Private ruling: Capital gains tax and absolute entitlement
Published: January 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will you make a capital gain (or loss) on the transfer of your share of the legal title of the property to your relative? Answer: No

Relevant facts and circumstances: Your relative wished to purchase a house (the property). Your relative approached a bank for a loan however, the bank requested proof of serviceability of loan. You attempted to go as guarantor for the loan, but the bank declined. The only way the bank would provide the loan was if you became a party to the loan. You became a party to the loan, and subsequently title of the property was held by you and your relative as tenants in common in equal shares. You state that although your name is on the title, there was never any intention that you should have any ownership interest in the property. The property has always been entirely your relative's property and they have lived in the property since it was purchased until the present day. You stated that you have never lived at the property. Your relative paid the deposit for the property, settlement, mortgage payments, rates, maintenance, small improvements and repairs. You have provided various receipts (in the name of your relative) for repairs and improvements made to the property. You state that you have not paid any monies towards the establishment or maintenance of the property, nor have you received any monies from it. Bank statements have been provided, which show corresponding withdrawals from your relative's bank account into the loan account. Now, as the loan has been fully repaid, your relative wishes for the title of the property to be in their name only. No money will be exchanged for the transfer of title into your relative's name. You state that at the time of taking out the loan, you and your relative agreed that title would be transferred to them when the loan was repaid.

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 106-50

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if, and only if, a capital gains tax (CGT) event happens to a CGT asset. Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, however, a change in ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Accordingly, it is the beneficial ownership of the property that is of importance. | Detailed Reasoning - Holding a property in trust: When considering the disposal of a property, the most important element in the application of the CGT provisions is beneficial ownership. It must be determined who is the beneficial owner of the asset. In some cases, an individual may hold legal ownership interest in a property for another individual in trust, such as occurs under a bare trust arrangement. A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281: Today 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 beneficiaries or as directed by them, for example, on sale to a third party. Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. It is considered that 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. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled. Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that: The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. Further, at paragraphs 21 and 22 of TR 2004/D25 it states; A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries). Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction As a sole beneficiary, in respect of an asset, has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible. Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. In these cases, no CGT event will happen when the legal title in the asset is transferred to the beneficiary as the beneficiary is already considered to be the 'owner' of the asset. The beneficiary would be considered to be the 'owner' of the asset from the time they became absolutely entitled. | Detailed Reasoning - Application to your circumstances: · you and your relative are the only parties to the arrangement · the arrangement is only in relation to one asset (the property) · you did not contribute any funds towards the purchase of the property · you did not pay any of the acquisition costs. · you did not make any repayments towards the loan. · you did not make any payments towards the ongoing property costs such as insurance, rates, repairs or maintenance. · you have never lived in the property. · the property has been your relative's main residence since its acquisition date · you will receive no consideration for the transfer of your share of the legal title of the property to your relative · you have received no monies from the property Based on the information provided, the actions of you and your relative at the time the property was purchased, and subsequently, constitute conduct from which it is reasonable to infer that despite being a part legal owner, you have at all times held your share of the property as trustee for your relative. Therefore your relative would be considered to be absolutely entitled to the asset as against the trustee since its acquisition. As your relative is already considered to be the beneficial owner of the property, there will be no change of beneficial ownership when you transfer your share of the legal title of the property to your relative. Accordingly, no CGT event will happen and there will be no capital gain or loss on the transfer of the legal title.