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Ruling

Subject: Capital Gains Tax Liability

Question and answer

Should your portion of a capital gain resulting from the sale of real estate be included in your assessable income?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Vacant land (the property) was purchased by your parents after 20 September 1985.

Your name was also included on the property purchase contract and registered on the title with your parents.

A dwelling was built on the property and was the principal place of residence of your parents.

You did not reside at the property at anytime.

You did not pay any monies towards the purchase of the property, the construction of the dwelling, maintenance of the property or the meeting of mortgage loan repayments.

There was no written agreement or arrangement between you and your parents in relation to your co-ownership of the property.

The property was sold.

You did not receive any proceeds from the sale of the property.

Your portion of the capital gain resulting from the sale of the property was included in your assessable income.

Relevant legislative provisions

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 112-20.

Income Tax Assessment Act 1997 - Section 116-10.

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or a capital loss as a result of a CGT event happening to a CGT asset you own (section 102-20 of the Income Tax Assessment Act 1997 (ITAA)). Section 108-5 of the ITAA 1997 specifies that real estate is a CGT asset.

The most common event is CGT event A1. CGT event A1 happens when you dispose of an asset that you have an ownership interest in. The disposal of the property constitutes CGT event A1 (section 104-10 of the ITAA 1997).

You have an ownership interest in vacant land, or land on which there is a dwelling, when you have a legal or equitable interest in it, or a right to occupy it. Your name was registered on the title to the property so you had an ownership interest in it. We assume that where taxpayers are related that the equitable interest is exactly the same as the legal interest in the title.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners states that any income, gain or loss from real estate must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title. Any oral agreement to share any income, gain or loss in different proportions to that of the legal interest is a private arrangement which has no effect for income tax purposes.

Where a trust situation occurs, legal ownership of an asset differs from what is known as beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. If the beneficial owner is absolutely entitled to the asset as against the trustee, it is the beneficial owner that is considered to be the owner of the asset, and the person who makes any capital gain or loss due to a CGT event happening. No CGT event happens to the trustee due to any sale of the asset.

While trusts can be created orally, all state property law acts contain provisions that preclude the creation or transfer of interests in land except if evidenced in writing. In your case there is no evidence of any trust arrangement being in existence.

Whatever you receive as a result of a CGT event is referred to as your 'capital proceeds'. For most CGT events, your capital proceeds are an amount of money or the value of any property you receive, or are entitled to receive. If you receive nothing in exchange for a CGT asset you are usually taken to have received the market value of the asset at the time of the CGT event. This is known as the market value substitution rule for capital proceeds (section 116-10 of the ITAA 1997). The market value substitution rule also applies if you pay nothing when you acquire a CGT asset (section 112-20 of the ITAA 1997).

Although you state that you did not receive any proceeds from the sale of the property, you were entitled to receive a share of the capital proceeds as you had an ownership interest in the property.

In some circumstances a full or partial exemption is available for any CGT liability if the property you had an ownership interest in was your 'main residence' (also referred to as 'your home') for all or part of the period of ownership. However, you have stated that you did not reside in the property at any time and therefore this exemption is unavailable to you.

The sale of the property constituted a CGT event, and you were entitled to a share of the capital gain resulting from the sale as you had a legal ownership interest in the property. There is no CGT exemption available to you and you are therefore required to include the capital gain you are entitled to in your assessable income.