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Ruling

Subject: CGT - transfer of property to a special disability trust

Question and answer:

Can you disregard any capital gain you make if you transfer your property for no consideration to a 'special disability trust' within the meaning of the Social Security Act 1995?

Yes.

This ruling applies for the following period:

1 July 2011 to 30 June 2013.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances:

You own a residential property (the property).

You acquired the property after 20 September 1985.

You intend to transfer ownership of the property for no consideration to a trust.

The trust will be a 'special disability trust' within the meaning of the Social Security Act 1995.

You will make a capital gain on the transfer of ownership of the property.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 116-30.

Income Tax Assessment Act 1997 Section 118-85.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Real estate is a capital gains tax (CGT) asset.

Real estate that is acquired on or after 20 September 1985 is subject to the CGT provisions of the tax law.

If you own a CGT asset and a change of ownership occurs from you to another person or entity, you are considered to have disposed of the asset.

When you dispose of a CGT asset, CGT event A1 happens. In the case of real estate, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

When a CGT event happens to a CGT asset you own, you make a capital gain or loss at the time of the event, depending on whether the capital proceeds from the CGT event are more or less than the cost base/reduced cost base of the CGT asset.

For CGT purposes, when assets are disposed of for no consideration, a special rule known as the market value substitution rule applies. The effect of this rule is that you are taken to have received consideration equal to the market value of the asset at the time of the CGT event.

Generally, any assessable gain made from a CGT event is included in your assessable income in the income year in which the event happens. However, in some cases an exemption may apply that allows a taxpayer to reduce, or disregard (and therefore not include in their assessable income), any gain or loss made as a result of a CGT event. Where applicable, such exemptions are provided for by the tax law.

Section 118-85 of the Income Tax Assessment Act 1995 (ITAA 1997) provides that you can disregard any capital gain or loss made on the transfer of CGT asset for no consideration to a 'special disability trust'.

According to the definition of a 'special disability trust' in section 995-1 of the ITAA 1997, for the exemption provided by section 118-85 to apply to the transfer of a CGT asset, the transfer must be to a 'special disability trust' within the meaning of the Social Security Act 1995.

Conclusion

You will not be required to include in your assessable income any capital gain you make from the transfer of the property for no consideration to a 'special disability trust' within the meaning of the Social Security Act 1995.