Edited version of private advice

Authorisation Number: 1052217335214

Date of advice: 2 May 2024

Ruling

Subject: Capital gains tax

Question 1

Did a CGT event occur when the property was disposed of under the State Government's Home Buy Back Program?

Answer

Yes.

Question 2

Will you incur a tax liability in relation to any capital gain made on the sale?

Answer

Yes.

Question 3

Will the ex-gratia part of the payment be included in your capital gain made on the sale?

Answer

Yes.

Question 4

If you make a capital gain in relation to the sale of the property, does the 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997 apply to the gain?

Answer

Yes.

This private ruling applies for the following period:

Year ended XX/XX/202X

The scheme commenced on:

XX/XX/20XX

Relevant facts and circumstances

In 20XX, the Property was acquired by you, your child (Person A), and your child's spouse (Person B).

The initial purchase price was $X. Person A paid one quarter of the purchase price and you entered a mortgage to meet the remaining three quarters.

The objective of purchasing the Property was to provide Person A and Person B with a project and a financial stepping stone. It was intended that the Property would be gifted to Person A at a later date.

At the time of purchase, Person A and Person B were located overseas and unable to complete the necessary paperwork. Accordingly, it was agreed between the Parties that title to the Property would be registered in your name however ownership would be split in equal shares. It was further agreed that you would not undertake renovations on the property or meet the costs of any improvements of bills. Shortly thereafter, you reported to Centrelink that you own a 50% ownership interest in the Property.

The following year, Person A and Person B commenced renovating the Property. They personally met all costs which came to in excess of $X. All decisions concerning the Property were made by Person A and Person B and they personally invested significant man hours in the renovations.

Once the Property was in a liveable condition, Person A and Person B moved into the Property. Person A and Person B met all costs of the Property.

Between 20XX to 20XX, Person A and Person B paid $X off the mortgage.

In 20XX, Person B was diagnosed with a significant medical condition and became physically disabled as a result of surgery. Person A was also X. You all discussed transferring title to the Property to Person A and Person B, however Person A felt too pre-occupied by Person B's surgeries and their X to attend to this.

In 20XX, the house was effectively destroyed by a significant weather event. The Property was left unliveable and Person A and Person B homeless.

The following year, the Corporation made an offer to buyback the Property under state law. The offer consisted of a portion of funds for the value of the Property and an ex-gratia payment to top up the purchase of the Property to its value prior to the significant weather event. The offer amount was accepted by the Parties and directed to Person A and Person B.

Relevant legislative provisions

Section 108-5 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Did a Capital gains tax (CGT) event occur when the property was disposed of under the State Government's Home Buy Back Program?

Summary

Yes. CGT event A1 occurred when the property was purchased by the State Government's Home Buy Back Program.

Detailed reasoning

CGT is imposed on capital gains made from a relevant CGT event. Land and buildings are classified as capital assets pursuant to Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). When a CGT asset changes ownership, this is a disposal and therefore a CGT event, in this case a CGT A1 event (see section 104-10 of the ITAA 1997).

Question 2

Will you incur a tax liability in relation to any capital gain made on the sale?

Summary

Yes. You will incur a tax liability in relation to the capital gain made on you 75% ownership interest in the property.

Detailed reasoning

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.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. 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. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

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.

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.

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.

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.

However, there are instances where this application may not apply. This is where the property is transferred to the purchaser's immediate family such as a spouse or a child. In such circumstances, the presumption of a resulting trust is replaced by the 'presumption of advancement'.

The rebuttable presumption of advancement deems the purchaser to have prima facie intended to advance the interests of the family members (i.e. an absolute gift).

Application to your circumstances

You are the legal owner of the Property. The Property is not your main residence.

You have not provided evidence of an express trust or constructive trust.

You have provided evidence of a resulting or implied trust amounting to 25% beneficial ownership held on behalf of Person A. Person A and Person B renovated the dwelling on the property and resided in the dwelling from 20XX until the property was damaged in the 20XX significant weather event. You did not reside in the property at any time.

As the property was not your primary residence the main residence exemption will not be available to you in relation to your share of the property and you will be liable for CGT upon the sale of the property.

Question 3

Will the ex-gratia part of the payment be included in your capital gain made on the sale?

Summary

Yes. The ex gratia part of the payment is compensation for disposal of the underlying asset, being the property, and therefore taxable in accordance with Taxation Ruling 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35).

Detailed reasoning

An ex-gratia payment is a payment made by an entity as a gesture of goodwill where there is no legal obligation to make the payment. Whether or not an ex-gratia payment is taxable depends on the nature of the payment. Where compensation is received for the disposal of an asset, although the amount is less directly related to the asset than payment of the purchase price, it is treated as capital proceeds. this approach is the 'look through' approach, or 'underlying asset' approach.

As per para 4 of TR 95/35:

4. If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

The fact sheet regarding the Home Buyback stream provides:

The Corporation is proposing to pay eligible homeowners a purchase price which considers market value of the property immediately before XX. The Corporation is proposing to offer a payment package which comprises:

(a) compensation under the State Legislation, which is:

(i) the market value of the property calculated at the date on which the sale contract is entered into (the current market value); and

(ii) other types of compensation to which a homeowner may be entitled under the State Legislationt; Plus (if applicable)

(b) an additional grant to bring the total payment up to the market value of the property before the Weather event (referred to as the Top Up Payment).

Application to your circumstances

You received an ex-gratia payment to reflect the decrease in value of the property resulting from the Significant Weather event. The ex-gratia payment was wholly in respect of the disposal of the property and accordingly, the underlying asset is the property and taxable in accordance with TR 95/35.

Question 4

If you make a capital gain in relation to the sale of the property, does the 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997 apply to the gain?

Summary

Yes. As you held your ownership interest as an individual for over 12 months, and you were not a foreign resident at the time it was disposed, you are entitled to claim the 50% CGT discount on the disposal of your ownership interest.

Detailed reasoning

Under section 115-100 of the ITAA 1997, an individual is entitled to discount the capital gain made as a result of a CGT event by 50 percent provided:

• The individual is an Australian resident for tax purposes,

• The CGT event happens after 21 September 1999; and
• The CGT asset was acquired at least 12 months before the CGT event happening.

Application to your circumstances

As you held your ownership interest for longer than 12 months, and you were an Australian resident for tax purposes at the time that you disposed of your ownership interest, you are entitled to the 50% CGT discount in relation to the property.