Private ruling: Capital gains tax
Date of advice: 12 September 2017
Published: December 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will you make a capital gain or capital loss on the disposal of your ownership interest in the property? | A1: Yes.

Relevant facts and circumstances: Your parent purchased a property. Instead of putting the property in their name, they put the property in the name of their children. The property is the family home and all of the children have lived and continue to live at the property with your parent with the exception of you as you moved out into your own property. You and your siblings decided to transfer the title of the property to one of your siblings and stamp duty was paid on the current market value. No other money was exchanged. All expenses for running and occupying the house were mainly paid by your parent with the continuous help of the sibling who now holds legal title. You would like to keep your current home as your main residence from the time you purchased it.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 104-10(2)

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 capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs when you dispose of a CGT asset. CGT event A1 occurred when the property was sold. 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. An individual can be a legal owner but have no beneficial ownership in an asset. Under subsection 104-10(2) of the ITAA 1997, a change of ownership is not deemed to have occurred if you stop being the legal owner of the asset but continue to be its beneficial owner. As a result, it is the beneficial owner of a CGT asset that is liable for capital gains tax upon the sale of the asset if they are deemed to be absolutely entitled to it (section 106-50 of the ITAA 1997). In the absence of evidence to the contrary, the property is considered to be owned by the people registered on the title. However, it is possible for legal ownership to differ from beneficial ownership. 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. Trusts may be of three kinds: constructive, resulting or express. We consider that there are extremely 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 Trusts: An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. It is created by express declaration, which can be effected 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, certainty of the subject matter of the trust and certainty as to the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. In this case, you have not provided any documentary evidence that you held the property as trustee for your parent or your sibling. Such documents would constitute a declaration of trust and make clear the terms of the trust. The absence of such a document means that an express trust cannot exist. | Detailed Reasoning - Constructive trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers 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, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act. The facts of this case do not indicate the existence of a court order, therefore no constructive trust exists. | Detailed Reasoning - Resulting or implied trusts: A resulting trust, sometimes called an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad categories: ● cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and ● cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money. Where an individual purchases and pays for a property but legal title to it is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them. But where the property is transferred to the taxpayer's immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to prima facie intended to advance the interests of the family members (i.e. an absolute gift). 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. While it is possible to rebut the presumption of advancement, any rebuttal would essentially create an express trust. From the information provided, we have concluded (see reasons above) that no express trust has been established. In your case, your parent purchased a property and placed the legal title in your and your sibling’s names. Consequently, there is the presumption of advancement and the parties will hold their equitable interests in the property in the same proportions as their legal interests. Therefore, as there is no trust arrangement, it is not necessary to consider absolute entitlement and section 106-50 of the ITAA 1997 will not apply to treat any act done by you as if it were done by your parent. Accordingly, when you disposed of your ownership interest in the property CGT event A1 was triggered and you incurred a capital gain or capital loss.