Private ruling: CGT - legal and beneficial ownership
Date of advice: 24 September 2024
Published: 4 November 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

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

Relevant facts and circumstances: Your child and their partner purchased a property a number of years ago. At the time of the purchase the bank would not give your child and their partner a loan unless you were included as a borrower and mortgagee. You were required to be listed on the title along with your child and partner. Your child's partner was going through bankruptcy proceedings at the time of the purchase of the property. You never lived in the property. You never contributed to the loan repayments. You never paid any money toward the running costs of the property. You never received any rent from the property. A couple of years ago you transferred your share of the property to your child and their partner as they are now able to service the loan on their own. There was no agreement in writing setting out the arrangement between you and your child and their partner. You have no contemporaneous documentation from the bank or any other source setting out the reasons why you were required to go on the loan and title to the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10

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. 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. However, 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 their 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: You have not been able to provide the Commissioner with any contemporaneous evidence that you held the property in trust for your child and their partner. There was no written agreement between you and your child and their partner. You have not been able to provide any documentation from the bank setting out the reasons why you were required to go on the loan and title to the property. Therefore, you are required to declare the capital gain in your tax return for your share of the property you transferred to your child and their partner.