Edited version of private advice

Authorisation Number: 1012661509975

Ruling

Subject: Capital Gains Tax

Question

Can you offset the retention amount of a licence to enter and use an apartment in a retirement village against any current or future capital gains?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You entered a resident agreement under which you were granted a licence to enter and use an apartment in a retirement community (the agreement).

You paid a fee for the licence (the entry contribution).

The entry contribution is made up of a retention amount and a refundable amount.

The retention amount is X% of the entry contribution each year up to a maximum of 10 years.

The refundable amount is the balance of the entry contribution less the retention amount.

On termination of the agreement you will be refunded the refundable amount less any money owed.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997

Section 102-25 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Subsection 104-25(2) of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Section 108-20 of the Income Tax Assessment Act 1997

Reasons for decision

You make a capital gain or capital loss as a result of a CGT event happening (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-25 of the ITAA 1997, when ownership of an intangible CGT asset ends by being surrendered, satisfied or similar, CGT event C2 occurs. According to subsection 104-25(2) of the ITAA 1997, the time of the event is when you enter into the contract that results in the asset ending, or if no contract when the asset ends.

In your case, you have an intangible asset of a licence to occupy an apartment. According to the agreement under which you gained the asset the licence ends upon termination of the contract. Until the agreement is terminated there no CGT event occurs and no capital gain or loss may be made. This is in accordance with the Commissioner's view in Taxation Ruling TR 2002/14 Income tax: taxation of retirement village operators. Although that ruling relates to the operators of retirement villages, it does explain at paragraph 152 that the debt of a deferred management fee (which is the terminology used for fees such as the retention amount) does not come into existence until the occupancy agreement comes to an end and the village operator becomes entitled to demand payment of the fee from the outgoing resident.

Under section 108-20 of the ITAA 1997, any capital loss you make from a personal use asset must be disregarded. A personal use asset is a CGT asset that is used or kept mainly for your personal use or enjoyment.

In your case, the licence asset is used for your personal use and enjoyment as it is used to grant you access to your residential accommodation and associated amenities. The licence is not put to any profit making or business use.

Accordingly, you are not entitled to offset the retention amount of a licence to enter and use an apartment in a retirement village against current or future capital gains.