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1 Are any capital gains Individual C makes from the disposal of the property at Lot B disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A partial main residence exemption will apply to the sale of the dwelling. Question 2 Are any capital gains Individual A and Individual B make from the disposal of the property located at Lot A disregarded under section 118-110 of the ITAA 1997? Answer No. A partial main residence exemption will apply to the sale of the dwelling. Question 3 Can Individual A and Individual B include the proposed payment for Individual C's occupation right over Lot B in their cost base under subsection 110-25(5) of the ITAA 1997? Answer No. Question 4 Can Individual C include the proposed payment for Individual A and Individual B's occupation rights over Lot A in their cost base under subsection 110-25(5) of the ITAA 1997? Answer No. This ruling applies for the following periods: Year ending 30 June 20YY The scheme commenced on: DDMM19YY

Individual C (and the late Individual D), Individual A and Individual B advised that they did not seek legal advice prior to the purchase of the land located at XXX (the Property). On DD MM 19YY, a private agreement (the Original Agreement) was made between Individuals A and B and Individuals C and D, for the parties to purchase vacant land at XXX. •  Individual A would bid at auction on DD MM 19YY on behalf of all the Individuals to purchase the property. •  Individual A would pay for the property in full including all legal and other outgoings associated with the purchase. •  Individuals C and D agree to pay interest at the rate of 5% p.a. on half the amount of the legal fees and other outgoings associated with the purchase. •  It is the intention of Individuals C and D, at the appropriate time to sell their property XXX and use part of the sale proceeds to repay half the monies associated with the property's purchase.

•  The purchasers agree to develop the land by initially rezoning from Future Urban to Residential A, then obtaining a Group Title for X lots. One lot will be held by Individuals A and B and one lot to be held by Individuals C and D. Two lots will be owned collectively by the purchasers in the first instance. •  As from the date of settlement, all other costs associated with holding and/or developing the land shall be borne in equal parts by the purchasers. •  Any profit or loss associated with the abovementioned development shall also be shared equally among the purchasers. •  Should Individuals C and D wish to withdraw from this agreement, they may do so by giving 30 days' notice in writing and meet the cost of transferring clear title to Individuals A and B, including stamp duty on the conveyance. •  In the event that the proposed development does not proceed, because of rejection by XXX City Council or any other reason as agreed to by the purchasers, ownership shall be transferred to Individuals A and B, with all costs associated therewith including stamp duty to be the responsibility of Individuals C and D.

The property was purchased on DD MM 19XX. The title shows the ownership as Individuals A and B (as joint tenants), and as tenants in common with Individuals C and D (as joint tenants). Individual C acquired Individual C's interest as the survivor of the joint tenancy. The property was subdivided into XX lots on DD MM 19YY. Lot X was sold in the late 1990's. Individual C owns 50% of Lot A, as tenants in common with Individuals A and B. Individuals A and B own 50% of Lot B, as tenants in common with Individual C. Your legal representative advised: •  It was the intention of the individuals to eventually separate the legal ownership of the lots so that Individuals A and B would own 100% of Lot A and Individuals C and D would own 100% of Lot B. •  While the two couples were aware that they should have separated the legal ownership of the lots, they did not consider it a priority and believed that any practical difficulties resulting from the legal ownership issues could be resolved. •  Each couple paid for their own costs. Each party understood that they would have exclusive use and possession of their respective properties regardless of who was on the title.

