Edited version of private ruling

Authorisation Number: 1011697520654

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Ruling

Subject: Capital Gains Tax

Question

Does an assessable capital gains tax event occur when a taxpayer transfers to their child their fifty per cent share in an asset which they previously jointly owned?

Answer: No.

This ruling applies for the following period

1 July 2008 to 30 June 2009.

The scheme commenced on

1 July 2008

Relevant facts

The child of the taxpayer was negotiating to buy a home. However, they were unable to obtain bank finance in their own name. They were advised that if their parent provided a guarantee the finance would be approved. The parents wanted to help their child get their own home so the taxpayer agreed to guarantee the child's loan and the Offer and Acceptance documents were completed.

Subsequently the home was purchased. Both names appeared on the title. The child has lived in the property as their principal residence continuously since the date of purchase. They have paid all the loan payments on the home and has paid council rates, water authority rates and all utility accounts personally.

The parents wanted their child to have their home in their own name so they decided to transfer the property into one name solely. The Transfer of Land form required the transferor to state the value of the property being transferred. The parents obtained sales data from similar properties sold in the area and determined the market value of the property. This value was accepted be the Office of State Revenue as the market value of the property.

Stamp duty was duly assessed on fifty per cent of the value of the property which was the share of the property which was transferred. The taxpayer has never lived in the property. They have not obtained any financial benefit from having their name on the title of the property. They have paid neither any of the loan repayments nor any of the rates, taxes or other costs associated with the property. The principal reason for inserting their name on the original offer and acceptance and the title was to assist the child to buy a home and to assist them in obtaining finance. The property was transferred for "natural love and affection" and no payment was made or received on or subsequent to the transfer of the property.

This trustee relationship existed until such time that the taxpayer was no longer required to guarantee the mortgage. It also lasted until such time as the child was able to legally assume responsibility for any associated loans, mortgages and to provide them guarantee solely in relation to that property.

Relevant legislative provisions

Section 104-15 Income Tax Assessment Act 1997

Section 106-50 Income Tax Assessment Act 1997

Section 109-5 Income Tax Assessment Act 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

The taxpayer's half share of the property was effectively being held in trust for the taxpayer's child with the taxpayer acting as the trustee. Because the beneficiary was always absolutely entitled to the property as against the trustee everything done in relation to the property, including its acquisition, is taken to have been done by the beneficiary. That means that no CGT event happened when the taxpayer's share of legal title in the asset was transferred.

In any case, even if the taxpayer's child were not absolutely entitled to the property, the most relevant CGT event would be likely to be B1. If CGT event B1 happened when the taxpayer's child was granted the right to use and enjoy the property, there will be no CGT consequences for the taxpayer when their share of the title to the property is ultimately transferred.

Detailed reasoning

Subsection 109-5(1) states that a CGT asset is generally acquired when the taxpayer becomes its owner. However, there are circumstances in which that will not be the case. Subsection 109-5(2) contains a comprehensive table setting out the time at which a CGT asset is taken to have been acquired as a result of a CGT event happening.

In the present case, a half share in the property was held by the taxpayer's child from the date that the property was acquired from the vendor. The taxpayer's child has lived in the property continuously since the date of purchase, has made all loan repayments in respect of the property and has paid all rates and utility accounts. The child was unable to obtain finance in their own name unless the taxpayer guaranteed the loan and that was the only reason for the taxpayer's name to be included in the title documents.

The facts indicate that the taxpayer's half share of the property was effectively being held in trust for their child as beneficiary with the taxpayer acting as the trustee. The trustee arrangement existed only until such time as the child could legally assume responsibility for the mortgage.

How the acts performed in relation to the asset are then treated is dependent upon whether the beneficiary is considered to be absolutely entitled. It is considered that a beneficiary is absolutely entitled to a CGT asset of a trust as against the trustee if the beneficiary is:

· absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset, and

· able to direct how that asset shall be dealt with.

Absolute entitlement is not precluded because of the existence of a trustee's lien or where a loan must be discharged before transferring legal title.

Under the trust arrangement in this case, the taxpayer's child had a vested, indefeasible and absolute interest in the asset from the day it was purchased and was able to direct how it should be dealt with. Therefore, the taxpayer's child was absolutely entitled to the property as against the trustee.

According to section 106-50, because the beneficiary was always absolutely entitled to the property as against the trustee everything done in relation to the property, including its acquisition, is taken to have been done by the beneficiary. Therefore, for the purposes of the capital gains tax provisions, the beneficiary acquired the entire asset at the time of purchase rather than when sole legal title was obtained.

The fact that the child was absolutely entitled to the asset means that no CGT event happened when the taxpayer's share of legal title in the asset was transferred. A CGT event would only have happened if the transfer constituted a change of ownership and that will not be the case as section 106-50 treats the transfer as an act of the beneficiary.

In any case, even if the taxpayer's child were not absolutely entitled to the property, the most relevant CGT event would be B1. Subsection 104-15(1) of the ITAA 1997 states that 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 that 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.

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 this case, the taxpayer entered into an agreement with their child to grant them the right to use and enjoy the property. It would seem that an agreement existed under which exclusive title would pass to the child upon them becoming legally able to assume responsibility for any loans and provide their sole guarantee in respect of the property. Under such circumstances, CGT event B1 would have occurred as it is the most appropriate event that could apply.

If CGT event B1 happened, there would be no CGT consequences for the taxpayer when their share of the title to the property was ultimately transferred. That is because the relevant CGT event occurred when the child was granted the right to use and enjoy the property. At that point in time, the cost of the asset and its market value were the same and the capital gain would be nil. If the title to the property did not pass to the taxpayer's child at or before the end of the relevant agreement, under paragraph 104-15(4)(a), any capital gain or loss the taxpayer made from CGT event B1 happening would in any case be disregarded.