Edited version of private ruling

Authorisation Number: 1011605752491

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Ruling

Subject: Capital gains tax

Question and answer:

Can you disregard any capital gain or loss on disposal of the property?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2007

Relevant facts and circumstances

You purchased a home in xxx with a family member's money.

The reason for you putting the house in your name was because your family member was in poor health.

The family member would now like the house in their name.

The family member received legal advice at the time that a trust deed should be prepared.

All documents pertaining to the sale of the house are in your name.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 102-20.

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) directs that you make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event A1 and this normally happens when the beneficial ownership of a CGT asset is transferred to someone else. 

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

A beneficial owner is defined in Taxation Ruling TR 2004/D25 as a person or entity who is beneficially entitled to the income and proceeds from the asset.

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.

Therefore, we need to determine if you are holding your interest in the dwelling 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.

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 effected 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, certainty of the subject matter of the trust and certainty as to the object of the trust.

While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing.  Therefore Express trusts must be evidenced in writing. In your circumstances there was nothing put in writing. Therefore, it is considered that an express trust was not created over the property.

Bare trust

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a 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 of at their direction.

While a beneficiary in these circumstances may be absolutely entitled, the existence or otherwise of a bare trust is not considered the appropriate test because it focuses on the duties of the trustee(s) rather than on the ability of the beneficiary to direct the trustee.  While the two are obviously linked, the focus on the duties of the trustee produces a slightly difference emphasis which, if used as the test, would distort the result in some cases.

However, Gummow J in Herdegen v Federal Commissioner of Taxation says the trustee of such a trust has active duties and that the trust is therefore not a bare trust.  He said ((1998) 84 ALR 271 at 282) that a trustees obligations with respect to maintenance and advancement go beyond those of guarding the property prior to conveyance to the beneficiary.  He said that while a trustee retains active duties of the type involved in a trust for maintenance and advancement it would not be, in modern times, an apt use of language to describe him as a bare trustee.

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 difficulty 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.

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.

In your case, your name is on the title deed and all loan documents.

Legal advice was given to your family member to have a declaration of trust drawn up which he did not proceed with.

In your circumstances a bare trust is not in existence as it cannot be evidenced that you are holding the property in trust for your family member.

As there was no bare trust or express trust listed over the property, you will be subject to tax on any capital gain or capital loss you made when you transfer the title of the property into your family members name. You will be considered to have disposed of the property for the market value on the date you transfer the property title to your family member.

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