Edited version of private advice

Authorisation Number: 1052245786658

Date of advice: 14 June 2024

Ruling

Subject: CGT - international income - foreign asset

Question 1

Did you acquire a CGT asset when you became a bare owner of the property in 20XX?

Answer

Yes.

Question 2

Is the cost base of your CGT asset the market value of your ownership interest in the property at the time you acquired the ownership interest?

Answer

Yes.

Question 3

Did CGT event A1 happen to you on the sale of the property in 20XX?

Answer

Yes.

Question 4

Will you be eligible for the for the CGT 50% discount on your share of the net proceeds of the property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 202X

The scheme commenced on:

X XX 20XX

Relevant facts and circumstances

You are an Australian Resident for tax purposes.

You have been gifted a substantial amount of money in 20XX financial year from your grandmother overseas through a structure in Country A known as a Usufruct.

The bare ownership/usufruct arrangement was established deed on X XX 20XX. A copy of the deed has been included with the application.

The Usufruct outlines your grandmother's wishes to donate the property which is her principle place of residence to her grandchildren at a future point in time, which is to be determined by your grandmother. The usufruct or beneficiary ownership provides a way to structure the proceeds of a property sale to grandchildren.

The grandchildren have no involvement in the property financially and the grandmother continues to reside in the property. Your grandmother paid all outgoings associated with owning the property.

Donating a property using a bare ownership / usufruct arrangement is a legitimate way to structure a donation in Country A. It is commonly done as part of estate / succession planning.

The primary intent of the donation has always been to make a genuine donation of the sales proceeds (at the future time of sale) which is determined by the grandmother to her X grandchildren, similar to an inheritance.

In the bare ownership / usufruct arrangement, the donor (grandmother and her husband) retained rights and obligation over the property including maintenance, all income and expenses and importantly the right to make decisions regarding its use including sales decision of the asset.

Your grandmother made the decision to sell the house after your grandfather passed away.

On XX April 20XX the property was sold to new owners and each of the grand children received an equal part of the proceeds from the property sale - in line with the original intent of a donation to the grandchildren.

This sale was handled by the grandmother while still alive. In this case, the non-Australian beneficiaries who were Country A citizens for tax purposes were exempt from CGT. Its worth noting that none of the grandchildren ever had "full ownership" (volle eigendom) nor control over the property and its rights and obligations.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 109-50

Income Tax Assessment Act 1997 section 100-45

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 section 116-20

International Tax Agreements Act 1953

Reasons for decision

Question 1 and Question 3 - CGT Asset and CGT event A1

Under subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

Paragraph 108-5(2)(a) of the ITAA 1997 provides that a part of, or an interest in, an asset referred to in subsection (1) will be a CGT asset.

In your case your 'bare ownership' comprised rights or interests in the property. Those rights or interests were able to be disposed of by the Usufruct. When they were disposed of, you were entitled to receive part of the proceeds from the sale of the property, apportioned to the bare ownership interest.

Accordingly, it is considered you acquired an ownership interest in a CGT asset under section 108-5 of the ITAA 1997.

Whilst the Belgium real property rules operate differently to Australian rules, for taxation purposes we consider that the arrangement entered into on X XX 20XX resulted in a partial disposal for your grandmother, i.e. a partial disposal of her interest in the land by dividing her ownership interest into the nine interests and passing the bare ownership to you and your siblings. This is similar to the creation of inter vivos life and remainder interests in Australia.

Life and remainder interests are dealt with in 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 (TR 2006/14). Paragraphs 192 and 193 of TR 2006/14 state:

192. The Commissioner considers that legal life and remainder interests are not comparable to easements, profits a prendre or licences. Legal life and remainder interests are carved out of the existing fee simple and not superimposed on it in the way that rights attaching to these other interests are. Together legal life and remainder interests represent the entire freehold interest in the land. By 'creating' a life interest, the original owner is actually disposing of part of the freehold interest in the land in a similar way to the disposal of a percentage interest in the property.

193. Therefore, the creation of legal life and remainder interests involves disposals of the original asset by the original owner if created inter vivos or disposals by the legal personal representative or trustee of a deceased estate if the interests were bequeathed under the deceased's will.

In line with TR 2006/14, under section 104-10, a CGT event A1 happens to the grantor in these situations as they dispose of an interest in the CGT asset. The grantor is your grandmother.

Under Belgium law it is possible to create remainder rights without first creating the equivalent of life interests such as a usufruct.

Under Australian law, the property can be split into a life interest and remainder interest. A life interest grants a person the use of a property allowing them to live in the property and receive income from it without full legal ownership. A remainder interest is the future right a person has to the property while the life interest is in place. The owner of the remainder interest will have a legal ownership interest in the property but will not benefit from their interest until the life interest ends. The ATO view on the treatment of the disposal of a life or remainder interest is contained in TR 2006/14.

For the purposes of the current case, the same treatment is considered to apply to a situation where interests in Country A equivalent to a remainder interest are created by retaining the equivalent of a life interest and granting the remainder interest.

Hence, in applying TR 2006/14 to the current facts, paragraph 86 can be equally relevant to a disposal of a remainder interest:

86. CGT event A1 in section 104-10 of the ITAA 1997 happens if an original owner of real property disposes of a legal life interest to another person, that is, there is a change of ownership of part of the original asset from the original owner to the life interest owner.

The general acquisition rules set out in section 109-5 of the ITAA 1997 provide that where an entity disposes of a CGT asset to you, you acquire the asset when the disposal contract is entered into. In this context, it is considered that you acquired a CGT asset, being an interest in real property when CGT event A1 happened to your grandmother and they disposed of their ownership to you and your siblings on X XX 20XX.

Question 2 - CGT Cost Base

Under section 112-20 of the ITAA 1997, the first element of your cost base and reduced cost base will be the market value of the asset (on the day you acquired it) if you did not deal at arm's length with the previous owner in acquiring the asset. This is the market value substitution rule.

The application of this rule to life and remainder interests is covered in TR 2006/14. Paragraph 94 states:

94. The life interest and remainder owners acquire their respective interests at the time CGT event A1 happens to the original owner: subsection 109-5(2). If no money or property was given to acquire the interest, or the life interest or remainder owner did not deal at arm's length with the original owner in relation to the acquisition of the interest and the total market value of money or property given was not the same as the market value of the interest, its first element of the cost base and reduced cost base is its market value at the time of acquisition: section 112-20.

In your case, the arrangement is described as a 'gift' and is not considered to be an arm's length transaction for the purposes of section 112-20 of the ITAA 1997. Therefore, the market value substitution rule will apply.

A market value at this date needs to take into account the market value of the unencumbered real estate at this time, less the value of the Usufruct encumbrance.

Question 4 - CGT discount

Under section 115-100 of the ITAA 1997, an individual is entitled to discount the capital gain made as a result of a CGT event by 50 percent provided:

•         The individual is an Australian resident for tax purposes,

•         The CGT event happens after 21 September 1999; and

•         The CGT asset was acquired at least 12 months before the CGT event happening.

Application to your circumstances

As you held your ownership interest for longer than 12 months, and you were an Australian resident for tax purposes at the time that you disposed of your ownership interest, you are entitled to the 50% CGT discount in relation to the property.