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Ruling

Subject: Capital Gains Tax

Question 1

Will the transfer to another entity of an asset represent a disposal for the purposes of the Capital Gains Tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will section 109CA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the transfer of the property?

Answer

No.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

One of the directors of a company died some time ago. Their spouse then assumed control. The spouse had been previously endorsed as a director.

The surviving spouse now wishes to wind up the company but it has come to their attention that the company has an asset. The asset is a house that was purchased some years ago for the exclusive use of a family member who is largely unable to care for themself. The family member in question was not an employee of the company at any time. The surviving spouse wishes the property to be transferred from the present ownership to another entity for the continued exclusive use of the family member.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 109CA of the Income Tax Assessment Act 1936

Reasons for decision

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

Question 1

Detailed reasoning

Generally speaking, where title to an asset is transferred from one entity to another, there is a change of legal ownership of the property which triggers CGT event A1 as described in subsection 104-10(2). The main exception to that rule is where the asset was acquired prior to 20 September 1985 in which case sub-section 104-10(5) states that any capital gain may be disregarded.

When considering the disposal of property the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and beneficial owner of the asset. It is possible for legal ownership to differ from beneficial ownership. In the absence of evidence to the contrary, property is considered to be owned by the legal person(s) registered on the title. Evidence to refute that presumption may include documents that show the registered owner holds the property in trust for someone else.

In the present case, legal ownership rests with the company. If the property in question had been acquired after 19 September 1985 and the company now transfers ownership of it to another entity a CGT event will occur upon that transfer.

If the company transfers the property for no consideration, then the market value substitution rules apply and the capital proceeds will be taken to be the market value of the property worked out at the time of the CGT event under subsection 116-30(1). In effect, if you give a CGT asset to another entity, you are taken to have received the market value of the CGT asset as at the date of the transfer.

As stated in subsection 104-10(4), the company will make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. If the property was acquired no later than 21 September 1999, section 114-1 provides that the cost base may be indexed for inflation. Such indexation is to be in accordance with sections 960-275 and 960-280.

Question 2

Detailed reasoning

Subdivision B of Division 7A of the ITAA 1936 provides that certain payments to entities connected with a private company are to be treated as dividends. Section 109CA of the ITAA 1936 extends those rules to incorporate the provision of assets. Sub-section 109CA(7) of the ITAA 1936 provides exemptions for residences in certain circumstances.

In the present case, the provisions of section 109CA of the ITAA 1936 are not applicable as the disposal of the property would not be a transaction covered by Division 7A of the ITAA 1936.