Edited version of private ruling

Authorisation Number: 1011837601701

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Ruling

Subject: Capital gains tax - property held in trust

Question: Is the capital gain or capital loss made on the transfer of the property into your sibling's partner's name disregarded?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your sibling and their partner found a property (the property) they wanted to purchase.

The financial institution would not lend your sibling (person A) and their partner (person B) the money to acquire the property.

The financial institution advised that they would lend you the money to acquire the property but the title had to be in your name.

You acquired a loan for a specified amount. The purchase price of the property was $X.

In 19XX you acquired the property and person A and person B established it as their main residence.

You have never resided at the property.

You did not contributed to the purchase or the upkeep of the property but you did pay the rates on behalf person A and person B more than five years ago to avoid credit rating issues. You were repaid this money by person A and person B.

Person A and person B have paid all costs associated with the purchase and upkeep of the property.

Person B is now in a position to take over the title and finance of the property in their own right.

You have supplied the following documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling:

· Statutory declaration - yours

· Statutory declaration - person A

· Statutory declaration - person B

· Register Search Statement (Title Search) Transfer of Land Act 1958

· Transfer of land

· Mortgage of land

· Plan of Subdivision

· Modification Table, and

· financial institution deposit slip.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-15

Reasons for decision

When considering whether the transfer of the title of an asset is a disposal, the most important element in the application of the capital gains tax (CGT) provisions is ownership. It must be determined who the legal owner of the asset is and who the beneficial owner is.

In the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title.

However, it is possible for legal ownership to differ from beneficial ownership. In such cases, a trust relationship exists with the legal owner holding the property on trust for the beneficial owner.

There are two CGT events which may apply in these circumstances. These events are CGT event A1 and CGT event B1.

CGT event A1 occurs on the disposal of a CGT asset including when a property is transferred to another person for little or no consideration.

CGT event B1 occurs on the entry into an agreement with another entity under which:  

· the right to the use and enjoyment of a CGT asset owned passes to another entity; and

· title in the asset will or may pass to the other entity at or before the end of the agreement.

CGT event A1 and trusts

The time of the CGT event A1 is when the contract for the disposal of the CGT asset is entered into, or if there is no contract, when the change of ownership occurs.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an 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.

There are three kinds of trusts: express, constructive or resulting.

We have considered the facts that you have provided in order to determine whether a trust has been created in relation to the property and our determinations are as follows:

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 when relating to the transfer of interests in land, must be evidenced in writing. In your circumstances a trust deed was not established between person A, person B and yourself.  It is considered that an express trust was not created over the property.

A constructive trust is a trust imposed by operation of law. The facts of this case do not indicate the existence of a court order and therefore it can be concluded that a constructive trust does not exist.

A resulting trust, sometimes called an implied trust, is a trust that arises by the operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Where an individual purchases and pays for a property and retains legal title to it, it is not possible to infer that the property is held on trust for another, as both the legal and beneficial interests remain with the purchaser. The facts of the case do not indicate that a resulting trust has been created.

CGT event B1

CGT event B1 happens if you enter into an agreement with another entity to whom you grant the right to the use and enjoyment of a CGT asset you own, and title to that asset will or may pass to the other entity at the end of the agreement. The time of the event is when the other entity first obtains the use and enjoyment of the asset.

We consider that the arrangement with person A and person B to be a loose family arrangement which does not fall within CGT event B1 as there is no formal agreement under which the title will or may pass and because there is no specific point of time or particular occurrence when the arrangement will end in relation to the property.

Therefore, CGT event B1 does not apply to your circumstances.

As there has been no trust created and CGT event B1 will not occur we do not have to consider whether person A or person B have absolute entitlement to the property.

We consider the arrangement between you, person A and person B is no more than a private family arrangement which does not alter your status as the legal and beneficial owner of the property.

How the law applies to your situation

As the legal and beneficial owner of the property, the transfer of the property to person B constitutes a CGT event A1. The time of the event is the date the property is transferred to

Person B. As the property was not your main residence and was acquired after 20 September 1985 any capital gain or loss is not disregarded.

If you receive no capital proceeds from a CGT event, you are taken to have received the market value of the property at the time of the event.

To obtain the market value of the property at the time of disposal, you can:

· obtaining a valuation from a qualified valuer, or

· compute your own valuation based on reasonable objective and supportable data.

For more information on how to calculate your capital gain please find the enclosed information sheet, this information was taken from Guide to capital gains tax 2009-10 (NAT 4151-6.20108). Information is also available on our website - www.ato.gov.au.

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