Private ruling: Capital gains tax
Published: July 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Question and answer | Can you disregard any capital gain or loss on disposal of the property? | No.

Relevant facts and circumstances: You purchased the property a number of years ago. Your parent funded the purchase of the property. Both of your parents used the property as their main residence. You never used the property as your main residence. Your parent specifically requested that the property be purchased in their name due to concerns that another party may be able to make a future claim on the property if it were in the parent's name. You sold the property in 2011. The proceeds of the sale are with your parent. It is intended that any of these funds that remain upon your parent's death will be inherited by you and your sibling. You have provided a copy of a letter from your parent's solicitor stating that your parent informed their solicitor that you were holding the property in trust for your parent. You have provided a copy of a deed of option entered into between you and your sibling, which stated that you were the registered proprietor of the property and contained no mention of you holding the property on trust for your parent. The deed of option allowed your sibling the option to purchase one half of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 106-50. | Income Tax Assessment Act 1997 Section 102-20.

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) directs that you make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. Section 104-10 of the ITAA 1997 describes the most common CGT event A1 and this normally happens when the beneficial ownership of a CGT asset is transferred to someone else. However, in some cases, an individual may hold a legal ownership interest in a property for another individual in trust. Where the legal and beneficial ownership of an asset is different, a trust situation occurs. In this situation the legal owner is the trustee of the asset. A beneficial owner is defined in Taxation Ruling TR 2004/D25 as a person or entity who is beneficially entitled to the income and proceeds from the asset. The CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and the other person was absolutely entitled to that asset as against the trustee. Therefore, we need to determine if you are holding your interest in the dwelling in trust and also whether the beneficiary has an absolute entitlement to this asset. | Detailed Reasoning - Existence of a trust: A trust exists when legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary. There are several kinds of trusts, including express and bare. | Detailed Reasoning - Express trust: An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. It is created by express declaration, which can be effected 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, certainty of the subject matter of the trust and certainty as to the object of the trust. While trusts can be created orally, all state property legislation contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. Therefore express trusts must be evidenced in writing. In your circumstances a trust deed was not established between you and your parent. Therefore, an express trust was not created over the property. | Detailed Reasoning - Bare trust: The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust. A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries of at their direction. A person will have difficulty in establishing the requirements for absolute entitlement under section 106-50 of the ITAA 1997 if one or more other beneficiaries have an interest in the trust asset. This is because section 106-50 of the ITAA 1997 requires identification of a specific trust asset that is held on behalf of a specific beneficiary. It is not sufficient for a beneficiary to show they have an undivided interest in the trust asset. Instead, it must be possible to identify a particular asset being held for a particular beneficiary. Under a bare trust the beneficiaries are entitled to possession of the trust assets and the trustee must act in accordance with the direction of the beneficiary. Ultimately the trustee must deal with the property as directed by the beneficiary. In your case, your name was on the title deed. Furthermore, a deed of option was entered into between you and your sibling that stated that you were the registered proprietor of the property and contained no mention of you holding the property on trust for your parent. The letter from your parent's solicitor stating that your parent informed the solicitor that you were holding the property in trust for them is not evidence that a bare trust existed. In your circumstances a bare trust is not in existence as it cannot be evidenced that you were holding the property in trust for your parent and that you were required to deal with the property as directed by your parent. Furthermore, for a bare trust to exist there must be identification of a specific beneficiary. In your case, both of your parents resided in the property. Therefore, there would potentially be two beneficiaries. This means that the requirements of section 106-50 of the ITAA 1997 cannot be met in any event. Therefore, you were both the legal and beneficial owner of the property and as such the CGT provisions apply to you, rather than to your parent. There are no provisions that apply to your circumstances that would allow you to disregard any capital gain or loss you made when you sold the property. Therefore, any capital gain or loss made must be included in your income tax return.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.