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Edited version of private advice
Authorisation Number: 1012668782841
Ruling
Subject: Capital gains tax
Question and answer
Will the capital gains or loss, if any, be assessed to you on the disposal of the land?
Yes.
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You bought the land with the intention of building a dwelling with your children.
You paid for the land and your children were to obtain a mortgage to pay for the dwelling.
You decided to put the title of the land in the names of your children because you wanted to protect the land as their inheritance.
You were going to live in the house together with your children should the house have been built.
You had problems with the builders and decided against building.
You sold the land and received all the proceeds.
You state that the children were holding the land for your benefit, the land was always under your control and you had the full right to make decisions regarding the land, not your children.
You have provided a copy of a letter signed by you and your children confirming that you purchased the land which your children held in trust for you.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
A capital gain or capital loss is the difference between what it cost you to get an asset and what you received when you disposed of it. You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax, although it is generally referred to as capital gains tax (CGT).
When you sell an asset or give it to someone else it's called a 'CGT event'. This is the point at which you make a capital gain or capital loss. Most real estate is subject to CGT; this includes vacant land.
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity.
In your case, you entered into an arrangement in which you would provide the funds to purchase a block of land and your children would take out a mortgage to build a dwelling on the land. You have stated that you placed the title of the land in the names of your children because you wanted to protect the land as their inheritance.
You have also stated that the children were holding the land in trust for your benefit, the land was always under your control and you had the full right to make decisions regarding the land, not your children.
Based on the information you have provided, you are effectively stating that your children were the trustees of a trust holding property (the land) for your benefit. You were the beneficiary of the trust as you had a beneficial ownership interest in the land.
However, another intention of the arrangement was to protect the asset from being lost from your children's inheritance due to any spousal type property issues you may have had in the future. This intention may indicate that the land was also being held for the benefit of your children. However, it is not possible to say whether this type of arrangement may have actually been effective in legal terms if a dispute ever occurred between you and another party while the land was still in the names of your children. Therefore, we consider that the land was held on trust by your children for your benefit.
Section 106-50 of the ITAA states that if you are absolutely entitled to a CGT asset as against the trustee of a trust, the CGT provisions will apply to an act done by the trustee in relation to the asset as if you had done it. You are absolutely entitled to a CGT asset if you have an indefeasible right to the asset and the ability to call for the asset to be transferred to you or to be transferred at your direction.
In your case, CGT event A1 occurred when the legal owners and trustees, your children, disposed of the land. Consequently, CGT event A1 is taken to have happened to you under section 106-50 of the ITAA1997 and any capital gain or loss will be assessed to you.