Edited version of your written advice

Authorisation Number: 1012754872689

Ruling

Subject: Capital gains tax

Question

Will the entire capital gain on the disposal of the property be assessable to you?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2013

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You and your family migrated from X to Australia.

You returned to X, whilst your spouse stayed in Australia and enrolled in an Australian University.

Your spouse returned to X.

You temporarily returned to Australia. Because you had no place of your own, your spouse returned to X after a short stay of about two weeks. You stayed with a family member, primarily to look for a suitable piece of land on which to build your permanent home for your final retirement.

You purchased land prior to returning to X. The purchase was solely in your name as a matter of convenience, due to the fact your spouse had returned to X and you didn't want to delay settlement.

After you retired you returned to live in Australia permanently. After that point you decided the location of the land was unsuitable. Consequently you decided to sell the land and instead purchase a property in a different suburb.

Proceeds on the disposal of the property were credited to your joint account despite being solely in your name.

The property you currently live in is in joint names as both you and your spouse were both in the country when it was purchased.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

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

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) defines a disposal as:

You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

The way in which the CGT regime applies to legal owners of property in a family context was discussed in the recent Administrative Appeals Tribunal (AAT) case of Murphy v. Commissioner of Taxation [2014] AATA 461. In that case Mr Murphy inherited shares from his father in 2008; in 2013 he transferred the shares into the names of himself and his wife whom he considered to be at all times a joint owner of the shares. In affirming the Commissioner's objection decision that Mr Murphy was liable for CGT the Senior Member provided:

In this case, Mr Murphy's circumstances are such that he, and he alone, is recognised by Part 3-1 as the owner of the CBA and Telstra shares until he transferred them. This is so notwithstanding that he and Mrs Murphy regard themselves as joint owners of all that they collectively own, the contributions each has made to their lives together and their family members' lives and that Mr Murphy has, from the outset, believed that in equity and morally the shares that were transferred were owned jointly.

The system of taxing capital gains in Australia treats joint owners of assets as individual owners of a 50 per cent share of the asset. That is the effect of s 108-7 of the 1997 Assessment Act.

Transferring the Telstra and CBA shares to the joint account to reflect joint ownership was a disposal of a fractional interest in each of these shares. After the transfer Mr and Mrs Murphy are treated by the system of taxing capital gains as each owning a 50 per cent share of each of those shares, and before the transfer Mr Murphy was recognised as the sole owner of those shares. That means that a CGT event A1 happened.

It might well be, and in some cases understandably so, that partners to a marriage or a marriage-like relationship regard his or her assets as our assets. And it might also be the case that for family law purposes that is the practical effect of ownership of assets by individual partners to those relationships. Australian income tax law, however, does not, at least at the present time, recognise these sorts of joint asset ownership arrangements.

Where you dispose of legal title to a CGT asset, the only instances that will not give rise to a CGT event are where you continue to be the beneficial owner of the property or where you are a trustee and there is a beneficiary that is absolutely entitled to the property (see section 106-50 of the ITAA 1997).

Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:

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.

Further, at paragraphs 21 and 22 of TR 2004/D25 it states;

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

Does a trust exist in your circumstances?

Trusts may be of three kinds: constructive, resulting or express. There are extremely limited circumstances where the legal and equitable interests in an asset are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title. Where individuals are related, for example parent and child, we generally consider that the equitable right is exactly the same as the legal title.

Constructive Trusts

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

For a constructive trust to exist there needs to be a court order. In your case, no constructive trust exists.

Express Trusts

An express trust is one intentionally created by the owner of property 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 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.

However, the absence of writing does not make the declaration of trust over land void, but merely unenforceable.

If the trust is evidenced by writing, the writing need not be contemporaneous with the transaction that created the trust but may be brought into existence after the transaction.

In your case, there is no trust deed in existence.

Resulting Trusts

A resulting trust, sometimes called an implied trust, arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications:

• cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and

• cases in which someone purchases property in the name of another. A

trust is presumed in favour of the party providing the purchase money.

Where an individual purchases and pays for a property but legal title is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them.

However where the property is transferred to the taxpayer's immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (that is, an absolute gift).

The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests unless they can rebut the presumption of advancement.

Multiple Beneficiaries

The core principal underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust.

Paragraph 24 of Taxation Ruling 2004/D25 (TR 2004/D25) advises that there is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

• the assets are fungible;

• the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

• there is a very clear understanding of the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

Paragraph 54 of TR 2004/D25 states the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset, such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it.

Application to your circumstances

As discussed in Murphy the Australian tax system, barring the two above mentions exemptions taxes legal owners on capital gains regardless of the fact that they themselves may view property as jointly owned with their spouse. In a situation such as yours it cannot be argued that you continued to remain the beneficial owner of the property.

Further, even if there was sufficient contemporaneous evidence to displace the presumption of advancement, and establish that you held a half share of the property in a resulting trust for your spouse. Your spouse cannot be absolutely entitled to a half share of the property and consequently section 106-50 of the ITAA 1997 would not apply and you the legal owner would be subject to the capital gain.

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