Private ruling: Capital gains tax
Date of advice: 11 December 2023
Published: 5 February 2024
Ruling period: Year ended 30 June 2023
Date scheme commenced: 1 July 2022

Ruling: Q1: Are you required to pay capital gains tax (CGT) on the transfer of the property to your relative? | A1: Yes.

Relevant facts and circumstances: You purchased the property from your relative's ex-partner after your relative and their partner separated. You purchased the property several years ago. Your relative was not able to acquire a loan at the time of the separation from their partner due to their bankrupt status. Your relative lived in the property with their ex-partner prior to their separation and continued to live there after the separation. The property was in the ex-partners name solely. You paid the ex-partner for the property. The loan for the property was taken out in your name. Your relative paid the loan repayments and for all expenses associated with the property. Your relative paid the loan repayments into a bank account labelling the repayments as rent. Your relative came out of bankruptcy and was able to obtain a loan to pay your loan out for the property. Your relative obtained a loan to pay you out. You transferred the property to your relative several months ago. There was no binding financial agreement or court orders in relation to the property. There was no written agreement between you and your relative that the property was held on trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 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. 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 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. Usually if a person purchases a property in another person's name, there is a presumption that it is held on trust for the purchaser note that this is not the case where there is an immediate family relationship, in that case it is presumed that the legal and beneficial interest are the same. To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold them interest in the property for the benefit of the other. Trusts may be of three kinds: constructive, resulting, or express. There are 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 Trust: An express trust is one intentionally created by the owner of property to confer a benefit upon another. It is created by express declaration, which can be affected 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, subject matter, and the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the creation or transfer of interests in land except if evidenced in writing. | Detailed Reasoning - Constructive Trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies 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 dependent upon the order of the court. | Detailed Reasoning - Resulting or implied trusts: On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price. A resulting trust arises by operation of law and falls into two broad categories. One such category is where someone purchases property in the name of another ( Calverley v Green ). A trust is presumed in favour of the party providing the purchase money. If an individual purchases and then pays for a property, but legal title is transferred to another person at their direction, the presumption of a resulting trust arises -the property is held in trust for them. The law presumes that the purchaser, as the person providing consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the others name. | Detailed Reasoning - Application to your circumstances: In your case, there has been no evidence provided by you to establish that there was an express trust or a constructive trust. Further, the Commissioner considers that a resulting trust did not arise having regard to the following: • You purchased the property in your name with a mortgage also in your name. • Your relative did not contribute to the purchase price. • there was no written agreement between you and your relative that the property was held on trust. As a result, you have not been able to provide sufficient evidence that your relative had a beneficial ownership in the property. Accordingly, you have both a legal and beneficial ownership in the property. You are therefore required to declare any capital gain on the sale of the property in your tax return.