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Edited version of your written advice
Authorisation Number: 1051462011517
Date of advice: 17 December 2018
Ruling
Subject: Capital gains tax
Question
Are you required to report 1/3rd of the capital gain from the sale of the property as a 1/3rd owner of a jointly owned investment property in your tax return for the year ended 30 June 2018?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
In 2009 you purchased an investment property (the property) as tenants in common with Person A.
You had a 1/3rd ownership interest in the property. Person A held the remaining 2/3rd ownership interest in the property.
In 2017 you entered into a deed of agreement with Person A to receive a fixed amount upon sale of the property instead of a 1/3rd share of the balance proceeds of sale.
A contract to sell the property was entered into in the year ended 30 June 2018. The property settlement occurred one month later in the year ending 30 June 2019.
You received the fixed amount from the settlement of the agreement.
This amount was dispersed in accordance with a section 90C Family Law Act 1975 Financial Agreement made in 2017 between you and your ex-spouse as follows:
● 1/3 to you
● 1/3 to your ex-spouse
● 1/3 to be held in trust by your solicitor for the provision of any capital gains tax owing on the sale of the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 6
Income Tax Assessment Act 1997 Section 100-10
Income Tax Assessment Act 1997 Section 100-20(1)
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Paragraph 104-10(3)(a)
Income Tax Assessment Act 1997 Subsection 104-10(4)
Income Tax Assessment Act 1997 Subsection 108-5(1)
Income Tax Assessment Act 1997 Subsection 108-5(2)
Income Tax Assessment Act 1997 Subdivision 115-A
Income Tax Assessment Act 1997 Section 115-100
Income Tax Assessment Act 1997 Section 116-45
Reasons for decision
Upon sale of the property a CGT event A1 was triggered. There is a modification to the CGT rules to reduce the capital proceeds from a CGT event to the extent that you did not receive all of the proceeds, however you do not meet the conditions of section 116-45 and the modification does not apply. Therefore you must report your 1/3 share of the capital gain on your income tax return for the year ended 30 June 2018.
Detailed reasoning
CGT event A1
Division 6 outlines the components that make up your assessable income. It outlines that your assessable income consists of income according to ordinary concepts called ordinary income, as well as statutory income which are other amounts not considered ordinary income.
Section 100-10 outlines that capital gains tax (CGT) affects your tax liability because it includes any capital gain you made in an income year in your assessable income. You need to report any capital gain and loss in your income tax return and pay tax on your capital gains. Subsection 100-20(1) provides that you can make a capital gain or loss only if a CGT event happens.
Section 104-10 states a CGT event A1 happens when you dispose of a GST asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.
Paragraph 104-10(3)(a) states that the time of the event is when you enter into the contract for disposal. Subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base.
Subsection 108-5(1) states that a CGT asset is:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
Further subsection 108-5(2) provides that to avoid doubt, these are CGT assets:
(a) part of, or an interest in, an asset referred to in subsection (1);
(b) goodwill or an interest in it;
(c) an interest in an asset of a partnership;
(d) an interest in a partnership that is not covered by paragraph (c).
Therefore your 1/3rd share in the property was a CGT asset. CGT event A1 occurred when you entered into the contract for sale in the year ended 30 June 2018. Your capital gain on the CGT event A1 is calculated as the capital proceeds of the sale of the property less the cost base of the property, multiplied by your share interest of 1/3.
Modifications to the CGT rules
Section 116-45 provides a modification, known as the non-receipt rule, allowing you to reduce your capital proceeds from a CGT event if:
(a) You are not likely to receive some or all of those proceeds and
(b) This is not because of anything you have done or omitted to do and
(c) You took all reasonable steps to get the unpaid amount paid
The capital proceeds under this section are reduced by the unpaid amount.
As you signed the Deed of Agreement in 2017, and agreed to receive a fixed amount, rather than your 1/3rd share of the balance of sale proceeds, this prevents you from applying the modification in section 116-45.
Discount Capital Gain
Subdivision 115-A provides that a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.
The requirements in the relevant sections state that the capital gain is a discount capital gain if you are an individual, the CGT event occurred after 21 September 1999, the cost base has been calculated without indexation and you must have held the asset for more than 12 months. As you meet all of these requirements your capital gain is a discount capital gain.
Section 115-100 provides that the discount percentage for an individual is 50%. The discount is applied to your capital gain, the net capital gain after applying the discount is required to be included as assessable income in your tax return for the year ended 30 June 2018.
Conclusion:
Upon sale of the property a CGT event A1 was triggered. There is a modification to the CGT rules to reduce the capital proceeds from a CGT event to the extent that you did not receive all of the proceeds, however you do not meet the conditions of section 116-45 and the modification does not apply. Therefore you must report your 1/3 share of the capital gain on your income tax return for the year ended 30 June 2018.