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Ruling

Subject: Gifting of land - deductibility and capital gains tax implications

Question 1

Will you make a capital gain or capital loss on the disposal of any portions of land resulting from the signing of the deed of settlement?

Answer

Yes.

Question 2

Will you be entitled to a deduction under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) for the transfer of land?

Answer

No.

Question 3

If you are entitled to a deduction for the transfer of the land, can this deduction reduce any capital gain resulting from the transfer of the land?

Answer

As we have determined that you are not entitled to a deduction for the transfer of the land, it is not necessary to answer this question.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Several years ago, you and your partner moved to a town with your child to pursue the dream of community and to be nearer to a friend.

Your friend lived in a mobile home on a property. They rented the property on which they lived.

At some stage a little while later you became aware that the owner of the property wished to sell it. You began to assist in organising a group to purchase the property.

The group that were purchasing the land went by the name 'group A'.

During discussions with the group it was agreed that:

Group A would become an incorporated association,

Group A would purchase the property that your friend was living on and

The money for the purchase would be generated by both members and non members of the group making contributions to group A and by taking a mortgage.

You and another person in the group approached a financial institution and arranged for a mortgage. You believe this occurred some time after 20 September 1985.

You became the public officer of group A and arranged its incorporation.

The property on which your friend lived was purchased and placed into the name of group A.

You and your spouse donated an amount of money. The mortgage was paid from rent paid by persons who stayed in the house on the property and by your friend.

You and the group called the property 'property A'.

The property was subsequently transferred to you and your spouse for refinancing purposes. You regarded you and your spouse's role as holding the land for group A.

Group A was subsequently deregistered.

The venture was then abandoned.

Negotiations regarding the ownership of property A began between former individual members of group A and you and your spouse. These negotiations were not successful.

Since then you and your spouse have paid the mortgage, land taxes and rates.

The issue of the ownership of the land is now the subject of court legal proceedings.

You have now drafted a deed of settlement. The deed of settlement provides that the following actions will be taken in relation to this land:

The parties make enquiries with a certain deductible gift recipient (DGR) with the intention of achieving a result where the DGR will accept a transfer by way of gift from you and your spouse of some of the portions of land. The DGR will hold such land as a permanent reserve.

That the DGR will accept by way of gift or transfer some of the portions of land which can be sold if required to fund the ongoing costs of the other land to be transferred to it.

You and your spouse will sell some of the portions of land in order to pay the money required to discharge the mortgage and hold the balance of the monies to fund other obligations under the deed of settlement.

You and your spouse will transfer some of the portions of land to another entity.

The deed of settlement provides that the registered proprietors of the land to be transferred to the DGR are recognised as the absolute owners of such land free of any trust.

The deed of settlement also provides that a portion of land which is not involved in the above actions under the deed will also be absolutely owned by you and your spouse free of any trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 116-30

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Section 104-10 of the ITAA 1997 provides that capital gains tax (CGT) event A1 happens when you dispose of a CGT asset. This event will happen in your case when your interest in each portion of land is disposed of, whether by transfer or by sale.

The time of the event for each disposal will be when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.

You will make a capital gain if the capital proceeds from the disposal are more than the cost base of your interest in that portion of land. You will make a capital loss if those capital proceeds are less than the reduced cost base of that interest.

Capital proceeds is usually the amount that you receive as a result of a CGT event happening, however, section 116-30 of the ITAA 1997 provides that where you do not receive any capital proceeds from the CGT event, you are taken to have received the market value of the asset on the day the CGT event happened.

As you, in conjunction with your former spouse, currently hold title of the land, you will make a capital gain or capital loss in accordance with your ownership interest of 50%.

Question 2

Division 30 of the ITAA 1997 provides that a deduction is available to an entity that makes a gift or donation to an organisation which is endorsed by the Commissioner as a deductible gift recipient under Subdivision 30BA of the ITAA 1997.

DGR is a deductible gift recipient under Subdivision 30BA of the ITAA 1997. It therefore needs to be considered whether the transfer of your interests in the portions of land to the DGR qualifies as a gift for the purposes of Division 30 of the ITAA 1997.

Taxation Ruling TR 2005/13 provides guidelines on what is a gift for tax deductible gifts purposes. Paragraph 13 of TR 2005/13 states that rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features:

o there is the transfer of the beneficial interest in property

o the transfer is made voluntarily

o the transfer arises by way of benefaction, and

o no material benefit or advantage is received by the giver by way of return.

The courts have recognised that the criteria may not be absolute and may involve a matter of degree.

Transfer of the beneficial interest in property

Identifiable property will be transferred and this requirement will be satisfied.

Transfer made voluntarily

Paragraph 23 of TR 2005/13 states that in order for a transfer of property to be a gift, it must be made voluntarily. Paragraph 24 of TR 2005/13 states that a transfer is not made voluntarily if it is made because of a prior obligation imposed on the giver by statute or by contract.

In your case, by entering into the deed of settlement prior to the transfer of the portions of land to DGR, an obligation will be imposed on you by the deed to transfer the portions of land to DGR. This is a prior obligation imposed by contract.

The transfer of the portions of land to DGR will therefore not be made voluntarily and this requirement will not be satisfied.

Transfer by way of benefaction

Paragraph 27 of TR 2005/13 states that conferring benefaction means that the deductible gift recipient is advantaged in a material sense, to the extent of the property transferred to them, without any countervailing detriment arising from the terms of the transfer.

There is no indication that there will be any countervailing detriment arising from the terms of the transfer in this case, and this requirement will be satisfied.

Material benefit or advantage

Paragraph 37 of TR 2005/13 states that in order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return. It does not matter whether the material benefit or advantage comes from the deductible gift recipient or another party.

Paragraph 44 of TR 2005/13 provides as a circumstance which may lead to a conclusion that a benefit or advantage is material is where as a result of the transfer, a legal obligation is eliminated or reduced.

Paragraph 146 of TR 2005/13 states that where a giver is found to have received a material benefit in return for a purported gift, it is not necessary that the material benefit comes directly from the recipient of the property transferred.

In your case, the transfer of the portions of land to DGR will reduce your legal obligations under the deed of settlement and this would be a benefit or advantage of a material nature to you in return for the transfer. This requirement will therefore not be satisfied.

Conclusion

As the transfer of the portions of land to DGR under the deed of settlement will not be made voluntarily, and will provide a benefit or advantage of a material nature to you in return for the transfer, the transfers will not qualify as a gift for tax deductible gift purposes. You will therefore not be entitled to a deduction under Division 30 of the ITAA 1997 in relation to the transfer of the land.

Question 3

As we have determined that you are not entitled to a deduction for the transfer of the land, it is not necessary to answer this question.