Edited version of private ruling

Authorisation Number: 1011838543248

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax

Question and answer:

Will you be liable for capital gains tax (CGT) when the property is sold?

Yes.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You migrated from Country X to Australia in some years ago.

You became a citizen of Australia in a subsequent year.

Later your parents applied for Australian residency.

When they visited Australia they saw a property for sale and wished to purchase it as their home upon their migration.

As they were not residents of Australia at that time, they were under the impression that they could not purchase the property in their own name.

So it was decided that you would purchase the property on their behalf.

Your parents transferred money from Country X into their Australian bank account. You have provided bank statements as a proof of this transfer. You have also provided copies of cheques that were used to pay this money to purchase the property in question.

The property remained unoccupied until your parents relocated from the Country X . It has been their main residence ever since.

At that time you were not aware of any future tax implications that could arise as a result of the property being in your name.

The agent who sold the property to you did not make you aware that your parents could apply to the Foreign Investment Board if they wanted to purchase the property in their own name.

There is no written agreement that you purchased the property on behalf of your parents.

You have provided a letter from the settlement agent that supports the position that you purchased the property on behalf of her parents.

You have also provided various invoices in relation to repairs and maintenance of the property. All these documents are in your parents' name.

You have stated that although the property title is in your name you do not have any financial interest in the property.

Your parents are old and in failing health.

They now want to sell this property and move into something smaller and closer to you.

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or a capital loss as a result of a CGT event.

The most common event (CGT event A1) happens if you dispose of a CGT asset to someone else.

Section 118-10 of the Income Tax Assessment Act 1997 provides that a taxpayer can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is their main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it and must not have been used to produce assessable income.

In some cases, an individual may hold 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.  In this situation the legal owner is the trustee of the asset.

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 over land must be evidenced in writing.

In your circumstances a trust deed was not established between your parents and yourself. You also do not have any written agreement to the effect that you purchased the property on behalf of your parents. Therefore, an express trust was not created over the property.

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.

A bare trust however requires identification of a specific trust asset that is held on behalf of a specific beneficiary.  That is, each beneficiary must be able to point to the particular trust asset that belongs to them.   An asset such as land raises particular problems where there are multiple beneficiaries because it is generally not possible to divide it without prejudicing the interests of other beneficiaries.   While each beneficiary has an interest in the land, the asset held by the trust is the whole of the land.  There is no direct matching of the asset to which a particular beneficiary is entitled and the asset held by the trust as required.

Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Land is considered to be an asset that is not fungible.

If the assets are not fungible, but more than one beneficiary has an interest in them, then that is the clearest possible indication that, under the terms of the trust, individual beneficiaries are not entitled to particular assets to the exclusion of others.

That is, if each asset is unique, but the trust does not clearly set out which beneficiary is to get which asset, this indicates an intention that each beneficiary is in fact to have an interest in each of the assets.

You were not holding the property for one person, the property was not fungible so one person could be absolutely entitled to the property - there was not a bare trust. This is confirmed in paragraph 125 of Taxation Ruling TR 2004/D25 which states that if there is a shared interest in the trust asset, absolute entitlement does not exist.

As there was no bare trust or express trust listed over the property, you are the legal and beneficial owner of the property. As the property was not your main residence you will be subject to capital gains tax when you dispose of the property.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).