Edited version of private advice

Authorisation Number: 1052100038422

Date of advice: 22 March 2023

Ruling

Subject: CGT - legal vs beneficial ownership

Question 1

Are you considered the sole beneficial owner of the property for capital gains tax (CGT) purposes?

Answer

Yes.

Question 2

Are you entitled to apply the main residence exemption for up to 2 hectares to the property and disregard the capital gain or loss you made on the disposal?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in 20XX.

The size of the property exceeds 2 hectares.

The legal title of the property is registered in your name and one of your family members as joint tenants.

Due to your financial circumstances, the bank would not approve the loan unless another person was added on the title and the mortgage.

It was agreed that the name of one of your family members would be placed on the title and the mortgage.

There are no documents to record the agreement.

You provided the deposit to purchase the property.

You made all the mortgage repayments.

Since the property was purchased, you have paid all the expenses relating to the property including renovation costs, repairs and maintenance and utilities.

The property was your main residence.

The family member has never lived at that property.

The property has been sold.

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 115-25

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-115

Income Tax Assessment Act 1997 Section 118-120

Reasons for decision

Question 1

When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property.

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation. However, it is possible for legal ownership to differ from the beneficial ownership.

Based on the facts, the Commissioner accepts that in your circumstances, although you and your family member were the legal owners of the Property, it was never intended that this member would have any beneficial ownership. You were the sole beneficial owner of the property.

It can be reasonably concluded that at the time the legal ownership of the property was changed, that is, when the property was sold, you disposed of your beneficial ownership interest. Consequently, a CGT event happened to you when the property was sold.

Question 2

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership in it is disregarded if you are an individual and the dwelling was your main residence throughout your ownership period.

For the purposes of the main residence exemption, a dwelling includes a unit of accommodation that is a building, or is contained in a building, and consists wholly or mainly of residential accommodation, a unit of accommodation that is a caravan, houseboat or other mobile home, and any land immediately under the unit of accommodation as per section 118-115 of the ITAA 1997.

However, subsection 118-120(2) of ITAA 1997 specifies that the total of the land (including the land on which the dwelling is situated must not exceed 2 hectares. Any land exceeding 2 hectares is subject to CGT.

Where a taxpayer has land that exceeds two hectares and wishes to select the main residence exemption, Taxation Determination TD 1999/67 Income tax: capital gains: if your land (including land on which your dwelling is situated) exceeds 2 hectares, can you select which 2 hectares the main residence exemption in Subdivision 118-B applies to and, if so, how do you calculate any capital gain or capital loss you make on the remainder of your land? outlines how to calculate any capital gain or capital loss on land in excess of the two hectares for the main residence exemption. It also provides the methods that can be used to calculate the capital gains or capital loss as outlined in the following paragraphs:

3. If your selected area of land can be separately valued, you calculate your capital gain or capital loss on the remainder of your land by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on the basis of the valuation. This is relevant if the value of the remainder of the land is of a greater or lesser value than your selected area of land.

4. If your selected area of land cannot be separately valued, your capital gain or loss on the remainder of your land may be calculated by apportioning the capital proceeds and the cost base or reduced cost base (if applicable) on an area basis.

5. The amount of the capital gain or capital loss attributable to the remainder of your land must be reasonable in the circumstances.

Application to your circumstances

In your case, you purchased a property which was over 2 hectares. You lived in it as your main residence after you purchased the property. You are entitled to apply the main residence exemption for up to 2 hectares to the property.

Any excess land (non-exempt land) over the 2 hectares will be subject to the CGT provisions as it is notcovered by the main residence exemption. You are also entitled to the 50% CGT discount in relation to the excess land.