Private ruling: CGT - legal v beneficial
Date of advice: 7 February 2025
Published: 17 March 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will CGT event A1 occur for you on the transfer of the property, pursuant to Order made by the Supreme Court. | A1: No.

Relevant facts and circumstances: In 20XX, you entered into a de facto relationship with Person A (the Deceased). In XX 20XX, you purchased a property (the Property). The property is a XX acre rural property. You acquired the Property for the express purpose of assisting your child (Person B) and their then partner (Person C), to establish their own home. The Legal Title to the Property was registered in your name only. Upon settlement of the Property, Person B and Person C occupied it as their place of residence pursuant to an arrangement between 'them' (Person B and Person C) and you and the Deceased. In broad terms, the arrangement was that the title to the Property would be transferred to Person B and Person C when they were able to borrow funds to refinance the purchase. In the meantime, Person B and Person C serviced the mortgage debt. In mid-20XX, your de facto relationship with the Deceased ended. About the same time, the relationship between Person B and Person C also came to an end. When Person B and Person C separated, Person B left the Property. Person C remained living there, and still does. Person C continued to service the mortgage and agreed to pay back the contributions Person B had made to servicing the debt. At the time of their separation, Person B assigned to Person C any interest they had in the Property, entitling Person C to sue to vindicate their common interest in the property. Person B gave evidence in support of Person C's claim of entitlement to the property by operation of an estoppel said to be binding on you and the estate of the Deceased. Since the separation of Person B and Person C, Person C has continued to make all mortgage payments due for the Property. On XX XX 20XX, the Deceased passed away, and left a will (the Will). The Will made no provisions for you. The Deceased's inventory recorded that, at the time of their death, they (the Deceased) held an equitable interest in the Property. On XX XX 20XX, probate was granted to the executrix, the sibling of the Deceased (the Executrix). The Executrix lodged a claim on behalf of the Estate regarding the beneficial entitlements to the ownership of X properties, one of which was the Property. You lodged a competing claim against the Estate of the Deceased. You contested a claim for family provision relief. Person C filed a claim in regard to their beneficial entitlement to the Property. The proceedings required the Court to address interrelated property disputes between yourself and the Deceased, and between 'them' (you and the Deceased) and Person C. The Estate's opposition to your family provision application, invited the Court to make orders for the division and sale of X properties, including the Property, between you and the Deceased Estate, subject to any entitlements Person C may have. On XX XX 20XX, the Court handed down their decision. The Judgement detailed that the dispute around the Property, is whether Person C has an entitlement, in equity, to enforce an arrangement for themself and Person B, to acquire the title to the Property, or they are to be left an equitable charge for monies paid by them and Person B in reduction of the mortgage over the property and for improvement effected by them to the property, or something else less than full ownership to the property. Person C contended that they were entitled, as against you and the Estate of the deceased to a declaration that you held the Property on trust for them, subject to payment by Person C to you of a sum of money designed to give effect to your original arrangement (that you hold the property on trust for the benefit of Person B and Person C). The arrangement between Person B and Person C, and between 'them' (Person B and Person C) and you and the Deceased, was that the title to the Property would be transferred to Person B and Person C when they were able to borrow funds to refinance the purchase of the property. The Judgement details that Person C established an entitlement to equitable relief. You and the Deceased were accordingly estopped from departing from the original agreement, pursuant to which the Property was purchased in your name and the property was held on constructive trust for Person C. An Order was given that the Property be transferred to Person C on condition that Person C gives an undertaking to the Court to indemnify you against any capital gains tax liability you may have as a result of the transfer of the Property to Person C. On XX XX 20XX, you and Person C signed a Deed of Agreement to Indemnify in relation to the Property title transfer. On XX XX 20XX, you transferred the Property to Person C.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Summary: Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss results from a capital gains tax event occurring. Subsection 104-10(2) of the ITAA 1997 states that you dispose of a CGT asset if a change of ownership occurs from you to another entity whether because of some act of event or by operation of law. Subsection 104-10(3) explains that the timing of the event (if there is no contract), occurs when the change of ownership occurs. | Detailed Reasoning - Legal vs beneficial ownership: Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner 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 and legal ownership 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. To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other. Trusts may be of three kinds: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same and there is sufficient evidence to establish that the equitable interest is different from the legal title. | Detailed Reasoning - Express Trust: An express trust is one intentionally created by the owner of the property in order to confer a benefit upon another. It is created by express declaration, which can be affected 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, subject matter, and the objection of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the create or transfer of interests in land except if evidenced in writing. | Detailed Reasoning - Constructive Trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity consider 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 dependent upon the order of the court. | Detailed Reasoning - Resulting or implied trusts: On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price. A resulting trust arises by operation of law and fall into two broad categories. One such category is where someone purchases property in the name of another ( Calverley v Green ). A trust is presumed in favour of the party providing the purchase money. If an individual purchases and then pays for property, but the legal title is transferred to another person at their direction, the presumption of a resulting trust arises, the property is held in trust for them. The law presumes that the purchaser, as the person providing the consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the others name. | Detailed Reasoning - Application to your circumstances: To determine if you have beneficial in the property, the facts and circumstances surrounding the property's purchase are considered in light of your relationship with Person C. We consider the intent of the parties when the property was purchased as well as evidence of the dealings between the parties both initially and after purchase. In respect of the Property, the Court has granted orders in which Person C has established an entitlement to equitable relief to the property. The Judgement provides that you and the deceased estate are accordingly estopped from departing from the agreement pursuant to which the property was purchased in your name and held on constructive trust for Person C (and Person B) subject to Person C's performance of their obligations under the parties' agreement. The Judgement also provides that Person C has made out their claim and is entitled to equity (as against both you and the estate of the deceased) to an order that the Property be transferred to them on condition that, within a reasonable time, they repay the debt presently secured on the Property, confirm arrangements for repayment of Person B's contributions and give an undertaking to the Court to indemnify you against any capital gains tax liability you may have as a result of the transfer of the Property to Person C. On XX XX 20XX, the Court made orders for you to transfer the Property to Person C. On XX XX 20XX, you effected the transfer of legal title on the Property to Person C. The Commissioner accepts that your legal interest in the property was held on constructive trust for Person C, based on the Court's ruling. As you have never had beneficial ownership of the property, subsection 104-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT event A1 did not occur for you, when you transferred your legal interest in the Property to Person C.