Private ruling: Capital Gains Tax
Date of advice: 5 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can capital gains tax (CGT) on the sale of your share of the property be disregarded? | A1: No.

Relevant facts and circumstances: Your parents approached you and asked if you would help them gather a deposit to purchase a house and in return they would give you a one third share of the house as repayment for your help. You gave your parents your weekly wage and in a few years enough had been saved for a deposit and a property was purchased. This occurred before 20 September 1985. You continued to give your parents your wage to meet mortgage repayments and various household bills. In due course your other siblings finished school and gained employment at which time they also started contributing to your parents' household bills. Sometime later you got married and, with your spouse's agreement, you continued to help your family repay the mortgage. Your spouse supported you both financially. Later one of your parents passed away. Ownership of the property reverted to your remaining parent. You and your remaining parent continued to pay the mortgage with your siblings paying the household bills and utilities. Eventually you and your parent finished paying the mortgage to the property. In later years you and your parent had a discussion about the title of the house. They wished to transfer a half share to you instead of the one third share originally stated. They also stated that the other half would be transferred to your siblings. This discussion was a result of your parent being unable to pay the household bills and keep up with maintenance. You requested that your parent split the house equally between you and your siblings. You and your siblings also agreed that your parent and one of your siblings would continue to live in the house until your parent passed at which time it would be sold. You and your siblings also agreed to pay the household bills and maintain the property. The property was transferred to you and your siblings in equal shares approximately 15 years ago. Your parent passed away so the property was listed for sale. It was sold during the relevant income year. The money was divided out by the solicitor and you and your siblings each received a share.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10

Reasons for decision: Summary: Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property and if that legal owner is also the beneficial owner. Taxation Ruling TR 2004/D25 examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'. If the beneficiary of a trust is absolutely entitled to a CGT asset as against a trustee, any act carried out by the trustee is treated as if it was carried out by the beneficiary. In these cases, as an example, if the trustee disposes of a CGT asset, then it is seen that the beneficiary was the one who actually disposed of the asset, not the trustee. An express trust is one that is purposely created by the legal owner of the property in order to benefit someone else. It is created by an explicit declaration, which can be effected by an agreement or common intention held by the all parties to the trust. For an express trust to be created it is necessary that there is certainty of the intention to create a trust, certainty of the subject matter of the trust and certainty as to the object of the trust. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. This means when two or more things are interchangeable, can be substituted for each other, or are of equal value, they are described as fungible. Land is not a fungible asset. The foundation that supports the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a secured and unbeatable interest in the entire trust asset, to call for that asset to be transferred to them or to be transferred to someone else at their direction. Under section 104-10 if an asset is acquired before 20 September 1985 when that asset is disposed of then the capital gain or loss on that asset is disregarded. However in order to be eligible for this exemption you need to be either a legal or beneficial owner of the property and absolutely entitled to the asset for CGT purposes. You have advised that there was an oral agreement between you and your parents that you would be given one third ownership of the property if you assisted them in purchasing it and you also continued to assist your parents in making mortgage repayments. Therefore it could be argued that there was a trust arrangement in place and you had a beneficial ownership interest in the property at the time of purchase. However, your parents would also have had beneficial interest in the property as well as they were the legal owners and the trust arrangement was that they each had one third ownership of the property. Given that there was more than one beneficiary with interests in the asset you were not absolutely entitled to that asset as land is not fungible. Consequently for CGT purposes the owners of the property were the legal owners. As you did not become a legal owner of a share of the property until approximately 15 years ago, you would not be entitled to claim the property was acquired by yourself pre-CGT. Therefore you will have to pay CGT if a gain was made on the disposal of your share of the property.