Edited version of private advice

Authorisation Number: 1052082317495

Date of advice: 22 February 2023

Ruling

Subject: CGT - property

Question

Did you each have a 25% ownership interest in Property A for capital gains tax (CGT) purposes just before the time of transfer of your ownership interest in Property A?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your adult child and their spouse wanted to buy Property A.

At the same time that the purchase of Property A was proceeding, your child and their spouse were selling Property B. Following the sale of the property, they expected that there would be an amount of funds available to be put towards the purchase of Property A.

However, with the funds from the sale of Property B and other assets, your adult child and their spouse did not have enough to purchase Property A without requiring mortgage insurance.

You had some equity available in relation to your own home and wanted to help your adult child and their spouse.

It was suggested by the bank that you would each need to be on the title of Property A if they were to approve the loan using both Property A and your home as security and to avoid your adult child and their spouse having to take out mortgage insurance.

The bank advised that in these situations, the usual practice was a X%/X% ownership split.

You all purchased the Property in 20XX. The purchase was funded by a joint borrowing (slightly larger than the purchase price) secured against both properties.

Your purchase of the Property was registered as joint tenants, with the ownership recorded as you each having a X% ownership interest, and your adult child and their spouse each having a X% ownership interest.

The original instruction to the solicitor involved in the purchase was for Property A to be owned as tenants-in-common with you having a X% ownership interest as joint-tenants and your adult child and their spouse having the remaining X% ownership interest. as joint tenants.

The solicitor has acknowledged their fault and subsequently paid the additional stamp duty based on you each having a X% ownership interest rather than each having a X% ownership interest.

Your ownership interest in Property A was transferred to your adult child and their spouse in 20XX for $XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Issue

Question

Summary

You each had a XX% ownership interest in the Property for CGT purposes, just before the time of transfer of your interest. As a result, you are liable for any CGT incurred on the transfer of your ownership interest in Property A to your adult child and their spouse.

Detailed reasoning

Capital gains tax (CGT) is incurred when a CGT event takes place, and you make a gain from that event.

The most common CGT event is CGT event A1. CGT event A1 happens if you dispose of a CGT asset.

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or by operation of law.

CGT event A1 will happen if the transfer of legal ownership of property occurs. This is treated as a disposal for CGT purposes.

The time of the event is

(a)  when you enter into the contract for the disposal or

(b)  if there is no contract when the change of ownership occurs

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base.

It is the owner for CGT purposes just before the time of the CGT event that makes the capital gain or capital loss. A legal owner may hold legal ownership of a CGT asset in his or her own personal capacity (often described as holding the legal and beneficial interest) or as trustee of a trust.

The owner of a CGT asset is worked out on the basis of what has happened and not what was intended to happen. Intentions may provide information about what has happened but cannot in themselves alter what has happened.

The Commissioner does not have any discretion to apply the CGT provisions on the basis of your intentions in preference to what actually happened.

Application to your circumstances

You each acquired your legal ownership interests in Property A in 20XX. You have each personally funded the acquisition using your share of the borrowings under the $XXX loan.

Your original intention was to advance the interests of your adult child and their spouse by providing them with legal ownership over the majority of the part of Property A that was funded by you.

The CGT provisions apply to each of you on the basis of what happened in 20XX when Property A was acquired. That is, you each became the owner of a XX% interest in Property A.

The error by the solicitor involved in the purchase to record your ownership in accordance with the funding provided to acquire Property A does not invalidate the acquisition.

The Commissioner can only consider what actually happened in relation to Property A rather than what you each intended should happen. Although the intention was for you to each hold a X% ownership interest in Property A, you each actually acquired X% interests in it.

Consequently, you each held a legal and beneficial interest of X% in Property A when you transferred your interest to your adult child and their spouse.

Note: The transfer of your interests in Property A to your adult child and their spouse is not an arm's length transaction. You must use the market value of your XX% interests at that time as your capital proceeds.