Private ruling: Capital gains tax
Published: September 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer | Can you disregard any capital gain or loss on disposal of the property occupied by your parents? | No.

Relevant facts and circumstances: A residential property was purchased a number of years ago. The title deed of the property is in your name. Your parents paid for the property. Your parents have included the property in their will to be distributed equally between you and your siblings. All costs associated with occupancy, maintenance and repairs to the property have been incurred by your parents You have purchased your own home and investment property. The house is not stated in your will. The house is shortly to be sold and the proceeds will be distributed according to your parent's wishes. There was no written agreement between you and your parents.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 106-50. | Income Tax Assessment Act 1997 Section 102-20.

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) directs that you make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. Section 104-10 of the ITAA 1997 describes the most common CGT event A1 and this normally happens when the beneficial ownership of a CGT asset is transferred to someone else. However, in some cases, an individual may hold a legal ownership interest in a property for another individual in trust. Where the legal and ownership of an asset is different, a trust situation occurs. In this situation the legal owner is the trustee of the asset. A beneficial owner is defined in Taxation Ruling TR 2004/D25 as a person or entity who is beneficially entitled to the income and proceeds from the asset. The CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and the other person was absolutely entitled to that asset as against the trustee. Therefore, we need to determine if you are holding your interest in the dwelling in trust and also whether the beneficiary has an absolute entitlement to this asset. | Detailed Reasoning - Was there a trust created?: A trust exists when legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary. There are several kinds of trusts, including express and bare. | Detailed Reasoning - Express trust: 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. Therefore Express trusts must be evidenced in writing. In your circumstances a trust deed was not established between you and your parents. Therefore, it is considered that an express trust was not created over the property. | Detailed Reasoning - Bare trust: 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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust. A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries of at their direction. While a beneficiary in these circumstances may be absolutely entitled, the existence or otherwise of a bare trust is not considered the appropriate test because it focuses on the duties of the trustee(s) rather than on the ability of the beneficiary to direct the trustee. While the two are obviously linked, the focus on the duties of the trustee produces a slightly difference emphasis which, if used as the test, would distort the result in some cases. However, Gummow J in Herdegen v Federal Commissioner of Taxation says the trustee of such a trust has active duties and that the trust is therefore not a bare trust. He said ((1998) 84 ALR 271 at 282) that a trustees obligations with respect to maintenance and advancement go beyond those of guarding the property prior to conveyance to the beneficiary. He said that while a trustee retains active duties of the type involved in a trust for maintenance and advancement it would not be, in modern times, an apt use of language to describe him as a bare trustee. The existence of a bare trust does not automatically mean a beneficiary of the trust is absolutely entitled. There may be multiple beneficiaries with interests in the trust property in which case other factors need to be considered. It may be that despite the trust being a bare trust, no one beneficiary is absolutely entitled to the trust property. A person will have difficulty in establishing the requirements for absolute entitlement under section 106-50 of the ITAA 1997 if one or more other beneficiaries have an interest in the trust asset. This is because section 106-50 of the ITAA 1997 requires identification of a specific trust asset that is held on behalf of a specific beneficiary. It is not sufficient for a beneficiary to show they have an undivided interest in the trust asset. Instead, it must be possible to identify a particular asset being held for a particular beneficiary. Under a bare trust the beneficiaries are entitled to possession of the trust assets and the trustee must act in accordance with the direction of the beneficiary. Ultimately the trustee must deal with the property as directed by the beneficiary. In your case, it is not possible to point to a beneficiary who is absolutely entitled to the property. You have held the property in trust for your parents which means, there are multiple beneficiaries with interests in the trust property. It is not possible to point to a particular asset being held for a particular beneficiary as such, you will be subject to tax on any capital gain you made when the property is sold.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.