Private ruling: Capital Gains Tax
Date of advice: 13 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the property held by A and B on a resulting trust for their relative C? | A1: No. | Q2: Is C absolutely entitled to the property? | A2: No. | Q3: Will the capital gains tax (CGT) that arises from the transfer of the X interest in the property be disregarded? | A3: No. | Q4: Will any subsequent sale of the property be considered a capital gain or loss for C? | A4: No.

Relevant facts and circumstances: On the XXXX the property was purchased for $X in A and B names as the legal owners. C, their relative, was unable to acquire the property as the financier would not lend the money to them, given they were not working full time. The deposit for the property was funded by A and B. There is no formal trust deed between A and B and C. The current wills of A and B gifts all interest in the property to C but subject to other party surviving, in which case that surviving party would receive the other's interest given the ownership is joint tenancy. During the ownership period, C has fully funded all mortgage repayments on the property. In XXXX, C became a mortgagor (jointly with A and B) following a refinance that was undertaken. Whilst the property was rented to third party tenants, A and B received all rental income. All landholding costs, including council rates, land tax and the repairs and maintenance have been paid out of the rental income of the property. A and B have reported the rental income in their respective income tax returns and the deductions for expenses incurred have also been included. The property is currently vacant and C is intending on moving into the property as their main residence. In late XXXX, A and B transferred X% interest in the property to C. The transfer was pursuant to an oral agreement between the parties but a transfer form was prepared and executed by the parties and subsequently lodged, evidencing that C is now a joint landholder on title. Based on valuations at the time, the value of the property was estimated to be $X and, accordingly a X% interest had a value of $X. A and B each declared a capital gain in their tax return and paid the resulting CGT liability.

Relevant legislative provisions: Section 106-50 of the Income Tax Assessment Act 1997 | Section 118 of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: A resulting trust, sometimes called an implied trust, is a trust that equity creates based on the presumed intention of the settlor. To determine if an implied trust is created, an objective consideration of the facts and circumstances of the case is required. This is especially relevant where statements are been made detailing the party's intentions at the time of the purchase and the accuracy of those statements are critical to the correctness of the decision. This principle was considered in Harbutt v FC of T , 2013 ATC 10-290 where Deputy President Frost stated: A statement by that person that the income is not entirely his, but is shared with someone else, is a self-serving statement which, while it should not be rejected out of hand, is to be approached critically and must be subjected to careful scrutiny. There are two types of these trusts, presumed and automatic. A presumed resulting trust is created where it can be inferred that it was the intention of the transferor of the property that the person who holds legal title to the property should not hold it purely for their own benefit. This presumed intention of the settlor can be rebutted by evidence to the contrary. An automatic resulting trust will arise where the settlor has transferred the property to a trustee but failed to dispose of all of the beneficial interest in the property. In these cases, the interest automatically results back to the settlor on the presumption that the settlor intended to retain the interest. In this case, an automatic resulting trust has not been created as the settlor has not transferred the property to a trustee. A presumed trust has not been created as there is no contemporaneous evidence of A's and B's common intention at the time of the purchase of the property that their equitable interests should be different to their legal interests in the property. Although, C was making repayments to the property the rental income was declared in A's and B's income tax returns and they kept any residual amounts. C's mortgage repayments are not considered to be part of the purchase price of the property as discussed in Calverley v Green (1984) 155 CLR 242, at 257. The purchase cost of a rental property may include the actual purchase price of the property ( Calverley v Green (1984) 155 CLR 242, at 257), legal fees, stamp duty and incidentals ( Currie v Hamilton [1984] 1 NSWLR 687, at 691; Ryan v Dries [2002] NSWCA 3, at [52] and [53]). The purchase cost will not include loan repayments ( Calverley v Green (1984) 155 CLR 242, at 257), or legal fees and bank fees if they are not paid in order to acquire the property ( Calverley v Green (1984) 155 CLR 242, at 257; Sivritas v Sivritas & Anor (2008) 23 VR 349, at 372-373). In limited circumstances, under section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997), section 118 of the ITAA 1997 will apply to the disposal if it can be demonstrated that beneficiary of a trust is absolutely entitled to the CGT asset against the trustee. Draft Taxation Ruling TR 2004/D25 discusses the meaning of the words absolutely entitled to a CGT asset as against the trustee of a trust for CGT purposes. Paragraph 2 of TR 2004/D25 states that; an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the CGT provisions. Paragraph 10 of TR 2004/D25 states 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. In this case, as there is no resulting trust, C is not considered to be absolutely entitled to the property. Capital gains tax (CGT) is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event, happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). When considering the disposal of your interest in 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. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title. In this case, the CGT event will not be disregarded as there has been a change in ownership interest in the property. As C is not absolutely entitled to the property any subsequent sale of the property will not be considered a capital gain or loss for C. A and B are the legal and beneficial owners and consequently any CGT event that occurs will happen to them as joint tenants.