Edited version of your written advice

Authorisation Number: 1051345202232

Date of advice: 22 March 2018

Ruling

Subject: CGT event B1

Question 1

Did capital gains tax (CGT) event B1 trigger in 19XX, at the time that you entered into an agreement with your relatives in relation to the property?

Answer

No.

Question 2

Are you taken to have acquired the property prior to 20 September 1985?

Answer

No.

Question 3

Are you entitled to a full main residence exemption for the property?

Answer

No.

Question 4

Are you entitled to a partial main residence exemption for the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 1980

Relevant facts and circumstances

Your relatives acquired Property A prior to 20 September 1985.

Your relatives acquired land at Property B prior to 20 September 1985.

In 19XX your relatives commenced building on Property B.

A valuation of Property A was completed in 19XX. The value of Property A was $XXX.

In late 19XX, you came to a verbal agreement with your relatives in relation to Property A. The verbal agreement was as follows:

● All your spare money would go to your relatives to show them your ability and commitment to pay for the property.

● Your relatives would not charge you interest and you would not expect you to pay the full $XXX. They would take into account work you completed around the property.

The dwelling on property B was completed in 19XX and your relatives moved into the new house. You remained living at Property A.

In 19XX your relatives advised that they considered the debt for the purchase of Property A had been paid in full. You had paid approximately $XX to your relatives at that point.

Your relatives transferred the title of Property A to you after 20 September 1985.

You moved out of Property A in 19XX.

Property A was rented out from the time you moved out of the property in 19XX until it was sold in the 20XX-XX financial year.

Assumption(s)

None

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-15

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Question 1 and 2

Section 104-15 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event B1 happens if you enter into an agreement with another entity under which:

● The right to the right and enjoyment of a CGT asset you own passes to another entity; and

● Title in the asset will or may pass to the other entity at or before the end of the agreement.

ATO Interpretative Decision ATO ID 2005/216 provides guidance on the application of section 104-15 of the ITAA 1997. ATO ID 2005/216 provides that in order for CGT event B1 to happen the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified time in the future.

In your case, the agreement you entered into was not a formal agreement, there was no specific amount, time period or event that needed to occur for the property to pass to you. The property was passed to you when your relatives decided that you had ‘paid your debt in full’. It is considered that the agreement you entered into is a loose family arrangement and as such, CGT event B1 did not happen at the time the agreement was entered into.

As CGT event B1 did not happen, CGT event A1 happened in 19XX, when the title of the property was transferred to you from your relatives. As such, you acquired the property on the date of that transfer in 19XX, not upon entering the agreement with your relatives in 19XX.

Question 3 and 4

Main residence exemption

Subdivision 118-B of the ITAA 1997 provides an exemption for a capital gain or capital loss from certain CGT events that happen in relation to a taxpayer's main residence. The general rule is contained in section 118-110 of the ITAA 1997 which provides that a capital gain or loss that an individual makes from the disposal of a dwelling is disregarded if:

(a) the taxpayer is an individual; and

(b) the dwelling was the taxpayer's main residence throughout the ownership period; and

(c) the interest did not pass to the taxpayer as a beneficiary in, and the taxpayer did not acquire it as a trustee of, the estate of a deceased person.

Also, a capital gain or capital loss a taxpayer makes from a CGT event that happens in relation to a dwelling is disregarded under Division 104 of the ITAA 1997, if the taxpayer acquired the dwelling before 20 September1985.

To obtain a full exemption from capital gains tax the dwelling must have become the taxpayers home as soon as practicable; and the dwelling must have been the taxpayers home for the whole period they owned it; and the dwelling must not have been used to produce assessable income; and any land on which the dwelling is situated must be two hectares or less in area.

If any of these conditions are not met or are not met for the full ownership period, a partial exemption only will be available.

Partial main residence exemption

Section 118- 185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any loss or gain arising from a CGT event that occurs in relation to that dwelling. The capital loss or gain is calculated using the following formula:

Capital gain or loss x Non main residence days*

Total days of your ownership period

(* non main residence days are the number of days where a dwelling was not occupied as your main residence).

In your case, as determined above, you acquired the property in 19XX when the title was transferred to you. This means that the property was acquired post-CGT. In 19XX you moved out of the property and used it to produce assessable income.

You are therefore only entitled to a partial main residence exemption on the sale of the property.