Edited version of private ruling

Authorisation Number: 1011842590962

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Ruling

Subject: Capital gains tax - purchase and disposal of dwelling for parents

Question 1: Is the capital gain made on the disposal of the property you and your spouse acquired for your parents to reside in disregarded?

Answer: No.

Question 2: Does the Commissioner have any discretionary powers to disregard the capital gain made on the disposal of the property?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

In 19XX your parents were forced to move numerous times due to the rental properties they were residing in being disposed of by the owners.

Later, you, your spouse, your sibling and their spouse purchased a property (the property) for your parents to reside in so they would not need to worry about moving again. They moved in and established it as their main residence.

The mortgage and title to the property were in the names of you, your spouse, your sibling and their spouse.

Your parents paid the mortgage and all other expenses incurred in relation to the property.

In 20XX your sibling and their spouse's interests in the property were transferred to you and your spouse. There was no money exchanged to acquire these interests.

In 20XX you and your spouse used the property as cross collateralisation for you and your spouse to acquire your own home.

It was at this time that you and your spouse began to pay for all the repairs and maintenance on the property.

You and your spouse claimed the property as your investment property in your tax returns.

Your parent was no longer able to manage the upkeep on the property due to their physical limitations and the strain it was placing on their health and wellbeing.

The family decided that the property should be disposed of and the proceeds from its disposal should be used to construct a small dwelling at the rear of you and your spouse's property for your parents to reside in.

In late 20YY the property was disposed of.

A capital gain was made on the disposal of the property.

The construction of the new dwelling commenced in early this year.

After the construction of the new dwelling, the small amount of funds that remained from the disposal of the property is your parent's 'nest egg' which is to be used for their needs in the future.

The payment of any capital gains tax (CGT) will cause a significant financial hardship on you, your spouse and your parents.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 116-30.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 109-5

Reasons for decision

The most common CGT event (CGT event A1) occurs when you dispose of an asset to someone else. The time of the event is when you enter into the contract for its disposal or if there is no contract - when the change of ownership occurs.

You have an ownership interest in a dwelling if you have:

· a legal or equitable interest in the land on which it is constructed, or

· a licence or right to occupy the dwelling.

In the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title.

Main residence

Generally, you can ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

How the law applies to your situation

We have determined based on the information provided that the registered owners of the property at the time of acquisition in 19XX were you, your spouse, your sibling and their spouse. You each had an equal interest in the property.

Two CGT events have occurred in relation to the property, they are both CGT event A1 events.

The first occurred in 20XX when your sibling and their spouse transferred their interests in the property to you and your spouse for no proceeds.

The second occurred in late 20YY when the property was disposed of.

If you do not pay any proceeds to acquire a CGT asset, such as an interest in a property, you are taken to have acquired the CGT asset, which is the subject of the event for its market value, at the time the event occurs.

You and your spouse are taken to have acquired these interests at their market value at the time of transfer in 20XX.

You and your spouse each now have two ownership interests in the property with different cost bases, as follows:

· an interest in 19XX - the cost base is your share of purchase price of the property, and

· an interest in 20XX - the cost base is the market value on the date the interest was transferred into your name.

To obtain the market value of the property at the time of these interests were transferred to you, you can:

· obtain a valuation from a qualified valuer, or

· compute your own valuation based on reasonable objective and supportable data.

The main residence exemption does not apply in your situation as the property has never been your main residence.

As you and your spouse have used the property for investment purposes, any of the costs that you have claimed or entitled to claim cannot be included in your cost base as part of the second and third elements.

You can use the discount method to calculate your capital gain as you meet all necessary criteria. The discount percentage for individuals is 50%.

Whilst we appreciate your circumstances as you and your family where trying to assist your parents by purchased the property through a family arrangement for them to reside in as their main residence, the Commissioner does not have any discretionary powers to disregard the capital gain made on the disposal of the property.

For more information on how to calculate your capital gain please see the enclosed information sheet, this information has been taken from the Guide to capital gains tax 2009-10 (NAT 4151.6.2010). Further information is also available on our website - www.ato.gov.au.