CGT event B1
What is CGT event B1?
CGT event B1 involves a situation where a taxpayer enters into an agreement with another entity under which:
- the right to use and enjoyment of a CGT asset the taxpayer owns passes to the other entity; and
- title in the asset will or may pass to the other entity at or before the end of the agreement.
The rules governing CGT event B1 are contained in section 104-15 of the Income Tax Assessment Act 1997 (Cth).
At what time does CGT event B1 occur?
CGT event B1 occurs at the time when the other entity first obtains the use and enjoyment of the asset.
The taxpayer who acquires a CGT asset under CGT event B1 will typically be viewed as having acquired the asset at the time of first use and enjoyment, not at the time title is transferred.
How to calculate CGT Event B1 capital gain or loss
A taxpayer makes a capital gain if the capital proceeds from the agreement are more than the asset’s cost base.
A taxpayer makes a capital loss if the capital proceeds are less than the asset’s reduced cost base.
Importantly, the market value substitution rule for capital proceeds does not apply (e.g. if there is no consideration given in exchange for the right of use and enjoyment).
Who makes the capital gain or the capital loss?
The capital gain or loss is borne by the taxpayer who owns the CGT asset and who is providing the right of use and enjoyment.
Exceptions
A capital gain or capital loss will be disregarded if the relevant CGT asset was acquired before 20 September 1985 (i.e. pre-CGT), or if the title in the asset does not pass to the other entity at or before the end of the agreement.
In addition, CGT event B1 will not apply where another CGT event happens which has more specific application (e.g. CGT event A1). CGT event B1 would also not apply where the asset in question is held on revenue account as a revenue asset or as an item of trading stock.
CGT discounts and concessions
Any capital gain which results from CGT event B1 can be discounted under the general CGT discount (Division 115) and the small business CGT concessions (Division 152) where the taxpayer meets the various criteria of eligibility under those divisions.
The main residence exemption (Subdivision 118-B) may also be available to disregard a gain which occurs under CGT event B1.
Other matters and examples
In ID 2005/216, the ATO considered the applicability of CGT event B1 (versus event A1) in a situation where a taxpayer obtained finance and purchased a property on behalf of their adult child because the adult child was unable to obtain finance. It was agreed that the child could use and enjoy the property for a period of five years. After those five years, the child would obtain finance and pay out their parent’s outstanding loan balance and title would be transferred to them.
The ATO’s view was that CGT event B1 happened at the time the right was granted. There was both a formal agreement to grant a right to use and enjoy of the property and an agreement for title to pass at a specified point in time. Event B1 was more specific than event A1 and therefore applied with precedence.
Importantly, the ATO emphasised that for CGT event B1 to happen, the relevant agreement must be one under which title will or may pass at the end of a specific period or on the occurrence of a specific event. Additionally, CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified time in the future.
In TD 1999/78, the ATO provides several helpful examples which consider if CGT event B1 applies – two of those examples are extracted below:
Example: Perry allows his son use and enjoyment of the family holiday house as and when his son wishes with an expectation that some time in the future, when his son can afford to buy it, the title of the house will pass to him. This type of loose family arrangement does not fall within CGT event B1 because there is no agreement under which title will or may pass and because there is no specific point of time or particular occurrence when the arrangement will end.
Example: Jim owns a boat that his neighbour, Ken, is interested in buying but Ken wants to try out the boat first. Jim agrees to hire the boat to Ken and the agreement provides that Ken will buy the boat at the end of three years unless Ken decides to buy the boat sooner. Jim agrees that, if Ken does buy it, Jim will apply the hire fees against the agreed purchase price. Some months later, Ken inherits some money and approaches Jim to take the boat. The sale is concluded. Because there was an agreement under which Ken had a right to the use and enjoyment of the boat and under that agreement title to it would or might pass to Ken when the hire purchase agreement ends – which could be after three years or within that period - CGT event B1 occurs when Ken first obtained the use and enjoyment of the boat and not when Jim actually transferred the boat to him. Had the three years passed without Ken buying the boat, any capital gain or capital loss Jim made from the CGT event would be disregarded.
Note than CGT event B1 will generally not apply to lease agreements which provide the lessee with a right of first refusal.
Importantly, if title to the asset ultimately does not transfer under the agreement, then any capital gain or loss from CGT event B1 is to be reversed. If the capital gain or loss was recognised in a previously lodged tax return, that return may need to be amended.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
