Edited version of private advice

Authorisation Number: 1051986579945

Date of advice: 2 June 2022

Ruling

Subject: Pre-CGT assets - exemptions

Question 1

Did you acquire your interest in the Property prior to 20 September 1985 and thereby your interest is considered a pre-Capital Gains Tax (Pre-CGT) asset?

Answer

Yes.

Question 2

Are the improvements made to the Property in 1994 taken to be a separate CGT asset and thereby subject to CGT?

Answer

No.

This ruling applies for the following period:

1 July 20XX

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

Person A and Person B purchased a property (the Property). The Property was purchased as joint tenants.

Following a marriage breakdown between Person A and Person B, an agreement was registered in the relevant court. A copy of this agreement has not been provided.

The Agreement transferred the interest of Person A to their child Person C. Person C was a minor and could not legally be registered on the Property's title. A caveat was executed over Person C's interest in the Property.

The Property title was updated several years later to show that Person B and Person C held the Property as joint tenants.

Person C resided in the Property for several years. Following that, they lived either with their grandparents or in rented accommodation.

Building renovations were carried out over several months. The renovations bricked over the existing weatherboard façade and added a second story.

The Property was sold via a contract of sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 108-70(2)

Income Tax Assessment Act 1997 subsection 109-5(1)

Reasons for decision

Question 1

Did you acquire your interest in the Property prior to 20 September 1985 and thereby your interest is considered a pre-Capital Gains Tax (Pre-CGT) asset?

Summary

Yes. You acquired your interest in the Property on XX November 19XX and thereby your interest is considered a Pre-CGT asset.

Detailed reasoning

In general, you acquire a capital gains tax (CGT) asset when you become its owner. Subsection 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you become the owner of a CGT asset when an entity disposes of a CGT asset to you.

You acquire the asset at the time a disposal contract is entered into or, if none, when the entity stops being the asset's owner.

In order to determine the CGT implications upon the disposal of your interest in the property it is necessary to establish when you acquired ownership of the property.

Legal vs beneficial ownership

A person's legal interest in a property is determined by the legal title to that property under the property law legislation in the State or Territory in which the property is situated.

It is possible for legal ownership to differ from beneficial ownership in very limited circumstances. A beneficial owner is a person or entity who is beneficially entitled to the income and proceeds from the asset. An individual may hold a legal ownership interest in a dwelling for another individual in trust. Where legal and beneficial ownership interest of an asset are not the same, there must be evidence that the legal owner holds the property for the beneficial owner.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) contains guidance on the issues involved where the equitable interest in a property may not follow the legal title.

As stated in TR 93/32, the Commissioner considers 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.

Application to your circumstances

Under the Agreement, Person A transferred their interest in the Property to you. As you were a minor at the time, you were not able to be legally registered as the owner of the Property. In this regard, we consider that Person A held their ownership interest in trust for you. Consequently, you are considered to have been the beneficial owner of the interest in the Property from 19XX.

Further we consider that no CGT event happened when the title of the Property was updated to show that you and Person B held the Property as joint tenants. As a result, we considered that you acquired your interest in the Property in 19XX and therefore your interest is a Pre-CGT asset. Consequently, upon disposal of a Pre-CGT asset, no capital gains tax is payable.

Question 2

Are the improvements made to the Property taken to be a separate CGT asset and thereby subject to CGT?

Summary

No. The improvements are not taken to be a separate CGT asset as they do not meet the conditions pursuant to subsection 108-70(2) of the ITAA 1997 and thereby is not subject to CGT as the original asset was acquired before 20 September 1985.

Detailed reasoning

Subsection 108-702(2) of the ITAA 1997 provides that a capital improvement to a CGT asset that you acquired before 20 September 1985 (original asset) is taken to be a separate CGT asset if its cost base when a CGT event happens in relation to the original asset is:

(a) more than the improvement threshold for the income year in which the event happened; and

(b) more than 5% of the capital proceeds from the event.

This applies where the improvement is not related to any other capital improvement to the asset and the CGT event that happens in relation to the CGT asset does not happen because of your death.

A building and the land it is on are usually treated as a single asset. However, there are situations where they are treated as separate assets for CGT purposes.

Application to your circumstances

The cost base of the improvements made to the Property were less than the Improvement Threshold for the 20XX-XX period and it was more than 5% of the amount you received when you disposed of the dwelling.

We consider the conditions for a separate CGT asset in subsection 108-70(2) of the ITAA 1997 are not met. Consequently, the improvement is not considered to be a separate CGT asset. As the improvement is not considered a separate asset and form part of the original asset, any capital gain or loss you make on disposal of the original asset is disregarded as it was acquired before 20 September 1985.