Edited version of private ruling

Authorisation Number: 1011649418932

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Ruling

Subject: CGT Transfer of property

Question 1

Is Z an absolutely entitled beneficiary to the property as against X (the trustee of the resulting trust under section 106-50, subdivision 106-C of Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Whether the transfer of property from X to Z would result in a amount being included in the assessable income of X in the year of income to the year end 30 June 2011 under:

· section 6-5 of the ITAA 1997 as ordinary income?

· section 6-10 of the ITAA 1997 as statutory income being an amount referable to a capital gain within section 102-5 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In a particular year, Z purchased the property.

A deposit was paid (by Z) on signing of the contract and the balance was payable in the same year.

The balance of the purchase price was paid by Z by a bank loan. The bank required a guarantor.

X agreed to act as guarantor for Z.

X agreed to act as guarantor provided:

Z made all payments in respect of the home loan and in relation to the property that Z purchased.

X's name appeared on the title of the property so that X would be able to exercise his rights as guarantor in the event that Z failed to make the payments to the bank.

Z agreed to have X's name registered on the title on the express understanding that:

· X would have no interest in the property save for the property being provided as security for X's exposure as guarantor;

· the full beneficial interests in the property were at all times to remain solely and exclusively in Z;

X was not regarded as the owner of half of the property notwithstanding the fact that his name appeared on the title.

X at all times held the half interest in the property upon bare trust for the exclusive benefit of Z and only as a security interest.

The property was duly registered in the names of X and Z. At all times prior to the acquisition of the property and since the acquisition of the property in the name of X and Z, Z assumed full responsibility for and incurred all costs associated with the acquisition, holding upkeep and maintenance of the property. Such costs included the payment of the initial deposit, all mortgage repayments, stamp duty, council rates, insurance and maintenance of the property.

Z continued to pay all mortgage instalments to the bank. X at no stage made any contribution towards any payments relating to the property or the mortgage.

In a response to further information you provided:

· copy of the registered proprietor details from the titles office showing that both Z and X are joint proprietors

· copy of loan documents from the bank

· copy of the bank credit contract signed by both X and Z

· advice that no trust was formally established via a trust deed but contend that there is a bare trust established.

· copy of a bank cheque being the deposit paid for the property paid by Z.

· list of payments made solely by Z towards to the mortgage

You have stated that you are also in possession of a number of other invoices that are in the names of both Z and X. You state that both names appear on the invoices because of the fact that the title of the property is registered in both of Z and X's names.

It is proposed that X would transfer the half interest in the property to Z for no consideration.

Relevant legislative provision

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 104-10

Question 1

Is Z an absolutely entitled beneficiary to the property as against X (the trustee of the resulting trust under section 106-50, subdivision 106-C of Division 6 of the ITAA 1997?

Detailed reasoning

Event (CGT event A1) occurs if you dispose of a CGT asset to someone else. This may apply on the transfer of legal ownership of property (section 104-10 of the ITAA 1997).

When considering the disposal of a property, the most important element in the application of CGT provisions is ownership. It must be determined who is the beneficial owner 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.

In the absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title. (An exception is if the property is held in the name of someone other than a spouse or child of the owner). Evidence may include documents that show the registered owner holds the property in trust for someone else.

A trust has three necessary elements:

· The trustee the titleholder, whose title may be legal or equitable, who is under a personal obligation to deal with the property for the benefit of the beneficiary or object of the trust

· Trust property which must be identifiable and capable of being held on trust and which is impressed with the trust so that the beneficiary has rights against the property as well as the trustee; and

· The beneficiary or object for whose benefit the trustee holds the property.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of asset. Where the legal and beneficial ownership of an asset is different, a trust situation occurs. If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner (section 106-50 of the ITAA 1997). This situation would arise if there was a bare trust in existence.

A bare trust exists where the legal owner holds property without any interest other than holding the legal title of the asset as trustee, and has no further duties to perform, other than to transfer the asset to the beneficiary or carry out any directions given by the beneficiary in regard to the asset. The beneficiary of a bare trust would be the beneficial owner of the CGT asset.

Absolute entitlement

Paragraph 33 of TR 2004D25 states:

It is considered that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled.

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.

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 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 (see Herdegen & Anor v FCT of T 88 ATC 4995: (1988) 84 ALR 271).

In this situation, it is considered that the X holds the property as bare trustee. The trust was established when X acted as guarantor in order for Z to obtain a loan from the bank in order to obtain the property. The beneficiary provided the purchase consideration for the property and is responsible for the payment of principal and interest relating to the acquisition of the property and all outgoings and other maintenance costs. The beneficiary also affected improvements to the property since the acquisition and solely paid for those improvements. It is also concluded that based on the facts of the case, the beneficiary is absolutely entitled to the property as against the trustee of the trust.

As the beneficiary is absolutely entitled to the property as against the trustee for the bare trust, section 106-50 of the ITAA 1997 will apply to treat an act done by the trustee as an act done by the beneficiary themselves.

The fact that Z is absolutely entitled to the property as against the trustee means that no CGT event occurs when the title is transferred back to Z as X was simply holding the property as trustee for the beneficiary.

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