Edited version of your private ruling

Authorisation Number: 1012462093412

Ruling

Subject: CGT - disposal

Question and answer

Are you able to disregard the capital gain or capital loss you make when you transfer your half ownership in a property to your relative?

Yes.

This ruling applies for the following periods

1 May 2013 to 30 June 2014

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.

Your relative and their ex-partner obtained a loan from a bank to build a house on land that they already owned.

When their relationship broke down your relative sought to transfer the title to the property into their own name.

At that time your relative was self employed.

The bank considered your relative had insufficient income to enable them to enter into a mortgage agreement in their own right.

As a consequence it was indicated to you that you could assist your relative by becoming a guarantor.

You sought advice from a solicitor.

Subsequently your name was added, as a tenant in common, on the ownership title to the property.

You and your relative each have a half share in the property.

You were advised your relative could refinance the loan and have the ownership title changed to their name when it became financially viable for them.

You had a verbal agreement with your relative that the property remained their principle place of residence and that the loan would be refinanced and the title would be transferred into their name when financially viable.

The property has never been your principle place of residence.

You considered by having your name on the deed to title, acting as guarantor and your involvement in the ownership of the property was in name only. In effect the property was held in trust for your relative until such time as they could obtain a loan themselves.

You relative has since constructed the house.

Your relative has continuously resided in the property, paid all loan repayments, rates, insurance, home improvements, legal fees and stamp duty charges and other associated costs.

A financial institution has agreed, in principle, to provide your relative and their current spouse with a loan without the need for a guarantor.

You have provided two letters regarding transfer of title and registration of mortgage which shows that your involvement was, as a co-owner of the property, merely to satisfy the requirements of the lender.

You will not be receiving any payment when you withdraw your name from the loan and the property title deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you can make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset.

Under section 104-10 of the ITAA 1997 a CGT event A1 will happen when you dispose of a CGT asset to someone else.

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

In some cases, an individual may hold legal ownership interest in a property for another individual in trust. 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.

Under section 106-50 of the ITAA 1997 if the beneficiary of a trust is absolutely entitled to a CGT asset as against a trustee, any act done by the trustee is treated as if it was carried out by the beneficiary.

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. This situation would arise if there was a bare trust in existence.

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

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 different 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 that a trustee's 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 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.

Application to your circumstances

It is considered that you jointly hold the legal title to the property solely in trust for your relative for the following reasons:

· You relative has continuously resided in the property

· Your relative has paid all expenses relating to the property

· You have never received any income from the property

· The only reason you were listed on the property's title was because your relative was unable to secure a loan without you acting as guarantor

· You will not be receiving any payment when you withdraw your name from the loan and the property title deed

Based on these facts we conclude that your relative is absolutely entitled to the property and you were merely acting in a trustee capacity. As your relative is absolutely entitled to the property, section 106-50 of the ITAA 1997 will apply to treat an act done by the trustee as an act done by the beneficiary. In these circumstances, this means no CGT event will happen when legal title to the property is transferred entirely to your relative.

Therefore, you will not be liable for capital gains tax on the transfer of the legal title of the property to your relative.

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