Private ruling: Capital gains tax - transfer of property
Ruling period: Year ending 30 June 2011
Date scheme commenced: 01 July 2010

Ruling: Q1: Will the transfer of the ownership of the property between two parties be a capital gains tax event? | A1: Yes.

Relevant facts and circumstances: Taxpayer 1 (TP1) signed and registered a memorandum of transfer for the property to Taxpayer 2 (TP2) on a previous date. The property remains registered in the Land Titles Registry in Taxpayer 2s name as registered proprietor. TP1 maintains that that tjeu did not intend to transfer the equitable ownership of the property and intended TP2 to have only bare legal title which was to be transferred back to TP1 upon request. TP1 maintains that all times TP2 held the property in trust for TP1. No trust deed has been presented regarding the transfer of the property from TP1 to TP2. Prior to June 1999 TP1 was the registered proprietor of the property in fee simple, subject to a commercial mortgage securing an amount less than the value of the property. The loan money was applied to both TP1 and TP2. TP1 occupied part of the property as owner and TP2 occupied a part of the property as tenant. TP1 became involved in litigation and sought to protect the property by transferring it to another person (TP2) who would transfer it back to them on demand. A contract of sale and memorandum of transfer of the property were prepared by a solicitor on request by TP1. TP2 signed these documents. TP2 paid the costs and stamp duty on the contract and the memorandum of transfer was registered. TP2 was reimbursed the stamp duty and costs at a later date. Upon signing the initial transfer, TP2 ceased paying rent but commenced paying all the mortgage and interest costs on the loan. TP2 also paid for maintenance of that part of the property they occupied and paid rates and land tax on the whole property.TP2 vacated the property and TP1 has occupied, maintained and paid outgoings on the property since that date. No consideration or any other monies in relation to the transfer were ever paid by TP2. A deed of settlement has been drafted between TP1 and TP2. TP2 is willing to sign and provide TP1 a memorandum of transfer of the property without receiving any money in consideration. TP1 is now requesting that TP2 transfer the property back to TP1.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 and | Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Summary: The transfer of ownership of the property will be a capital gains tax event. | Detailed Reasoning - Detailed reasoning: A taxpayer can only make a capital gain or loss if a CGT event happens. The transfer of property between taxpayers will trigger CGT event A1 - the disposal of a CGT asset. Under Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), CGT event A1 occurs if a taxpayer disposes of a CGT asset. The property meets the definition of a CGT asset under Section 108-5 of the ITAA 1997. Subsection 104-10(2) of the ITAA 1997 states that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. The subsection goes on to advise that a change in ownership does not occur if you stop being the legal owner of the asset but continue to be it's beneficial owner or merely because a change of trustee. In order for a change of trustee to occur, there must first be a trust in place over the CGT asset. Trust situations occur where the legal and equitable/beneficial ownership of an asset is different. The creation of trusts fall within the jurisdiction of equity and trusts may be of three kinds: express, constructive or resulting. | Detailed Reasoning - Express Trusts: Express trusts have been defined as a trust that is intentionally created by the owner of property in order to confer a benefit upon another. All state property law acts contain provisions derived form the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. As there is no documentary evidence that TP2 held the property as trustee for TP1 an express trust will not apply in this case. | Detailed Reasoning - Constructive Trusts: Constructive trusts can be defined as a trust imposed by operation of law, regardless of the intentions of parties concerned, whenever equity considers it unconscionable for the party holding the title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however dependant upon the order of the court. The facts of this case do not indicate the existence of a court order. It is therefore concluded that no constructive trust currently exists. | Detailed Reasoning - Resulting or Implied Trusts: A resulting or implied trust arises in the absence of express or implied intention when the law presumes an intention to the parties. For example, when a person pays the purchase price of a property and causes the property to be placed in the name of some other person, it is presumed that he/she intends that other person to hold the property in trust for him/her. In this case TP1's intention in the transfer of the property was to divest themself of ownership of the property (both legal and beneficial ownership); as a result no resulting trust is deemed to have arisen. We consider that there are extremely limited circumstances where 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. We will assume where taxpayers are related, eg., husband and wife , that the equitable rights is exactly the same as the legal title. As the transfer of the property will not be considered a change of trustee it will be considered to be CGT event A1 disposal by TP2.

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