Private ruling: CGT- legal and beneficial ownership
Date of advice: 9 February 2022
Published: April 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you required to pay capital gains tax on your ownership interest in the property when it is sold? | A1: Yes.

Relevant facts and circumstances: Your parent purchased the property a couple of decades ago. A percentage of the property was placed into your name to protect the majority of the funds used by your parent to purchase the property. A percentage was kept in your parent's name, and a similar percentage was gifted by your parent to your parent's partner as a sign of good faith. Your parent and their partner entered into an opt out relationship agreement prior to the purchase of the property. Your parent and their partner moved into the house that had been constructed on the property. The property was the principal residence of your parent. The build cost was funded through a mixture of your parent's personal funds and a mortgage, which legally had to be held in the names of all title owners, including you. You had no access to mortgage funds. The mortgage was secured with the property, but you had no control over how funds were expended. There were major capital improvements completed on the property during your parent's time of ownership, including: • installation of a pergola • insulation and tiling work • toilet renovations. and • extensive landscaping. All the above was organised, authorised and paid for by your parent. Throughout the time of ownership, you had: • no control over the asset • no financial input on the purchase, renovations or holding costs of the property, and • received no personal benefits of the property. All upkeep and running costs of the property were of the responsibility of your parent and their partner. If, at any point while both your parent and their partner were alive, they were to sell the property, all proceeds were to be split between your parent and their partner however they agreed, with you having no entitlement to these funds. Despite the mortgages always being listed in all title holders' names, you have never been responsible for any part of payment of the mortgages. Several years ago your parent drew up a Statutory Declaration regarding the purchase agreement of the property. The declaration was in regard to your name being on the title of the property, and the asset test for eligibility for a disability support pension. It was accepted that you had no beneficial interest in the property, and for the past several years you have been paid a disability support pension. Your parent died a few years ago. Your parents' will allowed their partner to live in the property for several months after your parent's death. Your parents' will specified that 'my interest in the property shall form part of my residuary estate'. The partner challenged the will and placed a caveat on the property. A couple of years after the date of death, the case went to court for a settlement hearing. The court determined that the partner was entitled to a percentage of the estate, and the right to live in the property for a period of time with the caveat then being removed. The property is to be sold. You and your parent did not enter into any formal agreement regarding your percentage of the property. There is no documentary evidence that shows you were not the beneficial owner of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10

Reasons for decision: Summary: The most common capital gains tax (CGT) event happens if you dispose of an asset to someone else, for example, if you dispose of a property. The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs. The disposal of your interest in the property constitutes CGT event A1. In order to determine the CGT implications upon the disposal of your interest in the property it is necessary to establish the ownership of the property. It is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. If the beneficial owner is absolutely entitled to the asset as against the trustee, it is the beneficial owner that is considered by the capital gains provisions to be the owner of the asset and the person who makes any capital gain or loss due to a CGT event happening. No CGT event happens to the trustee due to any sale of the asset. Similarly, no CGT event happens if legal ownership to the asset is transferred to an absolutely entitled beneficiary. | Detailed Reasoning - Has a trust been created?: Where the legal ownership differs from the beneficial ownership, a trust situation occurs. In these cases the legal owner is the trustee of the asset. There may be three kinds of trusts: express, constructive and resulting. | Detailed Reasoning - Express Trusts: 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 Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. In this case, you do not have any documentary evidence that you held the property as trustee for your parent. Such documents would constitute a declaration of trust and make clear the terms of the trust. The absence of such a document means that an express trust cannot exist. | Detailed Reasoning - Constructive Trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, 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, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act. The facts of this case indicate that the court order that occurred due to the partner challenging the will did not consider or disturb the percentage which was in your name. The order gave the partner the remaining percentage in the property. There is no constructive trust in relation to the percentage owned by you. | Detailed Reasoning - Resulting or Implied Trusts: A resulting trust, sometimes called an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications: • cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and • cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money. Where an individual purchases and pays for a property but legal title to it is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them. But where the property is transferred to the taxpayer's immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (i.e. an absolute gift). In this case, your parent funded the purchase of the property and placed a percentage of the property in your name to protect these funds. Based on the information provided, it is considered that there is insufficient evidence to demonstrate that a resulting or implied trust exists. Therefore, you are both the legal and beneficial owner of a percentage of the property and CGT event A1 will happen to your ownership interest when the property is sold. You will make a capital gain or capital loss at this time.