Private ruling: CGT - legal vs beneficial
Date of advice: 8 March 2024
Published: 22 April 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: is the status of the land as a pre-CGT asset maintained when you inherited the property, which was then sold on the passing of the deceased? | A1: No.

Relevant facts and circumstances: On XX XX 19XX, the Deceased married their spouse (Spouse). On XX XX 19XX, your Spouse received approval for an application of land, provided under the Soldier Settlement Act 1958. The land was was to be utilised for farming (the Property). The Property is XXX acres in size. Approval of the Property was conditional on the Spouse and the Deceased selling their jointly owned house and land located at XX. In XX 19XX, your Souse received formal notification that they had been granted a temporary lease for the Property. The lease was effective from XX XX 19XX. In XX 19XX, your Spouse received formal notification that they had been granted a further temporary lease for the Property. This lease was effective from XX XX 19XX. On XX XX 19XX, a Settlement Interim Lease was granted to your Spouse. In XX 19XX, a 55-year Purchase Lease was granted to your spouse, which took effect from XX XX 19XX. Between 19XX and 19XX, the Property was used for farming purposes. The Deceased and their Spouse both earned and reported assessable income from the use of the Property to the Australian Taxation Office under a Partnership arrangement. The Title for the Property was registered in your Spouse's name only. In XX 19XX, your Spouse leased the Property to your child (your child). On XX XX 19XX, your Spouse passed away. The Deceased was the sole beneficiary of their Spouse's estate and inherited the Property. On XX XX 19XX, the transfer of the Property Title transferred to the Deceased, as confirmed by the Corporation's, Deed of Covenant. Up until 19XX, the Deceased continued to reside at the Property. The Deceased then moved to XX. On XX XX 20XX, you made a final lease payment of $XXX.XX to the Purchase Lease for the Property. On XX XX 20XX, the [STATE] Treasurer forgave the remaining debt in relation to the Soldier/Land Settlement loan. No more repayments were required from this time. On XX XX 20XX, you were provided with Discharge of Mortgage papers. On XX XX 20XX, the mortgage was discharged. Neither you, nor your spouse, held the Title documents for the Property prior to this release. On XX XX 20XX, the Deceased passed away. The Property continued to be leased to your Son, until the Property was sold and settled. On XX XX 20XX, you entered into a contract of sale for the Property. On XX XX 20XX, the Property settled.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 106-5

Reasons for decision: Summary: No. You acquired the land for CGT purposes on XX XX 20XX when the mortgage was discharged. Neither you, nor your spouse, held the Title documents for the Property prior to this release. For this reason, the Property constitutes a post-CGT asset, with its disposal in 20XX treated according to normal rules. This outcome regarding when the lessee acquired the land is consistent with Section 132-15 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Legal vs Beneficial interest: Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. 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. The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial and legal ownership are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset. To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other. rusts may be of three kinds: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same and there is sufficient evidence to establish that the equitable interest is different from the legal title. | Detailed Reasoning - Express Trust: An express trust is one intentionally created by the owner of the property in order to confer a benefit upon another. It is created by express declaration, which can be affected by some agreement or common intention held by the 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, subject matter, and the objection of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the create or transfer of interests in land except if evidenced in writing. | Detailed Reasoning - Constructive Trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is dependent upon the order of the court. | Detailed Reasoning - Resulting or implied trusts: On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price. A resulting trust arises by operation of law and falls into two broad categories. One such category is where someone purchases a property in the name of another ( Calverley v Green ). A trust is presumed in favour of the party providing the purchase money./p> If an individual purchases and then pays for a property, but legal title is transferred to another person at their direction, the presumption of a resulting trust arises the property is held in trust for them. The law presumes that the purchaser, as the person providing consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the others name. However, there are instances where this application may not apply. This is where the