Private ruling: Disposal of pre-CGT asset and resulting trust
Date of advice: 22 February 2023
Published: 11 April 2023
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX | Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you disregard the capital gain you make on the disposal of 50% of the interest of the property on the basis it is a pre-CGT asset? | A1: Yes | Q2: Are there any repairs and works on the property that become CGT assets on pre-CGT land? | A2: No

Relevant facts and circumstances: X (the deceased) arrived in Australia from overseas prior to 20 September 1985. The deceased had little belongings and money and owed money for their trip to Australia. Soon after, the deceased wrote to their sibling overseas, requesting his assistance to find a spouse to share their life in Australia with. After discussions with the deceased's family, an agreement was reached which included the provision of dowry by your family for your benefit in connection with your marriage to the deceased. You explained that at the time, a dowry of a home was the usual custom but instead it was agreed that a monetary dowry for your benefit would be made as you were moving to Australia to live with the deceased. You explained that the monetary dowry was representative of the purpose of a dowry of a home, and namely, an amount of monetary funds to enable the deceased and you to have a home to start a family. You and the deceased were married by proxy after they completed the necessary documents. Before your arrival in Australia, the deceased was looking for a home for their new family, and soon purchased the property in Australia, prior to 20 September 1985. The purchase of the property occurred with Z, who also came from the same country overseas to Australia, as tenants in common in equal shares. Z provided their own funds towards their purchase of 50% of the property, with the dowry being the only funds used to contribute to the purchase of the other 50% interest in the property by the deceased. You arrived in Australia soon after the purchase of the property and prior to 20 September 1985. The passenger list on the ship that you arrived on recorded your address as that of the property, further demonstrating that you regarded the family to be your new family home. Soon afterwards, the deceased bought out Z's 50% share of the property using funds provided by you, so that they became the sole registered proprietor on title of the property. You explained that various factors led to your name not being registered on the property. As noted above, you had not arrived in Australia when the property was initially purchased by the deceased and Z. You then arrived as an illiterate migrant, with no English. Your illiteracy and limited English, along with the strong patriarchal nature of the society during that time resulted in the deceased's name being the sole name registered on the legal title. However, you state that it was clearly the deceased's intention and your intention that the property was to be their family home and your monetary dowry was applied towards the purchase of the property. In essence, in your view, the property was the dowry that was settled for your benefit from your parents according to the dowry custom. The dowry custom also meant that you would have no further claim on your parents' estate. Following your arrival in Australia, you moved into the property and commenced your family life with the deceased. You found work in a local business and made financial contributions to the family home. In addition, you also managed the ground floor of the property including collecting rental from mostly migrants, with single furnished rooms available for rent. The property remained the deceased's and your main residence until you moved out some years later, prior to 20 September 1985. The property was then used solely to derive rental income, prior to 20 September 1985 and after that date also. The deceased and you carried out various repairs and works as required to maintain the property as a rental property. However, the repairs and maintenance never exceeded the 5% rule or the capital improvement threshold stipulated in section 108-70 of the Income Tax Assessment Act 1997 . Although the title on the property was never updated to reflect your half share in the property, all income and expenses in relation to the property was accounted for and shared equally by the deceased and you. Indeed, the tax returns for the deceased and you recorded the income from the property as partnership income. The deceased passed away some years after 20 September 1985. Pursuant to the last will of the deceased, all their assets were distributed to you, including the property. You are proposing to sell the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-70

Reasons for decision: Summary: You can disregard the capital gain you make on the disposal of 50% of the interest of the property on the basis it is a pre-CGT asset, as it was acquired prior to 20 September 1985 when the deceased purchased the property, purchased the additional 50% interest and then held the 50% interest on a resulting trust absolutely for you. | Detailed Reasoning - Detailed Reasoning: A resulting trust arises in cases in which someone purchases property on behalf of or in the name of another, with a trust being presumed in favour of the party providing the purchase money. In respect of the purchase of the Property, you provided the funds to pay for the Property by way of your dowry: • The deceased acquired their 50% interest in the property as tenants in common with Z using the dowry funds; • The deceased then used the dowry funds to purchase Z's 50% interest in the property. Generally, where an individual purchases and pays for a property but legal title to it is transferred to another person at their direction, then the presumption of a resulting trust arises, and the property is held in trust for them. However, it is noted that as the deceased was your spouse, the presumption of a resulting trust is replaced by the presumption of advancement, which deems that the purchase is prima facie intended to advance the interests of the spouse (that is, an absolute gift). If the presumption of advancement is upheld, then the legal title represents the beneficial interest in the Property. However, we consider that the presumption of advancement is rebutted in this instance. The purpose of the dowry funds provided by you was to enable the deceased and you to have a family home when you arrived in Australia. The conduct of you and the deceased also demonstrated a clear rebuttal of the presumption of advancement. The lodgement of their tax returns where income from the Property was declared as partnership income was a clear statement that rebutted the presumption of advancement and also confirmed that the deceased and you were in receipt of rental income jointly and were therefore a partnership for tax purposes in terms of Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (notwithstanding that the title to the property was never updated to reflect your interest in the property). Accordingly, up to the date of death of the deceased, the deceased held a 50% interest in the property on a resulting trust absolutely for you. Your 50% interest is a pre-CGT asset as it was acquired prior to 20 September 1985 when the deceased purchased the property, purchased the additional 50% interest and then held the 50% interest on a resulting trust absolutely for you. You can therefore disregard the capital gain you make on the disposal of 50% of the interest of the property on the basis it is a pre-CGT asset. | Summary: There are no repairs and works on the property that have become separate CGT assets on pre-CGT land as no balancing adjustment can apply in the circumstances and the repairs and works never exceeded the 5% rule or the capital improvement threshold stipulated in section 108-70 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under section 108-70 of the ITAA 1997, a capital improvement to land is treated as a separate CGT asset from the land if a balancing adjustment can apply to the improvement under the provisions for depreciating assets and R&D. A capital improvement to a pre-CGT asset is also treated as a separate CGT asset if its cost base, when a CGT event happens in relation to the pre-CGT asset, is • More than the improvement threshold for the income year in which the event happened; and • More than 5% of the capital proceeds from the event. There are no repairs and works on the property that have become separate CGT assets on pre-CGT land as no balancing adjustment can apply in the circumstances and the repairs and works never exceeded the 5% rule or the capital improvement threshold stipulated in section 108-70 of the ITAA 1997.