•  You advised that the decision relating to the location and boundaries for each lot were arranged by your town planner XXX in conjunction with the XXX City Council, with the four individuals having minimal input. •  There is a common driveway used by all XX lots on the property. Each lot can exit the driveway to enter their respective homes. •  There is no fencing between the lots. The owners have never seen the necessity to construct fences to separate the lots, due to the bush setting. •  The land tax notices were issued to each party for the Property and this is considered a residential property. Lot A Property Individuals A and B built their home, using cash reserves for the construction, to build on Lot A and moved into the dwelling in mid-20YY. Individuals A and B are solely responsible for the costs relating to Lot A. The Lot A Property being Individuals A and B's main residence is demonstrated by: •  their personal belongings are in the Property; •  their mail is delivered to the Property; •  the address, at Lot A, is on the State and Federal electoral rolls for both Individuals A and B;

•  Individuals A and B have not resided anywhere other than the Property since their house was built. The State Revenue Office Land Tax Assessment notice 20YY-YY issued to Individual A, and a separate notice to Individual B, at Lot A for the property at XXX, with exemption code R. Lot B Property Individuals C and D arranged a loan for the construction of their home. Their home was built on Lot B in mid-19YY and they took up residence, as soon as practicable, in MM 19XX. Individuals C and D repaid the loan (representing 50% of the purchase costs) to Individuals A and B and have directly paid for all other expenses related to Lot B property since the purchase. Individual D died in 20XX, and their interest passed to Individual C under joint tenancy survivorship. The Lot B Property is Individual C's main residence and is demonstrated by: •  all Individual A's personal belongings are in the Property; •  Individual A's mail is delivered to the Property; •  Individual A's address on the State and Federal electoral rolls is the Property; and •  Individual A has not resided anywhere other than the Property since the house was built.

The State Revenue Office Land Tax Assessment notice issued to Individual C at Lot B is for the Property with exemption code R. Restated Agreement Individuals A, B and C, agree that a more formal agreement (Restated Agreement) should be entered into to ensure: •  the parties' respective rights in respect to their properties - reflected in the use of "held by" in the Original Agreement - are formalised to protect their interests should they die or lose capacity; and •  a procedure is established to manage the sale of the properties. The Restated Agreement will essentially be a re-stating of the original understanding between Individuals A, B, C and D. It is not intended to change the parties' current rights in respect to the properties they respectively occupy. The material terms of the Restated Agreement will be: •  acknowledging the Original Agreement between the parties and that the Original Agreement still applies and is not intended to be replaced by the Restated Agreement;

•  confirming that the parties understand that Individual C, following Individual D's death, has exclusive possession and occupation rights of Lot B and if directed by Individual C, Individuals A and B must cooperate in the sale of the Lot A Property; •  confirming that the parties understand that Individuals A and B have exclusive possession and occupation rights of Lot A and if directed by Individuals A and B, Individual C must cooperate in the sale of the Lot A Property; •  setting out a procedure (the Sale Procedure, for convenience) should either Individual A and B and C, decide to sell their respective properties. By way of example in respect of the Lot B Property, the procedure specific in the Agreement would be: -  first, Individuals C, A and B will enter into an agreement in which individual C agrees to relinquish their exclusive possession and occupation rights in respect of the Lot B Property; -  secondly, that as consideration for this relinquishment in relation to their 50% interest in the Lot B Property, Individuals A and B will pay an amount equal to 50% of the value of the Lot B Property;

-  thirdly, that Individual C may receive the full sale proceeds of the Lot B Property, and their receipt of the 50% of the proceeds 'belonging' to Individuals A and B by virtue of their 50% legal interest in the Lot B Property is considered payment of the amount Individuals A and B must pay Individual C to extinguish their exclusive possession and occupation rights in respect of the 50% of the Lot B Property owned by Individuals A and B.

Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 118-130 Income Tax Assessment Act 1997 section 118-150

Question 1 Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs under section 104-10 of the ITAA 1997 when there is a change in ownership of a CGT asset. Accordingly, when applying the CGT provisions on the sale of property, ownership must be considered. It must be determined who had beneficial ownership of the property. The property title is registered as Individual C as a tenant in common with Individuals A and B (as joint tenants). The arrangement reflects the 50% ownership of Individual C and the late Individual D, and the 50% ownership of Individuals A and B. Their intention was to rezone the property from Future Urban to Residential A and obtain a Group title for X lots. The property was subdivided into three lots with Individuals C and D "holding" Lot B and Individuals A and B "holding" Lot A. Dwelling acquired from a deceased estate Section 118-195 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens in relation to a dwelling or your ownership interest in it is disregarded if:

•  you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as a trustee of a deceased estate; and •  at least one of the items in column 2 and at least one of the items in column 3 of the table, under paragraph 118-195(1)(b), are satisfied. Individual C acquired Individual D's share in the dwelling on their death, and their ownership interest in the land, under joint tenancy survivorship, and is the sole owner of the dwelling built on Lot B. Individual C can claim a partial main residence exemption for the dwelling when it is subsequently sold. Partial main residence exemption

Taxation Determination TD 2000/16 Income tax: and capital gains tax: in what circumstances does subsection 118-150(5) of the Income Tax Assessment Act 1997 modify the start of the period in paragraph 118-150(4)(b) for which you choose under subsection 118-150(2) to apply the main residence exemption in Subdivision 118-B? provides that the purpose of section 118-150 is to extend the main residence exemption in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) to land in which you have an ownership interest (other than a life interest) if you build, renovate or repair a dwelling on the land and that dwelling becomes your main residence.

If you build a dwelling on vacant land, you may choose under subsection 118-150(2) to apply the main residence exemption for the period from when you acquire your ownership interest in the land until the dwelling becomes your main residence. This period may not exceed four years before the dwelling becomes your main residence: subsection 118-150(4)). The dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months: subsection 118-150(3). Application to your circumstances Individual C acquired Individual D's interest in Lot B and the dwelling, upon their death, under the right of survivorship as a joint tenant. While Individual C and D paid for their dwelling, the land on which the dwelling was built is owned as tenants in common with Individuals A and B. As Individuals A and B are part owners of the land, they are entitled to half the proceeds of the sale and CGT will apply to their 50% interest with no main residence exemption.

The partial main residence exemption applies to Individual C's ownership interest in the dwelling due to the acquisition of the property in MM 19YY and the delay in building and occupying of the dwelling in MM 19YY. Question 2 Are any capital gains Individuals A and B make from the disposal of the property at Lot A disregarded under section 118-110 of ITAA 1997? Partial main residence exemption Taxation Determination TD 2000/16 Income tax: and capital gains tax: in what circumstances does subsection 118-150(5) of the Income Tax Assessment Act 1997 modify the start of the period in paragraph 118-150(4)(b) for which you choose under subsection 118-150(2) to apply the main residence exemption in Subdivision 118-B? provides that the purpose of section 118-150 is to extend the main residence exemption in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) to land in which you have an ownership interest (other than a life interest) if you build, renovate or repair a dwelling on the land and that dwelling becomes your main residence.

If you build a dwelling on vacant land, you may choose under subsection 118-150(2) to apply the main residence exemption for the period from when you acquire your ownership interest in the land until the dwelling becomes your main residence. This period may not exceed four years before the dwelling becomes your main residence: subsection 118-150(4)). The dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months: subsection 118-150(3). Application to your circumstances While Individuals A and B paid for their dwelling, the land on which the dwelling was built is owned as tenants in common with Individual C. As Individual C is a part owner of the land, they are entitled to half the proceeds of the sale and CGT will apply to their 50% interest with no main residence exemption. The partial main residence exemption will apply due to the acquisition of the property in MM 19YY and the delay in building and occupation of the dwelling in mid-20YY. Question 3

Can Individuals A and B include the proposed payment for Individual C's occupation right over Lot B in their cost base under subsection 110-25(5) of the ITAA 1997? Question 4 Can Individual C include the proposed payment for Individual A and B's occupation rights over Lot A in their cost base under subsection 110-25(5) of the ITAA 1997? Detailed reasoning What is an ownership interest in land or in a dwelling under section 118-130 of the ITAA 1997? A legal or equitable interest in the land or a right to occupy it is taken to be an ownership interest in land. For dwellings other than flats or home units, an ownership interest is a legal or equitable interest in the land on which the dwelling is erected, or a licence or right to occupy it. The next question which must be considered is when does such an interest arise or end. If the land or dwelling is acquired under contract, the taxpayer has an ownership interest from the time of obtaining legal ownership or, if earlier, the time of obtaining the right to occupy it under the contract or related contract.

