Edited version of private ruling

Authorisation Number: 1011711075934

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Ruling

Subject: Capital Gains Tax

Question

Should a capital gain be included in your assessable income under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of you disposing of property acquired on or after 20 September 1985?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You lodged tax returns for the year for all of the applicants and included capital gains on the sale of a property or properties where proceeds exceeded the cost base in all of the returns.

You believe that you are not liable for capital gains tax on the capital gains made.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 102-5.

Income Tax Assessment Act 1997, Section 104-5.

Income Tax Assessment Act 1997, Section 104-10.

Income Tax Assessment Act 1997, Subsection 104-10(3).

Income Tax Assessment Act 1997, Section 108-5.

Income Tax Assessment Act 1997, Section 110-25.

Income Tax Assessment Act 1997, Section 115-100.

Income Tax Assessment Act 1997, Section 116-20.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

Detailed reasoning

Capital Gains Tax Event Disposal of Property

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-10 of the ITAA 1997 the disposal of a CGT asset causes CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity. Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for disposal. 

Calculating Capital Gains and Losses

You make a capital gain if the capital proceeds from the disposal are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base.

Calculating Capital Proceeds

The capital proceeds of a CGT event are defined in section 116-20 of the ITAA 1997 as being the money received (or entitled to receive) in respect of the event happening, or the market value of any property received in respect of the event happening.

Calculating Cost Base

The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997. It consists of five elements.

1. Money paid or Property given to acquire the asset

2. Incidental costs of the CGT event, or of acquiring the CGT asset.

3. Non-capital costs associated with owning the asset.

4. Capital costs associated with increasing the value of asset.

5. Capital costs of preserving or defending your ownership of or rights to your asset.

Your capital gain or loss is generally calculated by subtracting the cost base from the capital proceeds. You may use the Discount Method to reduce the capital gain in certain circumstances.

The Discount Method

Where a CGT event A1 occurs, a discount is available on the capital gain where the following conditions in Division 115 of the ITAA 1997 are met:

1. The capital gain is made by an individual

2. The CGT event occurred after 11.45am on 21 September 1999

3. The cost base has not been indexed.

4. The asset must have been acquired at least 12 months before the CGT event.

Where these conditions are met, the capital gain is reduced by 50% for individuals (section 115-100 of the ITAA 1997).

Conclusion

You have declared capital gains in your tax return for the year.

The advice you have given is that these capital gains were made on the sale of a property or properties, therefore, the sale is an A1 event under section 104-5 of ITAA 1997 and you are liable for capital gains tax on the net capital gain on the property sales.