Edited version of your private ruling

Authorisation Number: 1012431704022

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Ruling

Subject: Capital gains tax - disposal of dwelling to child

Question:

Are you liable for capital gains tax (CGT) on the transfer of the dwelling to your child?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Approximately X years ago you and your spouse jointly purchased a dwelling (the property).

You and your spouse specifically purchased the property for your child to reside in as their main residence as they were not in a position to take out a mortgage.

You and your spouse took out a mortgage to purchase the property.

Your child has established the property as their main residence.

Your child pays you and your spouse rent which go towards the mortgage.

You and your spouse declare this income in your income tax returns.

You and your spouse do not intend disposing of the property for a profit.

Your child will purchase the property from you and your spouse by a stipulated date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 116-10

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-30

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we

The most common CGT event, CGT event A1, occurs when you dispose of an asset in which you have an ownership interest in to another entity. The time of the event is when you enter into the contract for its disposal or if there is no contract when the change of ownership occurs.

A CGT event A1 will occur when you and your spouse dispose of the property to your child.

You have an ownership interest in a property if:

· you have a legal or equitable interest in the land which the dwelling is erected upon; and

· you have a right or licence to occupy the dwelling.

For CGT purposes, if you are a joint owner of a dwelling, you are treated as if you own an equal share (50%) in the asset.

You and your spouse are currently the registered owner of this property, so you have a legal and equitable interest in the property.

You make a capital gain if the capital proceeds from the CGT event are more than the asset's cost base. You make a capital loss if your reduced cost base is greater than your capital proceeds.

There are special rules for calculating the capital proceeds if you dispose of an asset by way of a non-arms length transaction.

In determining whether parties deal at arm's length, you need to consider any connection between them and any other relevant circumstance. Because there is a definite connection between you and your child, it is deemed that you are not dealing at arm's length.

Upon the transferring (disposal) of your interest in the property to your child for little or no consideration, you will not be dealing at arm's length.

Therefore, the capital proceeds must be calculated in accordance with the market value substitution rules.

There are a number of options available to obtain the market value of an asset such as:

· obtain a detailed valuation from a qualified valuer; or

· compute their own valuation based on reasonably objective and supportable data.

Note: The Australian Tax Office may challenge valuations where appropriate.

In your situation, you will be taken to have received market value for your percentage holding in the property on the date of transfer.

You can use the discount method to calculate your capital gain as you meet all the relevant criteria. The discount percentage is 50% for individuals.

Information is also available on our website - www.ato.gov.au.