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Ruling

Subject: capital gains tax

Question

In accordance with section 104-15 of the income Tax Assessment Act 1997 (ITAA 1997), did the right to the use and enjoyment of the farm land pass to you from your parents prior to 20 September 1985?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the documents provided with the application for private ruling.

Your parents owned farming land.

You worked the farm land with your parents from a very young age without any formal payment or consideration being transferred to you.

In the 1970s, your parents formulated a plan to gift and transfer the farm land to you.

In 1975, your parents entered into an 'Agreement for Sale', which relates to the transfer of the crop of 1975 to you and another son. The crop was grown on the farm land.

In 1980, the farm land, which included all land and improvements, was transferred by your parents to you for your sole use and benefit.

From this point in time and in accordance with the understanding of all parties, you assumed full responsibility for ownership. These included holding costs, operating costs and other risks associated with farming the land and for all intents and purposes held control and possession of the land as if legal transfer of title had taken place.

Although legal title to the property was not formally transferred at this time, for all practical purposes your parents regarded the farm land as being your property. It was understood between the parties that legal title to the property would be transferred at a future point in time.

The formal transfer of title was not undertaken until after 20 September 1985 due to delays and administrative complications associated with the regulations relating to cane assignments and farm peaks.

Your mother has signed a statutory declaration outlining the arrangement that was in place.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-15.

Reasons for decision

Under section 104-15 of the ITAA 1997, capital gains tax (CGT) event B1 (about use and enjoyment before title passes) happens if you enter into an agreement under which the right to the use and enjoyment of a CGT asset you own passes to another entity and title in the asset will or may pass to the other entity at the end of the agreement.

An agreement may come to an end for the purposes of CGT event B1 at the end of the period for which the agreement runs or during that period. This is so whether the terms of the agreement are for a fixed period, defined period or for a period that is to end on the occurrence of a particular event.

If under the agreement that provides the right to the use and enjoyment will or may pass at the end of the agreement, CGT event B1 is triggered and you make any capital gain or capital loss when the other entity first obtains the use and enjoyment of your asset.

Taxation Determination TD 1999/78 provides the following example where no agreement under which title will or may pass is in place:

7. Perry allows his son use and enjoyment of the family holiday house as and when his son wishes with an expectation that some time in the future, when his son can afford to buy it, the title of the house will pass to him. This type of loose family arrangement does not fall within CGT event B1 because there is no agreement under which title will or may pass and because there is no specific point of time or particular occurrence when the arrangement will end.

In your case, your parents formulated a plan to transfer the farm land to you in 1975. Then your parents entered into an 'Agreement for Sale' to transfer the crop grown on the farm land to you. In 1980, the farm land was transferred to you for your sole use and benefit and you assumed full responsibility for ownership. Although these actions may demonstrate your parent's intentions, they do not constitute an agreement in relation to the ownership of the property or specify a definite end point. This type of agreement is considered to be a loose family arrangement and does not fall within CGT event B1.

The formal transfer of the title of the property occurred after 20 September 1985. As the agreement between you and your parents is considered to be a loose family arrangement, CGT event B1 did not occur and the farm land did not pass to you prior to 19 September 1985.