Private ruling: CGT - equitable interest
Date of advice: 14 April 2016
Published: June 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you considered an equitable owner in the investment, and therefore entitled to claim a portion of your ex-spouse's capital loss? | A1: No.

Relevant facts and circumstances: In the year ended 30 June 20WW, your spouse at the time, invested into a property development, purchasing blocks of land. You and your spouse have since divorced. The investment contributions were made from a bank account that was held in both your names, connected to your family home loan. Your wages were deposited into this account, your spouse deposited money into this account also. The mortgage repayments for the family home were taken from this account, as well as cash withdrawals, groceries and other family expenses. The land was registered in the names of the investors in the property development joint venture. You did not hold legal interest in the land. The land was not registered in your name. You were not listed in the Joint Venture Agreement. In the year ended 30 June 20YY, the bank repossessed the land, and your spouse realised a capital loss. In the year ended 30 June 20ZZ, you received a family court order indemnifying you from any and all interest and involvement in the land.

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

Reasons for decision: Summary: Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity. When considering the disposal of your interest in 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. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title. Taxation Ruling TR 93/32 deals with the division of net income or loss between rental property co-owners. Paragraph 42 of TR 93/32 explains that any capital gain or loss should be apportioned on the same basis. Generally, the profit or loss should be shared according to the legal interests of the owners. If the equitable interest does not follow the legal title, there is some basis for the profit or loss to be distributed on the equitable and not the legal basis. However, paragraph 41 of TR 93/32 states the following: We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title. A person's legal interest in a property is determined by the legal title to that property under the land legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deed for the property issued under that legislation. In your case, your spouse at the time, invested in a joint venture property development with other people. You were not included in the joint venture agreement and the investors' names were listed on the title deeds of the land. As you were not on the title deeds for the properties, you do not have any legal interest. Therefore, we will need to consider if you had equitable ownership in the properties. An example of where the equitable interest may differ from the legal title is where a party is holding the property in trust for another party. A Family Court order that determines the financial relationship between two parties in divorce proceedings may also provide sufficient evidence to establish that the equitable interest is different from the legal title, where the order provides that the ownership shares in the property are to be altered. In your case, the Court Order does not alter the equitable ownership of the property. Rather, the order indemnifies you in relation to any and all interest or involvement with the investment. This indemnification does not mean that prior to this court order you were considered to have a legal or equitable ownership in the property, it is simply giving you security against any future damage or liability that could come from your involvement, that is, your previous relationship with your ex-spouse. In an Administrative Appeals Tribunal (AAT) case, Domjan v. FC of T (2004) 2004 ATC 2204, [2004] AATA 815, 56 ATR 1235 ( Domjan's Case), the Tribunal found that where a borrowing is deposited into an account that already contains funds the account becomes a mixed pool of funds and it is not possible to determine the source of each subsequent withdrawal. It is impossible to determine whether funds drawn from this account then used to pay an otherwise deductible expense are sourced from the loan monies or whether the funds used are sourced from a taxpayer's own monies. It cannot be said that the interest incurred on the loan has been incurred in the course of gaining or producing assessable income. The principle in Domjan's case can be applied in your situation also. In your case, the funds for the property investment were withdrawn from a joint bank account in which you both deposited wages into and general living expenses were taken out of. In this situation it is impossible to determine whether the funds you deposited into the account were used to contribute to the investment or to pay for living expenses. Therefore it cannot be said that this establishes any equitable interest in the investment properties. After considering the above, there is no evidence that establishes that your equitable interest is any different to your legal interest in the property, you are not entitled to claim a portion of your ex-spouse's capital loss from the sale of the investment.