Private ruling: CGT - legal v beneficial ownership
Date of advice: 24 May 2023
Published: 10 July 2023
Ruling period: Financial year ending 30 June 20YY
Date scheme commenced: XX Month 19YY

Ruling: Q1: Will I be required to declare Capital Gains Tax (CGT) in relation to the sale of the property in my income tax return? | A1: Yes.

Relevant facts and circumstances: Your parents purchased a property (the property) in 19YY. The property required major repairs and renovations, but your parents did not have sufficient financial stability or borrowing capacity to refinance the property. The property was gifted to you by your parents in 20YY for the purpose of acquiring finance to renovate the dilapidated dwelling. It was also gifted to you to ensure that upon their death, the proceeds from the sale of the property would be shared in accordance with their wishes. You resided in the property as your main residence prior to the required changes to the title. The remaining balance of the loan on the property was absorbed into the new loan you took out which included the cost of the renovations. The renovations were 100% financed through the loan and were finished in approximately 20YY. Your parents assumed responsibility for the repayment of the new loan that was under your name and all other expenses related to the property. The property has always been considered your parents main residence and was intended to be until their death. Neither you nor your parents have ever declared rental income or expenses in relation to the property. Parent A passed away in 20YY and later Parent B passed away in Month 20YY. The property was sold in Month 20YY. Neither of your parents had a Will. You paid the mortgage and other costs for the property after both parents passed away until the property was sold. The property was in your name when it was sold and did not form part of your parents deceased estate. When the property was sold, you and your sibling received 37% of the proceeds and your children received 25% after considering costs incurred to prepare the property for sale. Note: The transfer of your parents interests in the property to you in 20YY was not an arm's length transaction. You must use the market value at that time to calculate your cost base.

Relevant legislative provisions: Income Tax Assessment Act section 102-20 | Income Tax Assessment Act section 104-10

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs with the disposal of a CGT asset. A CGT event A1 may arise when property is sold. Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity and specifies that a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property. The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. 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. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset. | Detailed Reasoning - Application to your circumstances: The property was gifted to you by your parents in 20YY for the purpose of obtaining finance for renovations. At that time you became the legal owner of the property, and the title was transferred into your name. The loan to finance the remainder of the amount owing on the property and the amount for the renovations was also in your name. Your parents remained living in the property until their deaths. In this situation there is no evidence that beneficial ownership remained with your parents. As stated previously, the title to the property was transferred into your name and while you state that your parents were paying the expenses arising from the property, including all loan repayments, there is no evidence to show that they were actually paying for these expenses. There is also no formal trust deed in place to alter the position that your parents held beneficial ownership. In addition, you have not provided any information to demonstrate the existence of an informal trust. You sold the property in Month 20YY, and as neither of your parents had Wills and the property was in your name, the property was not distributed as part of either of their deceased estates. You distributed the proceeds from the sale to your sibling, your children and yourself. You were the owner of the property and therefore CGT event A1 occurred when your legal ownership ended. As the property was held for over 12 months, there is a capital gains tax (CGT) discount of 50%, which means that you pay tax on only half the net capital gain on that asset.