Private ruling: Capital gains tax – ownership interest - disposal of a dwelling
Date of advice: 10 September 2018
Published: October 2018
Ruling period: Year ending 30 June 2019
Date scheme commenced: I July 2018

Ruling: Q1: Will a capital gain from the sale of the property be disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the ownership interest that you dispose of when you sell the property the same ownership interest in relation to a licence or right to occupy that you are deemed to have under section 118-130 of the ITAA 1997? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-130

Reasons for decision: Summary: Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if: n you are an individual n the property is less than two hectares. n the dwelling was your main residence throughout your ownership period n the ownership interest did not pass to you through a trust or a deceased estate You contend that you have an equitable interest in the property since the date you moved into the property and that ownership interest was not transferred to you through the estate of the your deceased’s parent. Therefore, you should be entitled to the main residence exemption on any future sale of the property. The meaning of ownership interest in relation to the main residence exemption is discussed in section 118-130 of the ITAA 1997. It provides that you have an ownership interest if: n you have a legal or equitable interest in the land on which the dwelling is erected; or n a licence or right to occupy the dwelling. | Detailed Reasoning - A licence or right to occupy the dwelling: It is noted that you rented the property from your parent since they purchased it. This gave you a licence or right to occupy the dwelling which section 118-130 of the ITAA 1997 deems to be an ownership interest. However, when you dispose of the property, the CGT event will not happen to that deemed ownership interest. That is, the purchaser will not be buying the licence or right to occupy that you obtained from paying rent to your parent. Rather the purchaser will be buying your legal interest in the property which passed to you through your parent’s estate. The case Estate of Jack Reginald Cawthen (deceased) v. FC of T [2008] AATA 1168 confirmed that a main residence exemption was not available even though the taxpayer had a deemed ownership interest from a right to occupy, as the ownership interest that was disposed of when the property was sold was not the deemed ownership interest from the right to occupy. Therefore, you will only be entitled to a main residence exemption under section 118-110 of the ITAA 1997 if you aquired an equitable interest in the property prior to the legal interest passing to you as a beneficiary of your parent’s estate. | Detailed Reasoning - Equitable interest: In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title. However, ownership can also be claimed by an equitable owner for reasons explained below. If this fact can be proven beyond doubt, then ownership belongs to the equitable owner. To prove that a different equitable interest exists, there must be evidence that a trust, whether express, constructive or implied/resulting has been established such that one party is taken merely to hold their interest in the property for the benefit of the other. Express Trust All State property laws mandate that the creation of a trust over real property be evidenced in writing. You have not produced any evidence to show that you and your parent entered into a written agreement that your parent held her legal interest in the property as trustee for you. Therefore, it is concluded that there was no express trust in respect of that interest. Constructive Trust Constructive trusts are created by a court. No evidence has been provided of a court order as to the existence of a constructive trust. Therefore, it is concluded that no constructive trust exists in respect of the property. Implied/resulting Trust An implied trust is a trust that is implied from the presumed intention of the owner of the property. That is, it is the presumed intention of the owner of the property that they merely hold it on trust for another. Taxation Ruling TR 93/32 discusses the implications for taxpayers who contend that the equitable interests in the property do not correspond to the legal interest, and concludes with the following statement (at paragraph 41): We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, eg husband and wife, that the equitable right is exactly the same as the legal title. For example, where a person purchases and pays for property but legal title to it is transferred to another person at the purchaser's direction, if that other person is a stranger, the presumption of resulting trust arises and the property is considered to be held on trust for the purchaser. However, where the property is transferred to a spouse or child of the purchaser, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie an advancement (that is, an absolute gift from the purchaser to the spouse or child). The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests. In this case, it is your parent who purchased the property and they did so in their own name. You contend that your parent had no intention to use the property to obtain a benefit as there was no formal rental agreement and the rent charged to you was at below market rates. You argue that this rent was merely contributions to cover expenses for water usage, council rates and insurance premiums. However, the fact that there was no formal rental agreement and a below market rate of rent was charged does not provide sufficient evidence that your parent had no intention to obtain a benefit from the property. A review of the rental schedules lodged for the property shows that the rent charged exceed the rental expenses each income year. That is, your parent made a net profit from the property which meant that they received a benefit from the property. Given the above, it is arguable your parent provided you with a place to live at low cost while at the same time they benefited by earning income from the renting of the property which by their own actions was returned as assessable income in their tax returns. Further, the fact that you paid for some expenses in relation to the property, including for improvements, over the years is not sufficient to conclude that you have an equitable interest in the property. Rather than conclusively showing your parent was merely holding the property in trust for you, another possible explanation is an arrangement where you have made these payments in lieu of paying full market rate of rent. You also contend that as your parent left the property to you in their Will, it would be reasonable to conclude that it was their intention that they hold it for life for your benefit and then you would ultimately receive legal ownership through their Will. However, as noted further above, your parent did receive a benefit themselves as they made a net profit from the property. Also, if it was their intention that you were the only person to benefit from the property from the time they purchased it, then they could have simply put the title of the property in your name or in their name as trustee for you. As stated previously, it appears that their intention on purchasing the property was to provide low cost accommodation to yourself while also making a profit from the property and to leave you the property once they passed away. By purchasing the property in their own name and leaving it to you in their Will, they retained the option of changing their mind if circumstances necessitated that they either sell the property or they thought it more appropriate to leave it to someone else. Taking into account all of the above, we do not consider that there is sufficient evidence to conclusively determine that your parent was merely holding the property in trust for you. Therefore, you did not hold an equitable interest in the property prior to the legal interest passing to you as a beneficiary of your parent’s estate. You cannot disregard the capital gain on the sale of the property under section 118-110 of the ITAA 1997 as the interest in the property that you will dispose of passed to you as a beneficiary of a deceased estate. | Detailed Reasoning - Other Information: Where a taxpayer is not entitled to a full main residence exemption upon the sale of an inherited dwelling, they may be entitled to a partial exemption. Please refer to section 118-200 of the ITAA 1997 to calculate a partial exemption for an inherited dwelling.

Relevant facts: Your parent who is now deceased purchased the property in the 1990s. | Your parent was the sole owner of the property from the date of purchase until they passed away during the 2017-18 income year. | Your parent entered into an agreement with you to rent the property to you shortly after the property was purchased. | You have lived in the property since that time. | Your parent has never resided in the property. | Your parent’s Will provides on their death, you are to be given the property for your sole use and absolute benefit. | The property was rented to you at below market rates until your parent passed away. | Your parent declared rental income and expenses from the property in their tax returns from the time they purchased it. They declared a small net profit each income year. | During the time you lived in the property you paid for some expenses in relation to the property, including improvements. | You are intending to sell the property in the future.