Private ruling: CGT - sale of porperty
Date of advice: 22 July 2024
Published: 2 September 2024
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Did you have a CGT event in relation to your 50% legal interest in the property when it was sold? | A1: Yes. | Q2: Are you entitled to utilise the main residence exemption detailed in section 118-110 of the Income Tax Assessment Act 1997 to exempt the gain? | A2: Yes.

Relevant facts and circumstances: The property has a land size of less than 2 hectares and was purchased more than 20 years ago in four names in equal shares as tenants in common. The owners were you, your spouse, and your two adult children (W and Z). Your previous main residence was co-owned by you and your spouse. It was sold with the sale proceeds used for the deposit to purchase the property. The mortgage for the property was taken out in all four names included on the title to the property. At the time of the purchase of the property, W was a young adult and working part-time while Z was a few years older and employed by a large corporation. After the purchase, your children lived in the property with you and your spouse until Z left home a couple of years later and W left home a few years after that. The property mortgage was extinguished from the proceeds of a lump sum you received several years after the property was purchased. Your children's names were not removed from the title when the loan was paid out. Upon your spouse's passing in 20XX, you acquired their ownership interest in the property under their will such that the registered ownership interests for the property became 50% for you and 25% for each of your children. In 20XX, you decided that you wanted to sell the property to fund your retirement. A dispute arose in relation to Z's interest in the property as you needed their signature to be able to sell the property. Z lodged a legal claim against you. In their statement of claim they stated: • They were added to the title and mortgage so that the bank would loan the necessary funds to you and your spouse. • It was because they consented to this that they subsequently suffered financial loss by not being entitled to the First Home Owners Grant and not being able to acquire as many investment properties as they otherwise would have. In their claim, Z sought orders for the property to be sold and the net proceeds to be paid to each owner of the property in proportion to the interest held by the owner as reflected on the Certificate of Title. You and Z agreed to settle the dispute. The consent orders stated that the property was to be sold with you to pay Z $XXX,XXX upon settlement. The property was sold for $X,XXX,XXX. After payment of relevant costs, and the $XXX,XXX to Z, the balance of the sale proceeds was received by you. You used part of the balance to purchase a new downsized residence. The property was always your main residence and never used as a rental property during your family's ownership period. Your contentions You have made the following contentions: • Your two adult children each held their 25% legal ownership interest in the property on trust for you. You were the beneficial owner of 100% of the property when it was sold so a CGT event happened to you in relation to 100% of the property. • It was never the intention of you and your spouse that your children would have any beneficial ownership interest in the property. • You and your spouse included Z on the loan and title as they were employed at the time and were required to be on the loan and title in order for you and your spouse to be able to secure the loan on the property. • You and your spouse included W on the title so that no favouritism was shown. This was also done to ensure that on the deaths of you and your spouse, Z could not use the fact that their name was on the title to try to support a greater claim over the property than W. • You and your spouse satisfied all loan repayments. • You and your spouse paid all the property expenses such as repairs, council rates, water rates, body corporate rate fees, house insurance, electricity and gas and maintenance. • You had only been receiving a principal place of residence exemption for 50% of the land tax because you had been unaware that you could have applied for an exemption on the land tax relating to the share of the property owned by your children. • The reason your children's names were not removed from the title when the mortgage was repaid was because you and your spouse believed that stamp duty would have been payable if this was done. • W has always held their 25% interest in the property as bare trustee for the survivor of you and your spouse. This is stated in a document signed by you and W dated within the last six months.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 118-110

Reasons for decision: Summary: There is insufficient evidence to demonstrate that the legal and beneficial ownership interests in the property were different. That is, there is insufficient evidence to establish that your children held their ownership interests in the property on trust for you. Consequently, capital gains tax (CGT) event A1 happened to you for your 50% ownership interest, rather than for the entire property, when the property was sold. As the property is situated on not more than 2 hectares of land and was your main residence during your entire ownership period, you are entitled to a full main residence exemption for any capital gain resulting from your CGT event on the disposal of your 50% ownership interest. | Detailed Reasoning - Detailed reasoning: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs under section 104-10 of the ITAA 1997 when there is a change