Edited version of private ruling

Authorisation Number: 1011576324025

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Subject: CGT - property transfer

Ruling

Question

Is there a CGT event when you transfer part of your interest in a property to a family member?

Answer: No.

This ruling applies for the following period

1 July 2010 to 30 June 2011

Relevant facts and circumstances

You and a family member purchased a block of land with the intention of building two units.

An agreement was drawn up by your lawyers stipulating that the portion of land, the unit each person built and the expenses involved would be the respective individual's responsibility.

You did not have enough assets to secure a loan to build your unit so the title for the land was put solely in your name.

Your intention is to transfer the portion of land the family member's unit is built on into his/her name on the title.

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

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that you make a capital gain or capital loss if and only if a Capital Gains Tax (CGT) event happens. A net capital gain is added to your other income and you are taxed at your marginal tax rate.

The most common CGT event is CGT event A1.

CGT event A1 disposal of a CGT asset

CGT event A1 occurs when you dispose of a CGT asset (section 104-10). The disposal of a CGT asset takes place if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

In the circumstance where a person is the sole title holder of a property, but then, transfers part of their ownership to another person, a CGT event A1 could be triggered.

Holding an Asset in Trust

In some cases, an individual may hold a legal ownership interest in a property for another individual in trust. Where the legal and beneficial ownership of an asset is different, a trust situation occurs.

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 (section 106-50 of the ITAA 1997).

Thus we need to determine if you are holding your interest in the property in trust and also whether the beneficiary has an absolute entitlement to this asset.

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.

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 or at their direction.

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.

It was necessary for your name to be the only name on the title deed so that you could secure finance for your unit. However, the family member paid all the expenses incurred for their half of the property and unit.

Therefore it may be argued that a bare trust exits in your circumstances as you merely held the legal title to the family member's share of the property. Your role as trustee was to simply hold the property and to deal with it according to the deed of agreement drawn up between you and the family member.

Absolutely entitled

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 difficultly 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.

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 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.

The asset concerned is an interest in the part of the property in which the family member's unit is built. This asset was held for one beneficiary only, who had a vested, indefeasible and absolute interest in the asset. Further, the family member was able to direct how that asset was dealt with as he/she made all of the decisions regarding their portion of the property.

Evidentiary requirements

For a beneficiary to be absolutely entitled to an asset of a trust under section 106-50 of the ITAA 1997, there are also some evidentiary requirements.

Tax Ruling TR 2004/D25 discusses the meaning of the words absolutely entitled to a CGT asset as against the trustee of a trust. Paragraph 121 of the TR 2004/D25 states that the number of assets (in a single asset class) held for each beneficiary must be evidenced in writing by the trustee. This evidence may take the form of a trust instrument or some other written form.

Conclusion

It has always been intended by you and the family member that the portion of land in which the family member's unit is built on would be transferred into his/her name on the title deed.

You have provided evidence in the form of a written agreement, drawn up by your lawyers, which supports this.

Therefore, the requirements of paragraph 121 of TR 2004/D25 have been satisfied.

Accordingly, your family member is absolutely entitled to his/her share of the property held by you under section 106-50 of the ITAA 1997 and no CGT event has occurred.

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