Edited version of your written advice

Authorisation Number: 1012918979561

Date of advice: 27 November 2015

Ruling

Subject: Capital gains tax: transfer of dwelling/main residence exemption

Question 1

Will you be entitled to the main residence exemption when you dispose of your tenancy in common interest in the property to a third party/non-associated entity?

Answer

Yes.

Question 2

Will the arrangement whereby you, your spouse and the Unit Trust own the property as tenants in common give rise to a partnership within the meaning of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to you in respect of this arrangement?

Answer

No.

This ruling applies for the following period<s>:

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

1 July 2019 to 30 June 2020

1 July 2020 to 30 June 2021

1 July 2021 to 30 June 2022

1 July 2022 to 30 June 2023

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

The scheme commences on:

1 July 2015

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.

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

(a)  The application for private ruling together with all other documents, information and views attached to that application; and

(b)  Email provided, together with all of the attachments provided with that email including the trust deed of the Unit Trust.

The Unit Trust was established in the 19X0s.

The trustees of the Unit Trust are you and your spouse.

The Unit Trust owns a residential property, consisting of a dwelling on a block of land that is less than 2 hectares in area (the property). The property was acquired after 20 September 1985.

The unit holders of the Unit Trust are the trustee of a self-managed super fund (the Super Fund).

Your spouse holds greater than 50% of the units in the Unit Trust and the Super Fund holds the remaining units. This structure was set up pursuant to professional advice received at the time the property was acquired.

The members of the Super Fund at all relevant times have been your spouse and you.

The tenants of the property at all relevant times have been your spouse and you. Your spouse and you as tenants have paid on a regular basis an arm's length amount of rent to the Unit Trust as the landlord. The Unit Trust then distributes on a regular basis the net income of the Unit Trust to the unit holders pursuant to the terms of the deed of the Unit Trust.

The property has at all relevant times been the main residence of your spouse and you.

Your spouse and you now wish to simplify your tax affairs and acquire an ownership interest in your main residence, and as such propose to undertake the following course of action.

Stage 1:

In the 2016 income year, the Unit Trust will redeem your spouse's units in the Unit Trust for their market value. Rather than the Unit Trust redeeming the units for cash, it will redeem the units for an in-specie transfer of a greater than 50% tenancy in common interest in the property. This interest will be equal to the value of your spouse's units, i.e. greater than 50% of the total value of the property.

Your spouse would then have a greater than 50% tenancy in common interest in the property and the Unit Trust would own the rest of the property.

Your spouse and you as tenants will then pay a percentage of the market value of the rent to the Unit Trust. The payments of rent will be made in respect of the less than 50% tenancy in common interest that will be held by the Unit Trust. The greater than 50% of the property that your spouse will own will not be income generating.

It is anticipated that the Unit Trust will make a capital gain from the disposal of a greater than 50% interest in the property to your spouse, and that your spouse will make a capital gain from the redemption of their units in the Unit Trust.

The trust deed of the Unit Trust does not give the trustees the power to make any unitholder 'specifically entitled' to capital gains, as defined in section 115-228 ITAA 1997.

At the end of the 2016 income year, the Super Fund will be the sole unit holder and, as such, will be presently entitled to all the net income of the Unit Trust, which will include the capital gain from the disposal of the greater than 50% interest in the property.

Stage 2:

It is proposed that, following the redemption of your spouse's units, they will transfer half of their interest in the property to you. At a later time, the property will be sold to an unrelated entity. That is, you and your spouse together with the Unit Trust will sell your respective interests in the property to an unrelated entity.

The sale is anticipated to happen sometime in the next 10 years. The dwelling will be your main residence and your spouse's main residence throughout the period in which you hold an ownership interest in the property. During your ownership period, you will not use the property to produce any assessable income.

