Edited version of your private ruling

Authorisation Number: 1012493886292

Ruling

Subject: Capital gains tax on transfer of property

Question 1

Has a Capital gains been made on the transfer of the property?

Answer

Yes

This ruling applies for the following periods:

01/07/2012 to 30/06/2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You purchased a property as joint tenant with your sibling in 199X. Cost base of the unit (including stamp duty and legal fees) was $xxx.

You were on the title deed as your sibling would not have been able to borrow money on their own accord to purchase the property. You never lived in the property and received absolutely no benefits from the property. You live with your parent and have only ever lived in your parent's residence.

Your sibling lived in the property until they died on in 20XX. Value of property at date of your siblings's death was $xxx

The property was transferred to your sibling's children for $Y. The value of the property at date of transfer was $xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102 - 5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 108 - 5(1)

Income Tax Assessment Act 1997 108-5(2)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 116-10(2)(b)(i)

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-130(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

You have ownership interest or equitable interest in the property, as your name is on the title deed. Therefore, as a CGT event A1 happened on transfer of the property and the deemed capital proceeds were more than your cost base of the property, you made a capital gain.

Detailed reasoning

Subsection 118-130(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that you have an ownership interest in land or a dwelling if you have a legal or equitable interest in it.

As your name is on the title deed of the property you have a legal interest in it, and therefore an ownership interest in it. The property was held as joint tenant with your sibling. Therefore, for tax purposes you owned a half share in the property. The fact that you never lived in or received any benefit from the property in anyway does not change this fact.

The transfer of the property to your sibling's children constitutes the happening of a CGT event A1 (section 104-10 of the ITAA 1997) to a CGT asset you owned. Land and building being a CGT asset as defined in subsection 108 - 5(1) of the ITAA 1997, and confirmed by note 1 after subsection 108-5(2) of the ITAA 1997.

When a CGT event A1 happens to a CGT asset you own, subsection 104-10(4) of the ITAA 1997 states, you make a capital gain if the capital proceeds form the disposal of the asset are more than the assets cost base and you make a capital loss if those capital proceeds are less than the assets cost base.

To determine if a capital gain has been made on the transfer of the property the cost base of the asset and the capital proceeds from the assets disposal need to be determined.

You advised the purchase price of the property, including stamp duty and legal fees was $xxx. You had a half share (interest) in the property. Hence your cost base is $xxx.

The capital proceeds from the assets disposal are determined at the date of transfer, being the time the CGT event A1 happened (subsection 104-10(3) of the ITAA 1997).

Capital proceeds are determined under Division 116 of the ITAA 1997. The general rule in section 116-20 of the ITAA 1997 is: Capital proceeds from a CGT event are the total of:

(a) the money you have received or are entitled to receive, in respect of the CGT event happening, and

(b) the market value of any property you have received or are entitled to receive, in respect of the CGT event happening (work out at he time of the CGT event).

Subparagraph 116-20(2)(b)(1) of the ITAA 197, however, substitutes the market value of the asset for the actual capital proceeds. Where the actual capital proceeds are more or less than the market value and the parties did not deal with each other at arm's length in connection with the CGT event.

In your case as the $X transfer price is less than the property's market value at the date of transfer, the market value will be taken as the capital proceeds if you and your sibling's children were not dealing with each other at arms length in respect of the transfer.

When determining whether parties deal at arm's length any connection between them and any other relevant circumstance needs to be considered (subsection 995-1(1) of the ITAA 1997.

The market value substitution rule requires consideration to be given to the nature of the dealing between parties to a transaction and not simply their relationship. As Dodds-Streeton J explained in ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312 (at[224]-[226]).

"The concept of an arm's length relationship is distinct from that of an arm's length dealing or transaction, despite the potential overlap. Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm's length. Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. It may be inferred that the resultant transaction is not arm's length. Related parties nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills.

The circumstances of the impugned transaction may be such that, despite the parties connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common.

In determining whether or not parties dealing at arm's length with one another, Mckerracher J held in Healy v FC of T 2012 ATC that the authorities establish the following principles:

(a) Whether the parties deal at arm's length is a question of fact.

(b) There is a distinction between dealing at arm's length and an arm's length relationship that is parties can deal at arm's length even if they are not at arm's length.

(c) Whether the parties dealt at arm's length involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction.

(d) Whether the parties have acted separately and independently informing their bargain. There should be an assessment of whether the parties dealt with each other as arm's length parties would be expected to behave so the outcome is a matter of real bargaining.

(e) It is relevant to consider the nature of any relationship between the parties.

In your case there is a relationship between the parties and the $X transfer price is not an arm's length bargaining price. Therefore, the parties (you and your relatives) were not dealing at arm's length in respect of the transfer of the property.

As it has been determined that you and your sibling's children were not dealing at arm's length in respect of the transfer of the property, the capital proceeds for the transfer, in accordance with subparagraph 116-20(2)(b)(i) of the ITAA 1997 is $xxxxx. As you had a half interest in the property your capital proceeds are $xxxxx

You will make a capital gain from the transfer of the property, as explained earlier, if the capital proceeds from the transfer are more than the assets costs base. Your capital proceeds are $xxxx and your cost base is $xxxx. Therefore, you have made a capital gain from the transfer of the property in question.

Note:

1. The capital gain was a discount gain in accordance with Division 115 of the ITAA 1997, as the property had been held for more than 12 months and you are an individual taxpayer.

2. The capital gain will form part of your net capital for the relevant year, calculated in accordance with section 102 - 5 of the ITAA 1997.