Edited version of private advice

Authorisation Number: 1051694250928

Date of advice: 5 June 2020

Ruling

Subject: CGT on the disposal of a property to a beneficially entitled relation

Question

Will your disposal of the property be exempt from capital gains tax?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You purchased land after 19 September 1985, one block and then an adjoining block. The adjoining block was purchased with a relation who passed away a few years afterwards. Their share in the property passed to you.

A house was built on the land. On completion of the house another relation moved into the house rent free. The council rates and water rates were in your name and all other utilities were in your relation's name. Your relation paid all expenses including water, council, electricity, telephone and you provided financial assistance as required.

When the house was sold years later, your relation was given the proceeds from the sale of the property which was used to purchase another property in their own name.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

You make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Property is considered to be a CGT asset.

CGT event A1 happens if you dispose of your ownership interest in a CGT asset (section 104-10 of the ITAA 1997). You dispose of that interest if a change of ownership occurs from you to another entity, including a change in beneficial ownership.

Section 106-50 of the ITAA 1997 provides that where the beneficiary of a trust becomes absolutely entitled to trust property as against the trustee, the trust property is treated as the property of the beneficiary from just after that time.

When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset.

Paragraph 41 of Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners explains that:

·        there are extremely limited circumstances where the legal and equitable interests are not the same

·        and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides the circumstances where the beneficiary of a trust is absolutely entitled to a CGT asset of the trust as against its trustee. Paragraph 30 states that if a CGT event happens in relation to the asset, the beneficiary (and not the trustee) is responsible for any resulting capital gain or loss.

The CGT event is generally triggered when a beneficiary becomes absolutely entitled.

The transfer of beneficial title in the property from you to your relation is a change of ownership for the purposes of the CGT provisions and constitutes a CGT event. This is as your relation is taken to have owned the property and have the beneficial ownership of the property from the date they moved into it and began paying all of the expenses for it.

Summary

The capital gain will need to be calculated on the assets with separate cost bases that were disposed of as one:

·        Block 1

·        Block 2

·        the share of block 2 that was acquired after the passing of the other owner

·        the construction costs of the house.

Therefore a market valuation of the property will need to be obtained at the date when your relative moved in and became the beneficial owner of the property.

There is no main residence exemption available for you as you never lived in the property.