Relevant legislative provisions

Section 97 of the Income Tax Assessment Act 1936

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Section 118-20 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Anti-avoidance rules

Part IVA of the Income Tax Assessment Act 1936

Reasons for decision

Main residence exemption

You can disregard any capital gain or capital loss you make when you dispose of your main residence if it is your main residence throughout your ownership period and; it was not used to produce assessable income; (section 118-110 of the ITAA 1997).

In your situation you will acquire your ownership interest in the property from your spouse. You intend to occupy the property as your main residence for all of your ownership period. Therefore, any capital gain or capital loss you make on disposing of all or part of your interest to another entity will be disregarded.

Creation of a partnership interest

Taxation Ruling TR 93/32 provides guidance on the division of net income between co-owners. Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land.

Partnership is defined in the various State and Territory partnership acts as "the relation which subsists between persons carrying on a business in common with a view of profit". Subsection 6(1) of the ITAA 1936 defines partnership as 'an association of persons carrying on business as partners or in receipt of income jointly but does not include a company'.

An important ingredient of the definition is "carrying on a business". As noted at paragraph 15 of TR 93/32, without this ingredient, there can be no partnership at general law.

In your case you, your spouse and the Unit Trust will hold your respective interests in the property as tenants in common. You and your spouse will pay rent to the Unit Trust at a percentage of the market value of the rental property reflecting your use and enjoyment of the dwelling in accordance with the Unit Trust's ownership interest. There is only one property owned by the parties as tenants in common.

Owning and renting one property does not amount to carrying on a business. Accordingly there is no partnership interest created between yourself and the Unit Trust at general law.

Furthermore, as you and your spouse will be paying rent to the Unit Trust for the use and enjoyment of its interest in the property, you, your spouse and the Unit Trust will not be in receipt of income jointly, and therefore will not be a 'partnership' under the extended definition of that term in subsection 995-1(1) of the ITAA 1997.

Part IVA

Part IVA of the ITAA 1936 may apply to a transaction if it is determined that there is:

a) a tax benefit; and

b) the sole or dominant purpose of entering into the transaction or scheme was to obtain the tax benefit.

It is arguable that this is a scheme to obtain a tax benefit, being the reduction in tax attributable to your eventual claiming of the CGT main residence exemption. If not for you and the other associated entities undertaking the scheme, on eventual sale of the property to an unrelated party the Unit Trust could make a capital gain which would be assessable income of the unit holders, of which your spouse would be one, under section 97 of the ITAA 1936. By entering into this scheme, there will be a tax benefit being the tax on the capital gain that is disregarded under the CGT main residence exemption. However, that tax benefit will only arise if you make a capital gain. It is not certain you will make a gain - it is possible you will make a loss, in which case there will be, no tax benefit at all. In fact, in that situation there will be a capital loss which you won't be able to claim.

Furthermore, the tax law should not be an obstacle to a taxpayer who wishes to acquire an asset of the type that many taxpayers own, such as the dwelling in which they live. There is no conceivable reason for a policy that deters taxpayers from acquiring an ownership interest in their own main residence.

The purpose of the scheme is to simplify your tax affairs and to acquire an ownership interest in your main residence. We accept that this is a reasonable thing for you to want to do, and is an extremely common thing for taxpayers generally to aim for.

As such, we accept that this scheme will not be entered into with the sole or dominant purpose of obtaining a tax benefit. The dominant purpose is to acquire an ownership interest in your main residence. Further, any tax benefit is not guaranteed - it will only occur if you make a capital gain on eventual disposal of your interest. Accordingly, Part IVA will not apply to you in relation to the scheme.

ATO view documents

CGT Determination 40

Taxation Ruling 2006/14

Taxation Ruling 2012/D1

Law Administration Practice Statement PS LA 2005/24 (draft)

Taxation Ruling 93/32

Other references (non ATO view)

ATO ID 2005/18 (withdrawn)

Colonial First State Investments Ltd v FC of T [2011] FCA 16

Commissioner of Taxation v Bamford [2010] HCA 10

F.C.of T. v. McDonald (1987) 18 ATR 957 87 ATC 4541