property is transferred to the purchaser's immediate family such as a spouse or child. In such circumstances, the presumption of a resulting trust is replaced by the 'presumption of advancement'./p> The rebuttable presumption of advancement deems the purchaser to have prima facie intended to advance the interests of the family members (ie. an absolute gift)./p> | Detailed Reasoning - Acquisition by lessee of lessor's reversionary interest in land: Where a lease of land is granted, the interest in the property which remains with the lessor is called the reversion. Section 132-15 of the Income Tax Assessment Act 1997 (ITAA 1997) applies where the lessee of the land, acquires the reversionary interest of the lessor in the land. The lessee of the land need not be the person to who the lease was originally granted. Section 132-15 of the ITAA 1997 specially recognises that the lessee may acquire the lease by way of assignment. This section specifically recognises that the lessee is deemed to have acquired the land and the timing of the acquisition and consideration in respect of acquisition depends on whether the lease is granted for 99-years or more. If the lease was granted for a term of 99 years or more, the lessee is deemed to have acquired the land when the lease was granted. In Taxation Ruling IT 2328 - Income tax: capital gains provisions: interpretation and operation the Commissioner stated in relation to the equivalent provision in the Income Tax Assessment Act 1936 (ITAA 1936), section 160ZW, that it was not necessary for the lease to have been granted for 99 years or more to the lessee who was acquiring the reversionary interest; what was relevant was whether the lease was granted to the original lessee for a term of 99 years or more. The provision of the ITAA 1997 explicitly refers to the lease being 'originally granted' for 99 years or more. In any other case, where the lease is not for 99-years, the lessee is deemed to have acquired the land when the reversionary interest is acquired. | Detailed Reasoning - Application to your circumstances: In 19XX, your spouse was granted land under the Soldier Settlement Act 1958, this land was provided under a Purchase Lease. The Purchase Lease required the payment of rental purchase instalments, half-yearly, for a term of XX-years. The following Sections are applicable to your circumstances: • Section 67 of the Soldier Settlement Act 1958 applied to your circumstances in 19XX on the transfer of the Property to you following the passing of your Spouse • Section 73 provides for Crown grant of land in relation to the Purchase Lease. This subsection applies to you on payment of the last rental purchase instalment. To determine if you have a beneficial interest in the Property, the facts and circumstances surrounding the Property's purchase are considered. We consider the intent of the parties when the Property was purchased as well as evidence of the dealing between the parties both initially and after purchase. n this case, there is no documentation to establish that the Property was held on trust for your Spouse, and in turn, on the transfer to the Deceased, during the term of the Purchase Lease agreement. With the absence of a declaration of intention, an express trust cannot be held. With respect to a constructive trust, as there is no court order, it cannot be held that a construct trust has arisen. There is no resulting or implied trust in your circumstances as there was no purchase money provided for the Property. Your spouse's sole entitlement to the Purchase Lease was due to their service with the Defence force and provided under the Soldier Settlement Act 1958. Therefore, your Spouse did not have the entitlement to transfer any ownership to the Deceased during their ownership period. There is no presumption of advancement in your scheme, given that equitable interest was not held in the Property. At the time that your Spouse passed away, the land was still under the Purchase Lease arrangement and thus your Spouse was not the beneficial owner of the Property. You did not become the beneficial owner in the Property, until you had both major rights of ownership, ie. possession and the right of reversion held by the lessor./p> The lease was transferred to the Deceased after the death of their Spouse. The deceased acquired their absolute entitlement to the Property effective XX XX 20XX, with the discharge of the mortgage and release of the Title documents for the Property. For this reason, the Property constitutes a post-CGT asset, with its disposal in 20XX treated according to normal rules. This outcome regarding when the lessee acquired the land is consistent with Section 132-15 of the ITAA 1997. Subsection 132-15 (1) sets out what happens when the lessee of land acquires the reversionary in interest of the lessor in the land. Where a lease was originally granted for less than 99 years, and you acquired the lease after 19 September 1985, you are taken to have acquired the land for: • Any premium the lessee paid for the grant or assignment of the lease, plus • The amount the lessee paid to acquire the reversionary interest.