Edited version of your written advice

Authorisation Number: 1051404059733

Date of advice: 2 August 2018

Ruling

Subject: Rent to buy arrangement

Question

Will capital gains tax (CGT) event B1 happen when you enter into a contract of sale for the use and enjoyment of CGT asset before title passes?

Answer

Yes

Question

Are the instalments received under the arrangement considered rental income?

Answer

No

This ruling applies for the following periods:

1 July 2015 – 30 June 2016

1 July 2016 – 30 June 2017

1 July 2017 – 30 June 2018

1 July 2018 – 30 June 2019

1 July 2019 – 30 June 2020

1 July 2020 – 30 June 2021

1 July 2021 – 30 June 2022

The scheme commences on:

7 August 2015

Relevant facts and circumstances

You own a property which has always been treated as a rental property

You purchased the property on the early 2013

You entered into a lease agreement with tenants on mid 2014

You entered into a contact of sale on the mid 2015 with the existing tenants under a rent to buy arrangement

The contract of sale states the following:

● For a specified sale price

● The loan will be repaid by weekly payments to the Vendor for a specified amount with the first of such payment to be made on the mid 2015 and the last of such payment to be made on or before the late 2021

You have not considered a capital gain or loss under CGT event B1 in your 20XX income tax return

You have declared the income received under the rent to buy arrangement as rental income in your 20XX and 20XX income tax returns

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-15

Income Tax Assessment Act 1997 Subsection 104-15(1)

Income Tax Assessment Act 1997 Subsection 104-15(2)

Income Tax Assessment Act 1997 Subsection 104-15(3)

Reasons for decision

Summary

Capital Gains Tax (CGT) event B1 happened when you entered into a standard residential tenancy agreement allowing the use and enjoyment of CGT asset before title passes.

Detailed reasoning

Section 104-15 of the ITAA 1997 describes the circumstances under which a CGT event B1 may happen.

Subsection 104-15(1) of the ITAA 1997 states that CGT event B1 happens if you enter into an agreement with another entity under which the right to the use and enjoyment of a CGT asset passes to the other entity; and the title in the asset will or may pass to the other entity at or before the end of the agreement.

Subsection 104-15(2) of the ITAA 1997 provides that the time of a CGT event B1 is when the entity to which the title will pass first obtains use and enjoyment of the asset.

Subsection 104-15(3) of the ITAA 1997 states that you make a capital gain if the capital proceeds from the agreement are more than the asset's cost base. You make a capital loss where the capital proceeds are less than the asset's reduced cost base.

The Guide to capital gains tax provides guidance on how CGT event B1 applies to real estate. It is recognised that CGT event B1 may happen where an agreement is made with an entity to use and enjoy a property for a specified period after which time the property passes to the entity that has been allowed the use and enjoyment of the property. However, it is stated that CGT event B1 will not happen where under the arrangement title to the property will pass at an unspecified time in the future.

CGT event B1 effectively brings forward the time of a disposal, and the time of a capital gain or capital loss, under such an agreement from the time when the actual disposal takes place to the time when the use and enjoyment of the asset changed hands. In other words, the asset is treated as if it was disposed of when the use and enjoyment of the asset changed rather than waiting until the time when the CGT event A1 takes place.

Based on the information you have provided, it is the Commissioner's view that CGT event B1 is the most applicable CGT event in your circumstances for the following reasons:

● As stated in the contract of sale, you entered into an agreement whereby the title of property would pass to the existing tenants upon the “last of such payment to be made on or before the XX day of XX 2021”, being the specific occurrence for when the arrangement would end,

● The existing tenants have exclusive use of the property as soon as the agreement was made; and

● the agreement allowed the existing tenants the use and enjoyment of the property with the intention that they would become legal owners when the; ‘last of such payment to be made on or before the XX day of XX 2021’ is met, at which point the title of the property would be transferred into the existing tenants names, as stated in the contract of sale.

Therefore, CGT event B1 happened at the time when the existing tenants first obtained the use and enjoyment of the dwelling. This means that any capital gain or capital loss you made was at the time the existing tenants first obtained the use and enjoyment of the dwelling when the contract of sale was entered into.

Additional information

You should consider amending your 20XX and 20XX income tax returns to remove the amounts you have included as rental income relating to this property and work out your capital loss or gain to be included in the year the contract of sale was entered into.