Edited version of your written advice

Authorisation Number: 1012864738967

Date of advice: 25 August 2015

Ruling

Subject: Capital gains tax - assets transferred into a special disability trust

Question:

Can you disregard any capital gain you make if you transfer an interest in the dwelling, for no consideration, to a 'special disability trust' within the meaning of the Social Security Act 1991?

Answer:

Yes.

This ruling applies for the following period:

Income year ending 30 June 2017.

The scheme commences on

1 July 2014.

Relevant facts and circumstances

Your and your parent purchased a property (the dwelling) as joint tenants around 1996.

Your parent passed away a number of years later.

Your sibling is disabled and they had lived with your parent during most of their ownership period of the dwelling.

Your sibling's disability is currently being assessed to determine whether they meet the "severe disability" assessment.

For the purposes of this private ruling:

• your sibling has met definition of "severe disability" as outlined in section 1209M of the Social Security Act 1991 and will be assessed accordingly,

• you will set up a trust that meets the necessary requirements for a special disability trust as outlined in Social Security Act 1991; and

• you will transfer an interest the dwelling to the special disability trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 118-85

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Joint tenants

Special rules in section 128-50 of the Income Tax Assessment Act 1997 (ITAA 1997) that apply if a capital gains tax (CGT) asset is owned by joint tenants and one of them dies. The consequences of these rules are that the surviving joint tenant is taken to have acquired (on the day the other joint tenant died) that other's individual interest in the asset.

Application to your situation

You and your parent purchased the dwelling as joint tenants around 1996. Your parent passed away a number of years later.

As you are the surviving joint tenant, you are viewed as having acquired your parent's interest in the dwelling on the date they passed away.

Therefore, after your parent passed away you own 100% of the dwelling and are responsible for any CGT implications arising in relation to this dwelling.

Assets transferred into a special disability trust

If you own a CGT asset and a change of ownership occurs from you to another person or entity, you are considered to have disposed of the asset.

When you dispose of a CGT asset, CGT event A1 happens. In the case of real estate, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place.

When a CGT event happens to a CGT asset you own, you make a capital gain or capital loss at the time of the event, depending on whether the capital proceeds from the CGT event are more or less than the cost base/reduced cost base of the CGT asset.

For CGT purposes, when assets are disposed of for no consideration, a special rule known as the market value substitution rule applies. The effect of this rule is that you are taken to have received consideration equal to the market value of the asset at the time of the CGT event.

Generally, any assessable gain made from a CGT event is included in your assessable income in the income year in which the event happens. However, in some cases an exemption may apply that allows a taxpayer to reduce, or disregard (and therefore not include in their assessable income), any gain or loss made as a result of a CGT event. Where applicable, such exemptions are provided for by the tax law.

Where a CGT asset is transferred directly into a special disability trust for no consideration, section 118-85 of the ITAA 1997 allows the transferor to disregard a capital gain or capital loss from the transfer. The purpose of this rule is to remove any tax barrier that might otherwise impede family members from making contributions to an SDT.

According to the definition of a 'special disability trust' in section 995-1 of the ITAA 1997, for the exemption provided by section 118-85 to apply to the transfer of a CGT asset, the transfer must be to a 'special disability trust' within the meaning of the Social Security Act 1991.

The section 118-85 of the ITAA 1997 exemption can also apply if a CGT asset is transferred to a trust that is not an special disability trust at the time of the transfer, provided the trust becomes an special disability trust "as soon as practicable" after the transfer in accordance with paragraph 118-85(1)(b) of the ITAA 1997. A trust will satisfy this requirement if it applies to become an special disability trust within a reasonable time, and the application is later approved.

Application to your situation

You will not be required to include in your assessable income any capital gain you make from the transfer of an interest in the dwelling for no consideration to a special disability trust if your sibling and the trust meets the necessary requirements as outlined in Social Security Act 1991.