Private ruling: Capital gains tax
Date of advice: 21 April 2016
Published: June 2016
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will you make a capital gain or capital loss on the disposal of the share of the property held on trust for your sibling and their spouse? | A1: Yes.

Relevant facts and circumstances: You and two of your relatives acquired property as tenants in common in equal shares after 20 September 1985. You recall making some financial contribution towards the purchase of the property. You did not make any periodical contributions to the property such as running expenses or capital improvements since acquisition. You never lived in the property. The property was the main residence of your relatives until it was sold. You did not consider the property to be an investment. You did not receive any proceeds from the sale of the property. Your name was included on the title based on legal advice sought.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 102-20 | Income Tax Assessment Act 1997 - Subsection 104-10(2) | 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. 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 is they are deemed to be absolutely entitled to it. 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 do not have any documentary evidence that you held the property as trustee for your relatives. 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. Usually, where an individual purchases and pays for a property, but legal title is transferred to another person at their discretion, the presumption of resulting trust arises and the property is held in trust for them. In your case, we accept that you never lived in the property and you did not receive any proceeds from the subsequent sale of the property. However, because you made a contribution towards the purchase of the property, there is insufficient evidence to establish that a resulting trust existed. | Detailed Reasoning - Application to your circumstances: Having examined the facts we are unable to establish that there was a trust situation in this case. As you are not deemed to have held your ownership interest on trust for your relatives, it is considered that you held both an equitable and legal interest in the property. Therefore, as there is no trust arrangement it is not necessary to consider absolute entitlement. Consequently, section 106-50 of the ITAA 1997 will not apply to treat any act done by you as if it were done by your relatives. 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.