Edited version of private advice

Authorisation Number: 1052357379705

Date of advice: 18 March 2025

Ruling

Subject: Capital Gains Tax

Question 1

Are you required to include capital gains in your assessable income in relation to the transfer of property to your child?

Answer 1

Yes

Question 2

Are you entitled to a partial main residence exemption in relation to your ownership of 50% in the property and the 50% you received from your parent due to the survivorship rules?

Answer 2

Yes.

Question 3

How is the cost base determined?

Answer 3

Information about calculating the cost base can be found by searching ato.gov.au for QC66022.

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 and your parents moved to Australia.

On DD MM YY, your parents purchased a residential property.

You and Parent A were registered on the property title as joint tenants. You did not contribute any funds to the purchase of the property. You were added to the title because when your family arrived in Australia, your parents did not understand English language and property law at all. Your parents wanted you to read and sign the documents with them, and you were added to the title. You didn't know the meaning of joint tenancy or consider the ownership implications until Parent A passed away.

You and your parents moved into the property immediately after the property settlement.

You moved out of the property on DD MM YY, following your marriage. You then lived with your spouse's family until DD MM YY when you purchased a home with your spouse.

You did not pay any rent during the time you lived at the property with your parents. However, you did gift some money to your parents to help with general living expenses (like pocket-money).

From DD MM YY, your sibling (and their spouse) lived at the property with your parents.

On DD MM YY, Parent A passed away.

Parent B continued to live at the property until they passed away on DD MM YY.

You and your sibling were both appointed as an executor and trustee of the estate of your parents.

On DD MM YY, Grant of Probate was obtained by you and your sibling for Parent B's estate.

On DD MM YY, Grant of Probate was obtained by you and your sibling for Parent A's estate.

Following Grant of Probate on DD MM YY, the title was transferred solely to your name, as the surviving joint tenant.

As executors and trustees of your parents' estate, you and your sibling decided to transfer the property to your child.

The estate transferred the property to your child on DD MM YY as per your parents' wishes - but this was not specifically stated in your parents will and it was not documented.

The property was never used to produce income.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-135

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-185

Reasons for decision

Question 1

Are you required to include capital gains in your assessable income in relation to the transfer of property to your child?

Summary

You are required to include capital gains in your assessable income in relation to the transfer of property to your child. You use the market value of a property to calculate your CGT.

Detailed reasoning

Your net capital gain is included in your assessable income by section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Your net capital gain is calculated by subtracting any capital losses that you may have accrued from your capital gains made in that income year.

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring.

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if an entity disposes of a CGT asset. A 'disposal', as defined in subsection 104-10(2) of the ITAA 1997, occurs when there is a change of ownership from one entity to another. A 'CGT asset', as provided in section 108-5 of the ITAA 1997, is:

•                     any kind of property, or

•                     a legal or equitable right that is not property.

Under subsection 116-20(1) of the ITAA 1997, your capital proceeds from a CGT event include the total of the money you have received, or are entitled to receive, in respect of a CGT event happening.

Where on the disposal of an asset no money or property is received, the market value substitution rule contained in section 116-30 of the ITAA 1997 generally applies, such that you are taken to have received the market value of your ownership interest in the property at the time the CGT event occurs.

If you sell, transfer or gift property to family or friends for less than it is worth, you'll be treated as if you received the market value of the property for CGT purposes.

You use the market value of a property to calculate your CGT if both of the following are true:

•                     what you received was more or less than the market value of the property

•                     you and the new owner were not dealing with each other at arm's length.

This is called the 'market value substitution' rule.

Application to your situation

In your case, you've maintained an ownership interest in the property at XXXX that was purchased on DD MM YY. You and Parent A were registered on the property title as joint tenants.

Your parents continued to live at the property until they both passed away in XXXX. On DD MM YY the title was transferred solely to your name, as the surviving joint tenant. You and your sibling were both appointed as an executor and trustee of the estate of your parents. As executors and trustees of your parents' estate, you and your sibling decided to transfer the property to your child.

The estate transferred the property to your child on DD MM YY as per your parents' wishes - but this was not specifically stated in your parents will.

Your child did not pay any money on the transfer of the title from you.

As your child acquired the property from you for no consideration, the market value substitution rule will apply to modify the first element of the cost base of the property. When calculating the capital gain or loss associated with the disposal of the property the capital proceeds will be the market value of that property on the day the CGT event occurs (the transfer date).

The first element of the cost base will be the market value of the property at the time of acquisition from your Parent B.

Question 2

Are you entitled to a partial main residence exemption in relation to your ownership of 50% in the property and the 50% you received from Parent A due to the survivorship rules?

Summary

You are entitled to a partial main residence exemption in relation to your ownership of 50% in the property and the 50% you received from Parent A due to the survivorship rules. You will also be eligible to choose the absence rule.

Detailed reasoning

CGT Main Residence Exemption

In certain circumstances, there may be an exemption that can apply, which means that the gain or loss created by a CGT event is disregarded. Exemptions from CGT are set out in Division 118 of the ITAA 1997. In particular, Subdivision 118-B of the ITAA 1997 contains the CGT main residence exemption. The exemption disregards a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling, or their ownership interest in a dwelling, which is their main residence.

