Private ruling: Capital gains tax
Date of advice: 13 September 2023
Published: 30 October 2023
Ruling period: Year ending DD MM 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Are you required to declare a capital gain upon transfer of the property, with CGT event A1 occurring under section 104-10 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: Several decades ago, you and Person A decided to purchase the property together as tenants in common in equal shares. This step was taken because it was easier to obtain finance if both you and Person A were named on the loan and title. Person A paid the deposit on the property and you paid the stamp duty on the purchase. You and Person A both moved into the property in the year it was purchased. Initially, the loan repayments and all other expenses were paid equally by you and Person A. Several years later, you married your spouse. Your spouse moved into the property with you and Person A. The following year, you purchased a home with your spouse and relocated from the property into your new home. That year, you and Person A reached a verbal agreement whereby it was agreed that you would relinquish your interest in the property and Person A would be considered the sole owner. As part of this agreement, it was agreed that Person A would assume all financial obligations in relation to the property including the payment of all future loan repayments and expenses (insurance, rates, repairs, utilities) from that time onwards. It was further agreed that you wouldn't seek any compensation or reimbursement for your financial contribution towards the property as Person A had contributed a greater sum to the initial purchase of the property. You and Person A didn't seek to change the legal ownership of the property because you were satisfied with the oral agreement and enjoyed a close family relationship. From that time onwards until present, you have not made any financial contributions towards the property. All expenses on the property have been met by Person A. You made a will a couple of years later whereby you gave the half share you own in the property to Person A. Recently, Person A had a health scare and is now in a de-facto relationship. You and Person A now wish to transfer legal title to Person A. Pursuant to the oral agreement, you will not receive any consideration or compensation for the transfer of legal ownership to Person A.

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 a capital gain or capital loss results from a capital gains tax (CGT) event occurring. 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. We consider that there are extremely limited circumstances were 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. You have not been able to provide the Commissioner with sufficient evidence that you did not have a legal ownership interest in the property. Your sibling paying the mortgage and other expenses on the property does not prove that you gave up your interest in the property. Paying a mortgage is relevant but in the absence of anything else showing intent it can point to more than one possible intention. You have listed the property as one of your assets in your will and there is no mention that you did not have a legal or beneficial ownership interest in the property. It shows that your legal ownership is to be bequeathed to your sibling upon your death. There was no written agreement or any contemporaneous evidence of the intended transfer of your legal ownership of the property to your sibling. Consequently, as an owner of the property you are liable for capital gains tax on your share of the gain made when the property is transferred. CGT event A1 occurs in your circumstances under section 104-10 of the ITAA 1997 when the property is transferred.