Private ruling: CGT - legal and beneficial ownership
Date of advice: 3 May 2021
Published: July 2021
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Are you liable for capital gains tax (CGT) on disposal of your ownership interest in the property? | A1: No

Relevant facts and circumstances: A friend of yours sought to acquire a property (the property) to reside in as their main residence. You and your friend are not related and were/are not in a relationship. You consider that you and your friend are best friends. Your friend engaged a conveyancing solicitor to draft a contract for the purchase of the property in their name solely. Although your friend intended to solely borrow the funds to facilitate the purchase, due to the existence of other debts, your friend was unable to obtain the required finance from the lender they approached. The lender indicated that a loan may be available to your friend if another individual joined in with the loan and was also a co-mortgagor and co-purchaser of the property. It was subsequently agreed between you and your friend that you would be a joint borrower, co-mortgagor and co-purchaser to enable approval of the finance. You and your friend entered into a purchase contract as tenants-in-common with a 50% ownership interest each. The purchase contract has your name handwritten next to your friend's name which reflected the change in circumstances. Your friend paid the required deposit on entering into the purchase contract. To complete the purchase, you also agreed to lend your friend an amount equivalent to the amount they borrowed. You paid your contribution directly into the solicitor's bank account. Following completion of the purchase, the lender sent your friend a letter addressed to the property confirming the details of the loan which included that the repayments would be made from a bank account operated by your friend. Your friend made all repayments to the loan. Some years later, your friend refinanced the loan with another lender. The repayments for the new loan were all made by your friend from one of their bank accounts. Several years later, your friend decided to sell the property and acquire another one to live in as his main residence. On settlement for the sale, your friend repaid you the amount you had lent them and you did not receive any other proceeds. By agreement, your friend did not pay you any interest on the amount you lent them. During the ownership period, your friend was entirely responsible for the costs associated with the maintenance and upkeep of the property, including rates, utility bills and home insurance premiums. No one else lived in the dwelling with your friend during their ownership period and the property was never rented. You never lived in the property and had your own places to live during the whole period your friend occupied the property. The understanding of you and your friend as to the legal and beneficial ownership of the property was not put into writing.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 106-50

Reasons for decision: Summary: A person's legal interest in a property is determined by the legal title to that property under the property law legislation in the State or Territory in which the property is situated. In some cases, it is possible for legal ownership to differ from beneficial ownership. A beneficial owner is a person or entity who is beneficially entitled to the income and proceeds from the asset. An individual may hold a legal ownership interest in a dwelling for another individual in trust. Where it is asserted that the beneficial ownership and legal ownership of a property are not the same, there must be evidence to show that the legal owner holds the property in trust for the beneficial owner. Legal and equitable interests will not be the same where it is established that a resulting trust arose. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) contains guidance on the issues involved where the equitable interest in a property may not follow the legal title. However, as stated in TR 93/32, the Commissioner considers 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. Paragraphs 39 and 40 of TR 93/32 provide a summary of the legal principles involved: 39. It was explained in Calverley v Green 56 ALR 483, Dean J said(at p 500): 'It is simply that there are certain relationships in which equity infers that any benefit which was provided for one party at the cost of the other has been so provided by way of "advancement" with the result that the prima facie position remains that the equitable interest is presumed to follow the legal estate and to be at home with the legal title or, in the words of Dixon CJ, McTiernan, Fullagar and Windeyer JJ in Martin v Martin (1959) 110 CLR 297 at 303, that there is an "absence of any reason for assuming that a trust arose".' 40. Cases where the title includes the name of a person who is a nominee or trustee, must be decided on an individual basis on the evidence available to establish that fact. Authority can be found in Napier v Public Trustee (Western Australia) 32 ALR 153 where the court accepted there was sufficient evidence to establish that the equitable interest was different from the legal title. Aickin J said (at p 158): 'The law with respect to resulting trusts is not in doubt. Where property is transferred by one person into the name of another without consideration, and where a purchaser pays the vendor and directs him to transfer the property into the name of another person without consideration passing from that person, there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be. This proposition is subject to the exception that in the case of transfers to a wife or a child (including someone with respect to whom the transferor or purchaser stands in loco parentis ) there is a presumption of advancement so that the beneficial as well as the legal interest will pass. Each of the presumptions may be rebutted by evidence.' In your case, you state that: We also note that: From the information provided, the Commissioner accepts that the legal and equitable interests in the property were not the same and you had no beneficial interest in the property. A resulting trust arose with you holding your legal ownership interest on trust for your friend. A beneficiary of a trust is absolutely entitled to an asset of the trust if the beneficiary, who has a vested and indefeasible interest in the entire trust asset, has the ability to call for the asset to be transferred to them or to be transferred at their direction. Section 106-50 of the Income Tax Assessment Act 1997 states that from just after the time a beneficiary of a trust becomes absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being an asset of the beneficiary (instead of being an asset of the trust). In your case, your friend is the beneficiary of the trust and is absolutely entitled to the trust asset, the property. Therefore, the property is treated as being an asset of your friend. Consequently, you are not liable for CGT on disposal of your ownership interest in the property.

at the time of entering into the purchase contract for the property, it was agreed between you and your friend that you were not personally acquiring any beneficial interest in the property | you held your 50% legal ownership as a tenant in common as trustee for the benefit of your friend | you acquired your legal ownership as trustee without any duty except to convey the property at the direction of your friend | the amount you advanced to facilitate the property purchase was always intended to be a loan repayable in full by your friend on the future sale of the property. | the relationship between you and your friend was merely one of friendship | you did not live in the property | you did not pay for any expenses relating to the property | you did not derive any income from the property during the ownership period | you did not receive any capital proceeds from the sale of the property over and above the repayment of your loan.