Private ruling: Change of ownership title due to unsettled trust
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Were you the beneficial owner of the property since its purchase, which results in no CGT event happening when its ownership title is changed from the non-existent trust to you? | A1: Yes

Relevant facts and circumstances: The trust was registered with the Tax Office from the year ended 30 June 2007. You were its sole unit holder. During that same income year, the trust entered into the contract to purchase a rental property, with money borrowed by you. For the years ended 30 June 200X to 20XX , the trust lodged tax returns with rental income and expenses in relation to the property. However, the trust was never settled. As a result, the state Office of State Revenue required the title of the property to be changed from the non-existent trust to you (for which they are not charging stamp duty for this change of title).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 106-50

Reasons for decision: Summary: Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. CGT event E5 under section 104-75 of the ITAA 1997 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). The test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction (paragraph 33 of Draft Taxation Ruling TR 2004/D25). Section 106-50 of the ITAA 1997 provides from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being your asset (instead of being an asset of the trust). It follows the CGT provisions apply to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee). For example, an individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. This is so regardless of whether the beneficiary has always been absolutely entitled to the asset or they became absolutely entitled to it at some time after the trust commenced (paragraph 142 of TR 2004/D25). A 'bare trust' is one where the trustee has no active duties to perform. The usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or as directed by them (paragraph 35 of TR 2004/D25 ). A 'constructive trust' can arise where it would be inequitable for a legal owner to be permitted to keep property for their own benefit. Constructive trusts are created to satisfy the demands of justice and good conscience, irrespective of any intention of the parties (this was stated by Glass JA in Allen v. Snyder (1979) FLC 90-656; (1977) FamLN N56; 2 NSWLR 685 at 690). In your case, your unit trust is void ab initio (non-existent from the beginning) and therefore never owned the property. Since you were the borrower of the funds used to purchase the property, you have been its beneficial owner since its purchase. It follows no disposal or CGT event happened when the Office of State Revenue changed the name of the property title. Alternately, if a bare or constructive trust did come into existence at the time of purchase, you being the sole beneficiary of such a trust would result no disposal or CGT event happening when property title changed due to your absolute entitlement under sections 104-75 and 106-50 of the ITAA 1997.