If the CGT event in relation to land or a dwelling occurs under a contract, the taxpayer has an ownership interest until the taxpayer's legal ownership of the land or dwelling ends. Legal interests Legal interest is not defined in the ITAA 1997 and relies on the common law meaning. Accordingly, in its broadest terms, a legal interest in land, and or a dwelling would arise where a taxpayer has the rights, powers, duties and privileges associated with interest in the fee simple and lesser interests. Paragraphs 192 and 193 of Taxation Ruling TR 2006/14 Income Tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests provides:

'The Commissioner considers that legal life and remainder interests are not comparable to easements, profits a prendre or licences. Legal life and remainder interests are carved out of the existing fee simple and not superimposed on it in the way that rights attaching to these other interests are. Together legal life and remainder interests represent the entire freehold interest in the land. By 'creating' a life interest, the original owner is actually disposing of part of the freehold interest in the land in a similar way to the disposal of a percentage interest in the property. Therefore, the creation of legal life and remainder interests involves disposals of the original asset by the original owner if created inter vivos or disposals by the legal personal representative or trustee of a deceased estate if the interests were bequeathed under the deceased's will'.

All parties to the purchase gained their percentage of ownership interest in the property as a whole when it was purchased, providing each party with the right to use and enjoy the whole of the land. You did not create a legal life or remainder interest for the other joint tenants by carving this out from your freehold interest in the land, because each party already held those interests as components of their freehold interest. Therefore, there was no disposal of part of your freehold interest. The agreement did not extinguish, or expand, the parties' ownership interests. You merely respected each other's use and enjoyment of a particular portion of the land, and each party refrained from using the other couple's portion of the land identified as theirs to occupy. Right of exclusive possession

The fundamental right which a tenant has that distinguishes their position from that of a licensee is an interest in land as distinct from a personal permission to enter the land and use it for some stipulated purpose or purposes. Whether such an interest in land has been given is ascertained by seeing whether the grantee was given a legal right of exclusive possession of the land for a term or from year to year or for a life or lives. If he was, he is a tenant. And he cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise ( Radaich v Smith (1959) 101 CLR 209). In 34 ALJ 219 it is suggested that Radaich v Smith and Isaac v Hotel de Paris Ltd

are reconcilable on the footing that where it is said that "exclusive possession" does not necessarily connote a lease, the expression is used to describe a factual situation of sole occupation or an agreement which is no more than an agreement for sole occupation, but that where it is said that "exclusive possession" necessarily connotes a lease, the expression is used to describe the nature of the legal rights in the premises which the grantee is to have against the grantor and against third parties. The absence of a covenant for quiet enjoyment is relevant to the question whether the instrument is a lease or licence, but it is not necessarily decisive of that question where other provisions of the instrument combine to make it clear that a right to exclusive possession was intended to be vested in the lessees with the rights that such a vesting will confer against third parties ( Goldsworthy Mining Ltd v FC of T 73 ATC 4010). Creating contractual rights for the acquisition of a CGT asset

The creation of contractual rights as consideration for the acquisition of a CGT asset will not cause a capital gain or loss to arise under CGT event D1 in section 104-35 of the ITAA 1997. The asset acquired under the contract will not be capital proceeds for the creation of rights under CGT event D1. No cost base arises for the assignment of the rights. Application to your circumstances The proposed payment to Individuals A and B by Individual C, and Individual A and B's proposed payment to Individual C for the occupation rights is a private agreement and does not come within any of the elements of the cost base.