Edited version of private ruling

Authorisation Number: 1011866446170

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Ruling

Subject: Capital gains tax - contract entered into with a company

Question and answer

Did a capital gains tax (CGT) event happen when you entered into the contract with the company?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Some time after 20 September 1985, you purchased a property.

The property was used as a rental property for a period of time.

You moved into the property for the first time some time later and it became your main residence.

You did not own any other main residence during the period that the property was rented.

Some time later, you entered into a contract with a company in respect of the property.

Under the contract the company paid you an up front cash amount (a certain percentage of the current market value) for a share of the property and entitlement to a share of the sale proceeds of the property when it is sold in the future.

The contract provides you with the right to buy back the sale interest and stipulates that you must provide the company with a mortgage over the property. You mortgaged the property to the company on the same day you entered into the contract.

The contract also provided the company with an entitlement to lodge and maintain a caveat over the property to secure its rights under the contract. On the same day that you entered into the contract, the company placed a caveat over the property.

The purchase price was paid by means of an upfront initial sum less $X.

The remaining $X is paid when the contract is settled after death or earlier if you exercise your right to buy back the sale interest or decide to sell the property.

You remain the legal owner of the property.

Settlement of the contract may or may not occur, and in any event, will not occur until after you have died or earlier if you exercise your right to buy back the sale interest or decide to sell the property.

You have provided:

· a copy of the contract of sale,

· copies of the titles to the property,

· a copy of the mortgage of land that you entered into with the company,

· a copy of the caveat placed over the property by the company and

· a copy of a memorandum issued by the company explaining the arrangement.

These documents form part of and are to be read in conjunction with this private ruling.

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 104-40 and

Income Tax Assessment Act 1997 Section 118-110.

Reasons for decision

You make a capital gain or capital loss if, and only if, a CGT event happens to a CGT asset that you own.

There are two CGT events that are relevant to your circumstances, CGT event A1 and CGT event D2.

The most common event, CGT event A1 happens when you dispose of a CGT asset to someone else. You dispose of an asset if a change in ownership occurs from you to another entity.

CGT event D2 happens when you grant an option to a person or an entity.

Where more than one event can happen, you use the one that is the most specific to your situation.

You have advised that, despite entering into the contract, you remain the legal owner of the property. This means that no change in ownership occurred and that CGT event A1 did not happen.

Accordingly, CGT event D2 is the event that is most specific to your circumstances.

By entering into the contract with the company you granted them an option over the property and CGT event D2 happened when you signed the contract.

In your circumstances, the capital proceeds will be the amount that you received from the company. Your cost base will be X.

Please note: you will not be entitled to any partial main residence exemption in respect of any net capital gain you made as a result of granting the option over your property. This is because the main residence exemption does not apply to CGT event D2.