Edited version of private advice

Authorisation Number: 1052072677513

Date of advice: 21 December 2022

Ruling

Subject: Capital gains tax

Question

Will CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when you transfer your property to your adult child where it had been agreed that your child could use and enjoy the property for a period of time after which title to the property would be transferred to them?

Answer

No. In these circumstances, CGT event B1 in section 104-15 of the ITAA 1997 happened at the time you entered into the agreement with your child.

There is a special rule in the CGT provisions which provides that if more than one CGT event can apply in a particular situation, the event you use is the one that is most specific to your situation: subsection 102-25(1) of the ITAA 1997.

There are two CGT events which may apply in these circumstances. These events are CGT event A1 in section 104-10 of the ITAA 1997 and CGT event B1 in section 104-15 of the ITAA 1997.

CGT event A1 happens if you dispose of a CGT asset. 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 you own passes to another entity; and

•         title in the asset will or may pass to the other entity at or before the end of the agreement: subsection 104-15(1) of the ITAA 1997.

In order for CGT event B1 to happen the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified time in the future.

In your case, you entered into a formal agreement with your child to grant them the right to use and enjoy the property. It is accepted that the agreement entered into by the parties did not constitute a 'loose family arrangement'. The agreement with your child outlined the occurrence of a specific event which will enable the property title to pass to them.

Therefore, the Commissioner's view is that CGT Event B1 happened when your child first obtained use and enjoyment of your share of the property through the agreement. As CGT event B1 happened when your child was granted the right to use and enjoy the property, there will be no CGT consequences when the title to the property is ultimately transferred to them.

Further information about the Commissioner's view can be found in ATO Interpretative Decision ID 2005/216.

This ruling applies for the following periods:

year ending 30 June XXXX

year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

On XXXX you obtained finance for the purpose of purchasing the residential property at XXXX. The original loan amounts were $XX and $XX.

You purchased the property for the use of your child and their family as their family home, as at the time they were unable to get a mortgage from the bank.

The property settled on XXXX.

You entered into an agreement with your child, whereby they would pay the mortgage payments and home insurance costs for the property, and at a time when he could obtain a mortgage, the title would be transferred to them. The cost of the transfer being the remaining value left on the mortgages and any costs associated with the transfer.

The terms of the agreement were discussed and agreed upon in late XXXX when you first looked at purchasing the property for your child.

The agreement with your child outlined the occurrence of a specific event which will enable the property title to pass to them.

The agreement was signed in late January XXX when you got together with your child to help move them and their family into the property.

You mistakenly included rental income and deductions in your previous income tax returns on the basis of professional tax advice. You have since lodged objections to have the returns corrected. The resulting statement of account for tax owing to the ATO has now been settled.

Your child is currently in the process of obtaining finance so they can purchase the property from you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-15