a third party, your child and their partner would have the option to purchase from you your percentage of ownership at market value. If they do not take up this option then you would share the proceeds of the sale in proportion to your interests.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-15

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property.

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event occurs. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.

If more than one CGT event can apply in a particular situation, the event you use is the one that is most specific to your situation (section 102-25 of the ITAA 1997).

CGT event B1

CGT event B1 happens if you enter into an agreement with another entity under which:

· the right to the use and enjoyment of a CGT asset you own passes to another entity; and

· title in the asset will or may pass to the other entity at or before the end of the agreement.

(see section 104-15 of the ITAA 1997)

The Commissioner's view in regards to CGT event B1 is set out in ATO Interpretative Decision ATO ID 2005/216 and Taxation Determination TD 1999/78.

ATO ID 2005/216 states:

In order for CGT event B1 to happen the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified time in the future.

In ATO ID 2005/216, CGT event B1 happened because the taxpayer entered into a formal agreement with his children to grant them the right to use and enjoy the property and under the agreement title to the property would pass to the children in five years' time.

Paragraph 7 of TD 1999/78 gives the following example where CGT event B1 does not happen:

Perry allows his son use and enjoyment of the family holiday house as and when his son wishes with an expectation that some time in the future, when his son can afford to buy it, the title of the house will pass to him. This type of loose family arrangement does not fall within CGT event B1 because there is no agreement under which title will or may pass and because there is no specific point of time or particular occurrence when the arrangement will end.

In your case you intend to enter into an agreement whereby you, your child and their partner will purchase a property. Your child and their partner will have immediate use and enjoyment of the entire property and you will not charge them any rent. If the property is sold in the future, they would have the option to purchase from you your percentage of ownership at market value. If they do not take up this option then you would share the proceeds of the sale in proportion to your interests.

In your case, the arrangement between yourself, your child and their partner does not fall within CGT event B1 because there is no agreement under which title will or may pass to your child and their partner, and because there is no specific point of time or particular occurrence when the arrangement will end.

CGT event A1

CGT event A1 happens if you dispose of a CGT asset (see section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.

In your case you intend to purchase an interest in a property, which in the future your child and their partner may purchase from you at market value, or the property will be sold to a third party and you will receive your share of the proceeds of the sale.

As discussed above, CGT event B1 will not happen when you enter into the agreement with your child and their partner.

CGT event A1 will happen when you dispose of your ownership interest in the property.