in ownership of a CGT asset. Accordingly, when applying the CGT provisions on the sale of property, ownership must be considered. It must be determined who had beneficial ownership of the property. An individual can be a legal owner but have no beneficial ownership in an asset. This will ordinarily occur where the property is held on trust. To establish occasions where legal and beneficial ownership are not the same (i.e. a trust), there needs to be evidence to rebut the standard presumption that legal and equitable interests are the same. This evidence ordinarily includes: • contemporaneous documentation that clearly shows the parties' intentions at the time the property was purchased, and • documentation that clearly shows that the parties treated the property in accordance with those intentions during the ownership period. Gibbs CJ stated in Muschinski v. Dodds [1985] HCA 78 that the relevant principles included there being contemporaneous evidence: Where both transferees have contributed to the purchase money, the intentions of both are material, but where only one has provided the money it is his or her intention alone that has to be ascertained. The evidence admissible to establish the intention of the real purchaser will comprise 'the acts and declarations of the parties before or at the time of the purchase ... or so immediately thereafter as to constitute a part of the transaction' (Charles Marshall Pty Ltd v Grimsley [1956] HCA 28; (1956) 95 CLR 353 at 365) In relation to evidence of a trust arrangement, the following should also be noted: • contemporaneous evidence includes any documents such as e-mails, diary entries, bank documents, correspondence with third parties involved in the transaction, etc., that were created at the time of the property's purchase, • where there is little or no contemporaneous evidence of intention and the terms of an arrangement, formal documents prepared many years after a property was purchased will be of little probative value, and • the evidence must be unambiguous. In the absence of clear and compelling evidence to the contrary, the property is considered to be owned by the people registered on the title. Trusts may be of three kinds: express, constructive, or resulting. | 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 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 [1984] HCA 81. If a resulting trust arises, the party, or parties, who hold the legal title is, or are, presumed to hold the property upon resulting trust in favour of those who contributed to its purchase cost. That is, 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 other's name. The presumption of resulting trust may be rebutted by: • a presumption of advancement that arises and is not rebutted, or • evidence of the contributors' common intention at the time of the property purchase contrary to the resulting trust arising: Calverley v. Green. | Detailed Reasoning - Application to your circumstances: In your case, there was not a constructive trust. For the other two types of trust, clear contemporaneous evidence is required in order to either establish that there was an express trust or to rebut the presumption of advancement such that a resulting trust may have arisen. We make the following comments in relation to documents you have provided: • Your spouse's will passed their legal ownership interest to you. It provides no evidence that your children held their shares on trust. It reflects the legal interests in the property. • Your signed deed clearly states the intention regarding the property, but it is a very recent document so has little weight in the absence of contemporaneous evidence. • Z's statement of claim referred to both Z's legal interest of 25% and their reasons for being a party to the loan. This is not contemporaneous evidence of the intention to hold their share of the property on trust. • The consent orders show that under the settlement Z agreed that they would make no future claims against the property or your estate. This is not evidence that they originally intended to hold their share of the property on trust for you and your spouse. • Sale settlement documents - Distribution of proceeds of sale to a particular person is not evidence that a trust was created at the time the property was purchased. Parties can agree to a distribution of proceeds of sale that is different to their legal or beneficial interest. • Some of the documents for expenses in relation to the property are addressed to you only while others are addressed to Z, W and yourself. The payment of property expenses by a particular person is not evidence that there was a trust created when the property was purchased. None of these documents evidence the intention to hold the property on trust - some point towards the property being dealt with as if the legal and beneficial interest were the same. None of them are contemporaneous. As a result, we do not consider that sufficient evidence has been provided to establish that the equitable interests in the property were different from the legal title. That is, there is insufficient evidence to establish that your children held their ownership interests in the property on trust for you. | Detailed Reasoning - Main residence exemption: A full main residence exemption is provided under section 118-110 of the ITAA 1997 for your ownership interest in a dwelling and up to 2 hectares of adjacent land if it was your main residence during your entire ownership period. Having regard to your facts, it is clear that you are entitled to a full main residence exemption for any capital gain resulting from your CGT event on the disposal of your 50% ownership interest in the property.