Edited version of private ruling

Authorisation Number: 1011505059324

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Ruling

Subject: Capital gains tax - joint tenants - ownership interest - beneficial interest - right to seek compensation

Questions

1. Did a capital gains tax event C2 occur when you surrendered your right to seek compensation?

Answer: Yes.

2. Will a capital gain or capital loss occur when the capital proceeds for the surrendering of a right to seek compensation is the same as the right's cost base?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You were a tenant in common in a dwelling with two siblings in equal shares.

One of your siblings expressed that they wanted to dispose of their interest in the dwelling.

Your other sibling approached you in relation to an arrangement for the purchasing of the interest in the dwelling. Under this arrangement, your sibling would purchase your other siblings interest in the dwelling, your parent would be granted a life tenancy in the dwelling, and you would not be expected to contribute any funds towards the purchasing of your sibling's interest in the dwelling.

The Deed creating right of residence for life in the dwelling for your parent was executed after 20 September 1985.

Your sibling was paid the market value for their interest in the dwelling. Your parent contributed some funds towards the purchasing of your sibling's interest in the dwelling, with your other sibling contributing the balance. There was no written contract of sale for your sibling's interest in the dwelling.

You did not contribute any money towards the purchasing of your sibling's interest in the dwelling.

Your sibling's interest in the dwelling was transferred into you and your other sibling's names as joint tenants.

Your sibling and your parent lived in the dwelling rent free.

The ownership in the dwelling was changed from joint tenants to tenants in common after a number of months had lapsed, with you and your sibling listed as having equal ownership in the dwelling.

You and your sibling carried out negotiations in an effort to resolve the issue of your respective ownership interests in the dwelling.

You received a letter from your sibling's solicitors outlining that your sibling wanted to sever the joint tenancy and that discussions had occurred between you and your sibling in relation to the ownership interests in the dwelling, with an agreement being reached determining the ownership interest each of you held in the dwelling.

Your solicitors sent a letter to your sibling which provided that in an effort to resolve the ownership issue, you were prepared to accept that the transactions which had occurred involving your sibling's interests in the dwelling should be regarded as having no legal effect and that you were prepared to reconvey to your sibling the additional interest in the dwelling provided that all parties were restored to their original positions.

Negotiations continued with your sibling for a number of years until your sibling became ill and passed away.

The Public Trustee was appointed to administer your sibling's estate.

The dwelling was disposed of and all proceeds, with the exception of the proceeds from the interest in dispute, were distributed to you and your sibling's estate.

An agreement was reached between you and the Public Trustee in relation to the proceeds for the interest in dispute under which you would receive a settlement amount in exchange for you agreeing to relinquish your claim to the proceeds for the disposal of the disputed interest in the dwelling.

You have provided a number of documents, and they should be read in conjunction with, and form part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

CGT is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else.

When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset and in the absence to evidence to the contrary, property is considered to be owned by person(s) registered on the title.

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 to demonstrate that the legal owner holds the property on trust for the beneficial owner. We have considered the existence of a resulting trust in your case.

Resulting trust

A resulting trust, sometimes called an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances.

In general, where 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 or she intends that other person to hold the property in trust for him or her.

Where you purchase and pay for a property but legal title to it is transferred to another person at your direction, if that person is a stranger, the presumption of a resulting trust applies and the property is held in trust for you. But where the property is transferred to a relative, there is a presumption of advancement when the beneficial interest, as well as the legal interest, will pass.

The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests. While it is possible to rebut the presumption of advancement, this requires acceptance by the Australian Taxation Office that one party holds an interest in the property on trust for another party.

After objectively considering the facts of your situation, we have determined that a CGT event E1 occurred when a resulting trust was created over the interest in dispute. We have also determined that no presumption of advancement existed in this case as your sibling never meant for you to have the beneficial interest or legal interest in the disputed interest in the property.

As we have determined that a resulting trust existed in this case, we have to examine whether your sibling was absolutely entitled to the asset as against you as the trustee of the resulting trust.

Absolutely entitled

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee if the beneficiary is:

· absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

· able to direct the trustee how to deal with the asset.

When a beneficiary is absolutely entitled to a CGT asset as against the trustee any act done by the trustee will be treated as an act done by the beneficiary. It is the beneficial owner that is considered by the capital gains provisions to be the owner of the asset and the person who makes any capital gain or loss due to a CGT event happening. No CGT event happens to the trustee due to any disposal of the asset.

Based on the facts provided in this case, your sibling had a vested, indefeasible and absolute interest in the property. This is evidenced by the following facts:

· you did not contribute any money towards the purchase of the disputed interest in the dwelling

· your sibling provided funding to acquire the disputed interest in the dwelling

· your sibling lived in the dwelling

· you did not reside in the dwelling throughout your sibling's ownership of the dwelling

· you did not charge your sibling rent; and

· you did not receive any financial consideration from the disposal of the disputed interest in the dwelling.

Therefore, on disposal of the dwelling, it is viewed that your sibling disposed of their 1/3^rd interest in the dwelling, plus half of the interest acquired from your other sibling. You are viewed as having disposed of your 1/3rd interest in the dwelling, plus the other half of the interest acquired your other sibling, that you held on trust for your sibling. As your sibling was absolutely entitled to the disputed interest in the dwelling that you held on trust, we will treat your action as an act done by your sibling. Therefore, your sibling as an absolutely entitled beneficiary was liable for any capital gain made by you on the disposal of the disputed interest in the dwelling that you held on trust.

Right to seek compensation

If an amount of compensation is not received in respect of any underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

An underlying asset is the asset that, using the 'look-through' approach, is disposed of, or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity. If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation.

A right to seek compensation will be disposed of when the right is settled between the parties or is finally determined by a court, as there would then be a cancellation, release, discharge, or satisfaction, etc, of the asset constituted by the right of action, ie when CGT event C2 happens.

The cost base of the right to seek compensation consists of any expenditure or outgoing that has a direct and substantial link between the expenditure or outgoing and the arising of the right to seek compensation.

You make a capital gain if the capital proceeds from the disposal of a CGT asset, such as a right to seek compensation, if greater than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's cost base. When the capital proceeds are equal to the cost base, neither a capital gain nor a capital loss has occurred.

In your case, the property was disposed of and the capital proceeds received from the disposal of the dwelling have been distributed to you and your sibling's estate, with the exception of the proceeds for the disputed interest in the property. A dispute arose between you and the Public Trustee , as the trustee of your sibling's estate, in relation to the ownership interests in the property and the entitlement to proceeds for the disputed interest in the property.

You and the Public Trustee reached a settlement agreement in relation to the proceeds from the disputed interest and CGT event C2 occurred. Under the terms of settlement agreement, you agreed to relinquish your claim to the proceeds from the disposal of the disputed interest in the property in exchange for the payment of settlement amount. The settlement amount consisted of legal costs, outlays and interest.

It is viewed that the relevant asset in your case is your right to seek compensation as the legal proceedings have ultimately lead to you receiving the settlement amount. The cost base of your right to seek compensation will consist of any expenditure and outlays that have a direct link to that right.

As the capital proceeds for the surrender of your right to seek compensation are the same as the cost base for the right, you have not made either a capital gain or a capital loss, and therefore there is no CGT liability.

Note: Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provision when the taxpayer receives an amount in which the interest is separately identified. In this case, the settlement agreement outlines that you received an identifiable amount of interest. As the interest amount has been separately identified, it must be included as assessable income in your income tax return in the income year in which it was received.

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