Edited version of private advice

Authorisation Number: 7915164105032

Date of advice: 14 March 2024

Ruling

Subject: First home super saver scheme - freehold interest in property

Question

Does a signed contract for the sale of real property fall within the meaning of 'freehold interest in real property in Australia', as per subparagraph 138-10(2)(a)(i) of Schedule 1 to the Tax Administration Act 1953 (TAA)?

Answer

Yes

This advice applies for the following period

Year ending 30 June 20YY

Relevant facts and circumstances

•           You have made voluntary contributions to your superannuation funds for the purpose of accessing the First Home Super Saver Scheme (FHSSS).

•           You have only lived in rental properties and have never purchased a house or been registered on a title for a property.

•           You made a pre-auction bid on an apartment. Your offer was accepted on the same day and therefore you have a signed binding contract.

•           You have not yet applied for or received an FHSSS determination.

Contentions

•           Before signing the contract, you were unaware that the Commissioner holds the view that a freehold interest in land, for the purposes of subparagraph 138-10(2)(a)(i) of the TAA, includes entry into a contract of sale for the acquisition of land.

•           The weight of case law authority in Australia does not support the broad construction that a freehold interest in real property includes entry into a contract of sale for the acquisition of land, which has been taken by the Commissioner in relation to the FHSSS. Nor, it seems, does this interpretation find favour in the Commissioner's views with respect to other tax legislation and instruments.

•           Together with common parlance, the dominant view in the Australian case law is that an 'interest in real property' is obtained by the purchaser at settlement (the narrow construction).

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 section 138-10

Income Tax Assessment Act 1997 subsection 118-130(1)

We followed these ATO view documents

Law Companion Ruling 2018/5: First home super saver scheme

SPR GN 2018/1 - First home super saver scheme

Reasons for decision

The FHSSS allows you to save money for your first home by making voluntary concessional or non-concessional contributions to your super fund. You can then apply to release your voluntary contributions, along with associated earnings, to help purchase your first home under the FHSSS. You must meet the eligibility requirements to apply for the release of these amounts.

Under section 138-35 of Schedule 1 to the TAA, the maximum amount of eligible contributions that can be released from any one financial year is $15,000 and up to a total of $50,000 contributions across all years. You may also receive an amount of earnings that relate to those contributions.

Where you make a valid request under subsection 138-10(2) of Schedule 1 to the TAA, the Commissioner must make an FHSSS determination in relation to you as per subsection 138-10(3).

In accordance with section 138-10(2) of Schedule 1 to the TAA you may request the Commissioner to make a first home super saver determination if:

(a)  you have never held:

(i)    a freehold interest in real property in Australia; or

(ii)   a lease of land in Australia (including a renewal or extension of such a lease) as described in paragraph 104-115(1)(b) of the Income Tax Assessment Act 1997; or

(iii) a company title interest (within the meaning of Part X of the Income Tax Assessment Act 1936) in the land in Australia; and

(b)  you are 18 years or older; and

(c)  you have not previously requested a release authority under Division 131 in relation to a first home super saver determination that has been made in relation to you.

A key eligibility requirement is that you have never held a 'freehold interest' in real property prior to applying for and receiving an FHSSS determination.

Freehold land (or fee simple) provides people with the most complete form of ownership of that land, in perpetuity. It allows the land holder to deal with the land including selling, leasing, licensing or mortgaging the land, subject to compliance with applicable laws such as planning and environment laws.

'Freehold interest' in real property is not defined in taxation law and has no fixed meaning in property law.

You contend that the purchase of a freehold interest in real property is when settlement occurs, and the property legally transfers to the buyer.

At law, property consists of a bundle of rights that are divided into legal and equitable rights (see Yanner v Eaton, Gummow J, [1999] HCA 53 -201 CLR 351).

A legal interest in land is a legally enforceable right to possess or use the real property. If you have a legal interest over land, it makes you the legal owner. As the legal owner, you will have the right of control over the land including the right to transfer ownership of it.

An equitable interest arises in circumstances where someone may have a legitimate interest in a property, without being the legal owner of it.

The concept of an equitable interest only exists in jurisdictions with Common law backgrounds and is enforceable through the law of equity. With regard to real property, a right is created when an enforceable contract for the sale of land is exchanged, even though the transfer of legal ownership does not occur until settlement - as per the rule established in Lysaght v Edwards [1876] 2 Ch D 499 p.506. Therefore, an equitable interest is a right over or beneficial interest in property, which gives the holder the right to acquire formal legal title to the freehold property.

Subsequently, a freehold interest in property will include any interest in real property whether legal or equitable.

The Commissioner provides the following view in paragraphs 7 and 8 of Law Companion Ruling 2018/5: First home super saver scheme:

7. There is no definition of 'freehold interest' in the FHSS scheme provisions. In another instance in the tax law 'freehold interest' is defined to be limited to a legal interest in real property. In the absence of any evidence of an intent to limit the meaning of the term in the FHSS scheme provisions, the Commissioner's view is that a 'freehold interest' includes any type of interest in the relevant real property. This means that 'freehold interest' includes both legal and equitable interests in the relevant real property.

8. This interpretive approach is, in the Commissioner's view, consistent with the broader policy framework evidenced by the specific inclusion of situations where a person has acquired a lease of land within the FHSS scheme as a stipulated property interest. Entering into a contract to acquire real property, including vacant land, may mean that the individual acquires an equitable interest in the real property even before settlement of the contract.

This is further supported in SPR GN 2018/1:

Never held a freehold interest in real property

You must not have previously held a freehold interest in property in Australia (unless we determine that you have suffered a financial hardship). Holding an interest includes:

•         legal interests, such as the 'ownership' you receive when a property is transferred to you at settlement, and

•         equitable interests, such as the rights you hold in relation to a property between the time you sign a contract and when the contract settles.

This can mean that you are not eligible to request a FHSS determination from us if you have already signed a contract to acquire property.

As outlined above, in the absence of any limiting legislative reference to the definition of a freehold interest, entering a contract for real property includes acquiring an equitable freehold interest in land.

It is noted that ownership is not defined in taxation law, although the meaning of 'ownership interest' in land or dwelling is defined in subsection 118-130(1) of the Income Tax Assessment Act 1997 as 'you have a legal or equitable interest in it or a right to occupy it'. However, subsection 118-30(2) then specifies that where the land or dwelling is acquired under contract, the taxpayer has an ownership interest from the time of obtaining legal ownership (i.e. upon settlement), rather than from the time of entering into the contract. Therefore, the definition of ownership interest is limited to legal interest for capital gains tax purposes. Similar clarifying provisions do not exist in the TAA.

It is the Commissioner's view that the exclusions in paragraph 138-10(2)(a) of Schedule 1 to the TAA are intended to be of broad scope, and include not only direct legal interests, but other legal or economic rights comparable to a direct legal interest in real property. For example, under subparagraph 138-10(2)(a)(ii), individuals who have held a long-term lease over land will not be eligible for the FHSSS.

Therefore, in the absence of any limitations to the definition of freehold interest, the scope of the exclusions in paragraph 138-10(2)(a) were intended to be broad and not limited to individuals holding an interest in land either as registered proprietor (in the case of Torrens Title land) or as holder of the legal fee simple (in the case of General Law land) in order to achieve the object of the legislative scheme in Division 138 of Schedule 1 to the TAA.

As you have not applied for an FHSSS determination, prior to signing an enforceable contract for real property, you are ineligible to receive a determination under subsection 138-10 of Schedule 1 to the TAA.