Edited version of private advice

Authorisation Number: 1052234254592

Date of advice: 3 April 2024

Ruling

Subject: CGT - life interest

Question 1

Will a capital gain tax (CGT) event A1 occur on the surrender of your life interest in the property?

Answer

Yes.

Question 2

Can you disregard the capital gain or loss made on the surrender of your life interest in the property under section 118-110 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were married to the testator who passed away.

The testator owned a property. The property was acquired before 20 September 1985.

In the testator's Will, it provided a life tenancy to you for the property.

From the date you were granted a life tenancy in the property, you have rented out the property.

You are considering surrendering your life interest.

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 108-5

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-130

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 provides that a CGT asset includes a legal or equitable right that is not property. It is important to note that your life interest in the property is considered a CGT asset, which is separate from the property itself which is another different CGT asset.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset and paragraph 66 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests affirms this by including that where a life interest owner surrenders or releases their interest, a CGT event A1 happens. Example 9 of TR 2006/14 at paragraphs 172-175 also provides a scenario similar to yours. Therefore, CGT event A1 will occur when you surrender your life interest in the property.

Under section 118-110 of the ITAA 1997, a capital gain or capital loss made from a CGT event that happens in relation to a CGT asset that is your ownership interest, is disregarded if the property was your main residence throughout your ownership period. Your life interest is regarded as an ownership interest as per section 118-130 as it can be classified as an equitable interest or right to occupy the property.

However, since you were granted the life interest you have rented out the property and have not resided in it as your main residence. Therefore, any capital gain or capital loss made on the surrender of your life interest in the dwelling will not be disregarded under section 118-110 of the ITAA 1997.

Paragraphs 68-70 of TR 2006/14 provides information around the application of the market value substitution rule (MVSR) in section 116-30 of the ITAA 1997, notably that if surrendering your life interest for no capital proceeds the MVSR applies to determine the amount of capital proceeds from the event. If capital proceeds are given when surrendering your life interest, the MVSR still applies if those proceeds are more or less than the market value of the interest surrendered, and the parties did not deal at arm's length. The party acquiring the interest may be taken to have paid market value if no expenditure is given to acquire it or they did not deal at arm's length in relation to the acquisition.