Edited version of private ruling

Authorisation Number: 1011771138329

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Ruling

Subject: Capital gains - disposal of asset

Question

Should a capital gain be included in Partner B's assessable income for the year ended 30 June 2011, under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of you disposing of the marina lease?

Advice/Answers

Yes

This ruling applies for the following period

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

A marina lease was purchased in joint names by a husband and wife post September 1985.

After a number of years one partner gifted their share to the other.

The lease was then sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 104-10(3)
Income Tax Assessment Act 1997 section 108-5
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997, section 112-30
Income Tax Assessment Act 1997 Division 115
Income Tax Assessment Act 1997 section 115-100
Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Summary

Partner A - No capital gains is reportable by you from the sale in the 2010-11 income year. It is suggested that you lodge a 2011 income tax return to ensure possible entitlements (such as the Senior Australians tax offset) are considered.

Partner B - Capital gains are not taxed separately. They form part of your assessable income and are to be included, along with any other taxable income, in your 2011 income tax return. The tax payable will then be calculated on your total taxable income using the normal marginal rates.

Detailed reasoning

A capital gain or a capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Under section 104-10 of the ITAA 1997 the disposal of a CGT property asset causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity. Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for disposal.

Taxation Ruling TR 93/32 discusses the concept of ownership. Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest is achieved by the owner being the registered proprietor of the legal title. Where there is more than one person with a concurrent legal interest, those persons are co-owners and treated as having an equal 50% interest in the asset.

Where a CGT event happens to only part of a CGT asset, section 112-30 of the ITAA 1997 provides for the apportionment of the cost base and reduced cost base between the part of the asset to which the CGT event happened and the other part of the asset.

Calculating Capital Gains and Losses

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Calculating Capital Proceeds

The capital proceeds of a CGT event are defined in section 116-20 of the ITAA 1997 as being the money received (or entitled to receive) in respect of the event happening, or the market value of any property received in respect of the event happening.

Calculating Cost Base

The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997. For CGT events after 1 July 2005 it consists of the following five elements.

1. The total of: the money paid, or required to be paid, in respect of acquiring the CGT asset. In some cases, the market value substitution rule may be applied (see below).

2. Incidental costs of the CGT event, or of acquiring the CGT asset.

3. Costs of owning the asset. (Third element costs are not included in the cost base of assets acquired prior to 21 August 1991.)

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 ownership of or rights to your asset.

You do not include costs if you have claimed, or can claim, a tax deduction for them in any year.

Your capital gain or loss is generally calculated by subtracting the cost base from the capital proceeds.

Market value substitution rule

The market value substitution rule under section 112-20 of the ITAA 1997 states that, where a taxpayer acquires a CGT asset from another entity but did not incur expenditure to acquire the asset - for example, if the taxpayer was gifted the asset, the first element of the cost base or reduced cost base of the CGT asset is the market value of the asset at the time of acquisition.

Likewise, section 116-30 of the ITAA 1997 applies the market value substitution rule to the capital proceeds where either no capital proceeds are received, or the parties are not dealing at arm's length.

In your case this will apply during the year when the husband transferred his ownership to his wife.

The Discount Method

Where a CGT event A1 occurs, a discount is available on the capital gain where the following conditions in division 115 of the ITAA 1997 are met:

1. The capital gain is made by an individual

2. The CGT event occurred after 11.45am on 21 September 1999

3. The cost base has not been indexed.

4. The asset must have been acquired at least 12 months before the CGT event.

Where these conditions are met, the capital gain is reduced by 50% for individuals (section 115-100 of the ITAA 1997).

You purchased a marina lease in joint names post September 1985.

The lease was gifted to partner B sole owner. The market value of the lease at this time was XXX.

A CGT asset is defined in section 108-5 of the ITAA 1997 to include part of, or an interest in, an asset. Therefore, where a part owner of a jointly owned asset assigns their 50% right to the other owner, there is a disposal of a part of the CGT. This is a capital gains event (A1).

Partner B sold the lease. This is also a CGT event (A1).

You make a capital gain if the proceeds received for your asset are more than the cost base for the asset. The money received from the sale of the property will be the capital proceeds.

Your cost base is the total of the amount paid to purchase the property. The original purchase price was xx which equates to a cost base of xx each. You have not advised the additional costs you incurred to acquire and dispose of the asset, or amounts (if any) for the other elements of the cost base. These costs have therefore not been applied in this calculation.

Cost base

Using the CGT Discount Method

As you have met all the conditions in Division 115 of the ITAA 1997, you are eligible to choose the 50% discount method to calculate your taxable gain upon the sale of the property.

Partner A

In your situation the calculation is as follows:

Capital proceeds: Market value substitution

Cost base: 50% of purchase price

You then reduce the capital gain by any previous or current year capital losses and then apply the CGT discount: You have not advised of any losses and these have therefore not been considered.

You have an assessable net capital gain from the disposal of the lease in the income year the lease was transferred. The time limit for amending the information in most tax information is generally two years. Any request for an amendment would be required to include a request for us to treat your objection as if it had been lodged on time.

Partner B

In your situation the calculation is as follows:

Capital proceeds:

Cost base: 50% of original purchase price + 50% of market value at transfer

Capital proceeds - cost base = gross capital gain

You then reduce the capital gain by any previous or current year capital losses and then apply the CGT discount: You have not advised of any losses and these have therefore not been considered.

(Capital gain -capital losses) x 50%= net capital gain

Therefore you have an assessable net capital gain from the disposal of the lease in the 20XX income year.

As capital gains are not taxed separately and are deemed as assessable income this amount should be included, along with any other taxable income, in your 2011 income tax return. The tax will then be calculated on your total taxable income using the normal marginal rates.

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