Edited version of private advice

Authorisation Number: 1052320284257

Date of advice: 18 October 2024

Ruling

Subject: CGT - ownership interest property

Question

Can the capital gains tax reporting obligations from the sale of the investment property be altered due to financial hardship?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

On DD MM YY, you purchased the investment property (the property) and had sole ownership interest in the property.

You have been with your spouse since MM YY and have been sharing finances since DD MM YY.

In YY, the mortgage was re-financed, and your spouse was added to the mortgage over the investment property.

On DD MM YY, you and your spouse negotiated a reduced interest rate over a period for your main residence and the property.

On DD MM YY, you and your spouse entered a financial hardship arrangement which remedied the interest for a short-term period.

Due to financial obligations your spouse returned to full time work.

In MM YY, due to financial hardship, the property was sold to reduce the debts over your mortgages on the property and your main residence.

The property sale discharged the mortgages in full and the remaining profit was used towards the main residence and credit card debt.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Question

Can the capital gains tax obligations on the sale of your investment property be altered due to financial hardship?

Summary

The Commissioner does not have discretion under the tax law, to alter the reporting obligations on the capital gain or loss from the legal owner of the property, due to financial hardship.

Detailed reasoning

Section 104-10 (2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs.

Section 104-10 (4) of the ITAA 1997 explains when you will make a capital gain or capital loss from the disposal of your CGT asset.

Section 118-130 of the ITAA 1997 states that for a dwelling that you acquire under contract, you have an ownership interest in it from the time when you obtain legal ownership of it and until your legal ownership interest in the dwelling ends.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners. Provides the Commissioner's view on the 'division of net income or loss between co-owners' of a rental property.

Paragraph 6. The income/ loss from the rental property must be shared according to the legal interest of the owners.

Paragraph 8. Ownership of a property is generally demonstrated through being the 'registered proprietor of the legal title' to the property.

Paragraph 41. The Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

Application to your circumstances

In your situation, when you purchased the investment property (the property) you held the legal and beneficial ownership. The rental income and expenses were solely attributed to you as sole owner of the property.

When the mortgage was refinanced and your spouse was added to the mortgage, this did not change the beneficial or equitable interest, as there was no change in legal title at the time of the refinancing or a written formal agreement. Therefore, the Commissioner cannot consider there is sufficient evidence to establish that there has been a change in the equitable interest or difference in the legal title.

While we can appreciate your circumstances, the Commissioner does not have discretion under the tax law, to alter the capital gain or loss reporting obligations, and liability for the CGT payable, from the legal ownership of the property due to financial hardship.

Therefore, as you hold the legal ownership of the property CGT event A1, under section 104-10 of the ITAA 1997 will apply. You will be liable for the capital gain or loss and liability for the CGT payable.