Private ruling: Capital gains tax - trusts - legal and beneficial ownership
Date of advice: 29 April 2016
Published: June 2016
Ruling period: Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY.

Ruling: Q1: Does sibling A wholly own the property for capital gains tax purposes? | A1: No.

Relevant facts and circumstances: In the 20VV-WW financial year, sibling A & sibling B purchased a property. It was sibling A's intention to purchase the property themselves, however they were unable to obtain a loan. Sibling A paid the deposit for the property, and the balance amount was obtained through a mortgage loan in sibling B's name. The title of the property was held in sibling B's name. The property was used to generate rental income which was used to offset property expenses. Sibling A paid stamp duty and any other expenses relating to the property. Sibling B was responsible for any outstanding rental expenses when sibling A was unable to due to financial difficulties. Sibling B declared all rental income from the property and claimed all the expenses. This resulted in tax losses for sibling B. In the 20XX-YY financial year, sibling A tried to borrow money to re-finance the property in their name but was unsuccessful. A statutory declaration was signed in the 20XX-YY financial year stating that sibling B was holding the property in trust for their sibling. There was no trust document prepared when the property was initially purchased. The property was sold in the 20YY-ZZ financial year. The proceeds of the sale were used to payout the mortgage in sibling B's name and the remainder was paid to sibling A.

Relevant legislative provisions: Income Tax Assessment Act 1997 102-20, | Income Tax Assessment Act 1997 104-10, | Income Tax Assessment Act 1997 106-50 and | Income Tax Assessment Act 1997 118-110.

Reasons for decision: Summary: When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. Generally, the owner of the property is the person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership. Where the legal and beneficial ownership of an asset is different, a trust situation occurs. Section 106-50 of the Income Tax Assessment 1997 (ITAA 1997) explains that where an individual becomes absolutely entitled to a CGT asset of a trust and the trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. Trusts may be of three kinds: • Express, • Resulting or Implied, or • Constructive | Detailed Reasoning - Express Trusts: An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. All State property law Acts contain provisions derived from the State of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. There is no written evidence that sibling B held the property on trust for sibling A from the initial purchase of the property. Therefore, an express trust will not apply in your case. | 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 your case do not indicate the existence of a court order. It is therefore concluded that no constructive trust currently exists. | 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. In your case: • sibling A paid the deposit to purchase the property • sibling B obtained the mortgage loan for the balance of the purchase amount of the property in their name • the title for the property was in sibling B's name only • rental income was used to meet the mortgage payments and sibling B declared all rental income from the property and claimed all the expenses, resulting in tax losses. • sibling A paid stamp duty and other expenses relating to the property • sibling B paid rental expenses when sibling A was unable to due to financial difficulties • there are no documents signed by that support the existence of an express trust, at the initial purchase of the property • the sale proceeds were used to payout the mortgage with the balance paid to sibling A. Based on these facts, and in the absence of an express trust, we would consider sibling B to be both the legal and equitable owner of the property. They have the title in their name and have borrowed the majority of the funds to purchase the property. They have also had the beneficial interest in the property by declaring all the income derived from the property and claiming all the deductions, including amounts paid by sibling A, and making use of the resulting losses. Sibling B has at all times treated the property as their own, both legally and beneficially, therefore, sibling B would be liable for CGT on disposal of the property.