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Edited version of your written advice
Authorisation number: 1051497921693
Date of advice: 28 March 2019
Ruling
Subject: Capital gains tax - ownership interest
Question
Is the capital gain made on the transfer of your ownership interest in the property disregarded?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2019
The scheme commenced on:
Relevant facts
You and your child (‘A’) and their spouse (‘B’) purchased a property after 20 September 1985.
The property was acquired with an existing tenant. The property continued to be used as a rental property for a number of years.
You approached a financial institution to obtain finance to fund the acquisition of the property. The mortgage was entered into in joint names.
‘A’ & ‘B’ could not afford to purchase the property without your assistance. It was a requirement of the financial institution that you be included on the title to the property.
‘A’ & ‘B’ moved into the property and the property is their main residence.
You have been removed from the title to the property and ‘A’ & ‘B’ have paid the relevant stamp duty to enable this to occur.
You have not contributed any money towards the maintenance of the property.
You received no consideration for the transfer of your ownership interest in the property.
A capital gain has occurred as a result of the transfer of your ownership interest.
You do not have a trust deed in relation to the ownership of the dwelling.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 102-30
Income Tax Assessment Act 1997 Section 103-10
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Income Tax Assessment Act 1997 Section 108-5.
Reasons for decision
Capital gains tax provisions
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset.
Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.
You dispose of an asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
In this case, all the parties were the legal owners of the property. The transfer of your interest in the property is a CGT event. We therefore need to examine if there are any exceptions or CGT exemptions in your circumstances.
Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a property co-owned by husband and wife. The ruling states that the income/loss must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable or beneficial interest is different from the legal title.
Although the property is not now a rental property, the principles in TR 93/32 remain relevant.
You stated that ‘A’ & ‘B’ had full responsibility for the property since acquisition. However there is no documentary evidence to show that you held your interest in the property on trust for ‘A’ & ‘B’.
The title to the property did not change until the transfer and this was a number of years from acquisition.
We acknowledge your intention and that you may not have realised the implications surrounding your situation. However, the Commissioner can only consider what actually occurred rather than what was intended to occur.
The legislation applies to what in fact happened rather than what may have been in mind at some earlier or later point in time. As such the transfer of title to the property will be a CGT event under the CGT provisions.
Note
The market value substitution rule takes effect if you did not deal at arm's length with another entity in connection with the event, this also applies in your case as you have not received any capital proceeds from the CGT event. The market value substitution rule, broadly, is when the capital proceeds are replaced with the market value of the asset.