A capital gain or capital loss you make from a CGT event that happens to your main residence is disregarded if:

•                     you are an individual

•                     the dwelling was your main residence throughout your ownership period (section 118-110 of the ITAA 1997)

•                     the property was not used to produce assessable income, and

•                     any land on which the dwelling is situated is not more than two hectares (section 118-120 of the ITAA 1997).

CGT Main Residence Exemption Absence Rule

There are several extensions and limitations to the main residence exemption. These can affect your entitlement to the main residence exemption, depending upon your individual circumstances.

For example, there is an extension to the basic rule which allows you to continue the main residence exemption after the dwelling ceases to be your main residence. This is found in section 118-145 of the ITAA 1997 and is commonly known as the absence rule.

Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes you can continue treating a property as your main residence:

•                     for up to 6 years if you used it to produce income, such as rent (sometimes called the '6-year rule')

•                     indefinitely if you didn't use it to produce income.

•                     During the time that you treat the property as your main residence after you stop living in it:

•                     It continues to be exempt from CGT (the same as if you were still living in it, even if you start renting it out after you leave).

•                     You can't treat any other property as your main residence (except for up to 6 months if you are moving house).

Co-ownership and right of survivorship

When property ownership is shared, and an owner dies, how their share of the property is transferred is based on the co-ownership arrangement. This is called the right of survivorship.

Joint tenants have an equal share in the ownership of an asset.

If a joint tenant dies, the other tenant (or tenants) has a right of survivorship. The deceased tenant's interest is not an asset of their estate.

However, for capital gains tax purposes, the deceased's interest is taken to pass in equal shares to the surviving joint tenants, as if the interest is an asset of the deceased estate and the surviving joint tenants are beneficiaries.

This means if the property was the deceased's main residence, the surviving joint tenants may be entitled to the main residence exemption for the acquired interest.

Claiming the CGT 50% discount

For an asset to qualify for the CGT discount you must own it for at least 12 months before the CGT event happens. The CGT event is the point at which you make a capital gain or loss. You exclude the day of acquisition and the day of the CGT event when working out if you owned the CGT asset for at least 12 months before the CGT event happens.

Main residence for part of ownership period

Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any capital loss or gain arising from a CGT event that occurs in relation to that dwelling.

A partial main residence exemption is available in respect of a dwelling if it was your main residence for only part of the ownership period. The following formula is used to calculate a partial main residence exemption:

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* Non-main residence days are the days that the dwelling was not the taxpayer's main residence. For example, this will include the period from the acquisition date until the date they moved into the dwelling and commenced treating it as their main residence.

** The total days of ownership periodis from the acquisition date until the disposal date of the property.

Application to your situation

As the property was not your main residence for all of the ownership period you cannot disregard any capital gain or loss when you disposed of it. You are only entitled to consider a partial main residence exemption and the 50%CGT discount.

You lived at the property with your parents from acquisition on DD MM YY until DD MM YY. You are eligible to claim the main residence exemption for the period you lived at the property from DD MM YY to DD MM YY. This exemption applies to your 50% ownership interest.

You moved out of the property on DD MM YY, following your marriage. You then lived with your spouse's family until DD MM YY when you purchased a home with your spouse. You will be eligible to choose the absence rule for the period DD MM YY to DD MM YY - providing you don't treat any other property as your main residence (except for up to 6 months if you are moving house).

Following the passing of Parent A on DD MM YY, the property title was transferred solely to your name, as the surviving joint tenant. Therefore, you inherit Parent A's main residence exemption up to their date of death. You are eligible to claim the main residence exemption for the period from DD MM YY to DD MM YY under the co-ownership and right of survivorship provisions. This exemption applies to your 50% ownership interest that you inherited from Parent A.

From the date of Parent A's death on DD MM YY until DD MM YY (when the title was transferred to your son) you are not entitled to the main residence exemption (for the 50% ownership interest you inherited from Parent A).

Parent B continued to live at the property until they passed away on DD MM YY. You will not be eligible for the main residence exemption for the period Parent B lived at the property until they passed away on DD MM YY - as they did not hold an ownership interest in the property and they were not listed as a life tenant in the will.

Because you owned the land for more than 12 months you are able to discount your capital gain using the 50% discount method after applying any capital losses.

Question

How is the cost base determined?

Detailed reasoning

Work out the cost base of a CGT asset yourself, add these 5 elements:

1.            Money paid or property given for the CGT asset

2.            Incidental costs of acquiring the CGT asset or that relate to the CGT event

3.            Costs of owning the CGT asset

4.            Capital costs to increase or preserve the value of your asset or to install or move it

5.            Capital costs of preserving or defending your title or rights to your CGT asset

Do not include any costs for which a tax deduction was claimed. For example, don't include the cost of capital works for which you can claim a deduction.

Further information about calculating the cost base can be found by searching ato.gov.au for QC66022.