Edited version of private ruling

Authorisation Number: 1011797919400

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Ruling

Subject: Transfer of ownership

Question and Answer:

Will there be a capital gain assessable to the company as a result of the transfer of the title of a dwelling from the company to an individual?

Yes

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2008

Relevant facts and circumstances

Mr X purchased a family home (dwelling) in his company's name, Company Y (the company) using his personal funds.

Mr X took out a bank loan for the balance of the purchase price in the name of the company.

Mr X rented the dwelling from the company for several years. Rental income was declared and expenses claimed in the tax returns of the company.

The arrangement was found to be ineffective for tax purposes by the Australian Taxation Office (ATO).

As a result Mr X ceased to make rental payments to the company. The dwelling remains as the family home.

It is proposed to transfer the title of the dwelling from the name of the company to the name of Mr X's relative.

A capital gain will be made as a result of the transfer of title.

It is proposed that the transfer will take place at an amount equivalent to the cost base for the company.

At the time of purchase of the dwelling, there was no trust arrangement in place.

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 106-50

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 Subdivision 152-A

Reasons for decision

A person (which includes a company) can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Land and buildings are CGT assets. The dwelling in question is a CGT asset. An ownership interest in a CGT asset is also a CGT asset.

CGT event A1 happens when a person disposes of an asset to someone else (section 104-10 of the ITAA 1997). The transfer of the title of a property from person A to person B constitutes the disposal of person A's ownership interest in the property to person B.

The time of the event is when the person enters into the contract for the disposal or if there is no contract when change of ownership occurs.

An assessable capital gain is made to the person disposing of their ownership interest in a property. This is the case even if this is done for no consideration.

A capital gain is made if the capital proceeds from the disposal are more than the asset's cost base. A capital loss is made if those capital proceeds are less than the asset's reduced cost base

Your case

In your case, Mr X purchased a family home (dwelling) in his company's name. The company is the rulee of this ruling. Mr X rented the dwelling from the company for several years. Rental income was declared and rental expenses were claimed in the company's tax returns.

The arrangement was found to be ineffective for tax purposes by the ATO. Mr X ceased making rental payments to the company. It is now proposed to transfer the title of the dwelling from the company's name to the name of Mr X's relative.

The transfer of ownership from the company to Mr X's relative will result in a CGT event occurring, namely CGT event A1. As the company is making the disposal, it is the company that will be assessable on any capital gain made.

Market vale substitution rule for capital proceeds

In cases where the person making the disposal does not receive anything in exchange for the CGT asset, the person is taken to have received the market value of the asset at the time of the CGT event. This is known as the market value substitution rule (section 116-20 of the ITAA 1997). This rule is also applied where the capital proceeds received are more or less than the market value of the asset and the parties are not dealing with each other at arm's length in connection with the event. To determine if a transaction was made at arm's length, it is necessary to consider the connection between the parties and other relevant circumstances.

In your case, it is proposed that the transfer of the dwelling from the company will take place at an amount equivalent to the cost base for the company. As this will be less than the market value of the dwelling, the market value substitution rule will apply. The company will be taken to have received as capital proceeds the market value of the dwelling at the date of transfer to title.

Disregarding arrangement from the beginning

You have argued that as the arrangement was determined by the ATO to be not effective, the dwelling should be considered to have been purchased in the name of Mr X's relative at the time the dwelling was first purchased. We need to apply the law in coming to our decision. The fact remains that the dwelling was purchased in the name of the company. That was the intention at the time. Now there will be a disposal to another entity which will result in a CGT event.

Exemptions and rollovers

There are certain situations when a capital gain can be disregarded or reduced.

Main residence exemption

When a dwelling has been the main residence of an individual, an exemption from CGT is available if certain conditions are satisfied (section 118-110 of the ITAA 1997). However a company is not an individual. The main residence exemption does not apply to a company. This is the case even though the director of the company may have lived in the property throughout the ownership period. As we are dealing with a company owning a dwelling, the main residence exemption does not apply in your case.

CGT rollover

There are certain rollovers available which allow a capital gain to be deferred or disregarded until a later CGT event happens. Examples are transfer of assets in the case of a marriage breakdown or exchange of shares in a company takeover. No rollover provision is applicable in your situation.

Small business concessions

There are four CGT small business concessions available under subdivision 152-A of the ITAA 1997:

· the 15-year retirement exemption

· the 50% active asset reduction

· the $500,000 lifetime limit retirement exemption, and

· rollover (replacement of business assets) relief

These concessions do not apply in your circumstances.

Trust arrangement

When considering the transfer of ownership, the most important consideration is who is the legal owner of the asset.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset. Where the legal and beneficial ownerships of an asset is different, a trust situation occurs. If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner (section 106-50 of the ITAA 1997).

In your case the company is the legal owner of the dwelling in question. At the time of purchase, there were no documents drawn up to indicate a trust relationship was in place. Thus it cannot be said the company was holding the dwelling in trust for another entity.

In summary, no exemption or rollover will apply to your situation.

CGT discount

A discount capital gain is available to certain entities under subdivision 115-A of the ITAA 1997. These entities are:

· an individual

· a complying superannuation entity

· a trust, or

· certain life insurance companies

There will be no discount available for the company in your case.

Conclusion

There will be a CGT event as a result of the transfer of title of the dwelling from the company to Mr X's relative as there will be a change of ownership from one entity to another. The company will be assessable on the capital gain. We acknowledge and appreciate your situation and we have considered the possibility of any exemptions from or reduction in the resulting capital gain, however these are not applicable in your circumstances. In order to calculate the capital gain, the market value substitution rule will apply in working out the capital proceeds. No CGT discount will be available to the company.