The heated property market in places such as Sydney is throwing up a range of interesting capital gains tax (CGT) issues as prospective purchasers come up with creative ideas to get into the market – especially in relation to helping adult children buy a property.
Writing in Thomson Reuters inTAX magazine (August 2015 issue), Kirk Wilson, Senior Tax Writer, Thomson Reuters, explores a scenario in which CGT event B1 could apply.
Take for example, a case where, because the bank won’t lend money to the child, the parent instead borrows the money to purchase the house for the child to live in. Furthermore, the bank requires the home to be bought in the parent’s name. In addition, under the arrangement between the parent and the child, the child agrees to make the loan repayments (and pay outgoings) until such time the child can obtain finance themselves to refinance the loan – at which time the parent agrees to transfer the home to the child. (Presumably, this is not an uncommon type of arrangement in light of lending restrictions imposed by banks.)
In this case, when the parent does transfer the property to the child, the parent will not be entitled to the CGT main residence exemption (because they never lived in the home as their main residence). Moreover, they will presumably be subject to CGT on the difference between the amount they bought it for and its market value at the time of transfer pursuant to the calculation rules in CGT event A1 and the “market value substitution” capital proceeds rule in s 116-30 of the ITAA 1997. And this could be a significant amount if the transfer takes place several years later and the property market continues to rise dramatically.
However, Wilson writes that this may not necessarily be the case. This is because CGT event A1 may not be the applicable or relevant event for this transaction. Depending on the nature of the agreement between the parent and child, Wilson says the “most specific” CGT event (as required to be determined by s 102-25(1)) of the ITAA 1997) may be CGT event B1 – which applies where “the use and enjoyment” of an asset passes to a person before title to the asset passes to the person.
Wilson highlights potential anomalous outcomes and complex issues that could arise in calculating the capital gain or loss under CGT event B1. In particular, a key issue is what would be the “capital proceeds from the agreement” under such circumstances.
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