Edited version of your written advice

Authorisation Number: 1012808662100

Ruling

Subject: CGT - disposal

Question

Will you make a capital gain (or loss) when the property is transferred to your relative?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your relative and their ex-spouse owned a house with a 50-50 share.

Your relative agreed to buy out their ex-spouse's share of the house after separating.

Due to debt problems, your relative was unable to refinance.

You agreed to get a loan on your relative's behalf so they would not lose the property.

Title of the property transferred into your name but it was never your intention to own the property.

Your relative has made all payments on the loan and all associated outgoings.

Your relative is now in a position where they can get a home loan approved so you would like to transfer the property back to them.

You have not made any payments in regards to the property.

You have not and will not receive any benefit from the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

Summary

The arrangement between you and your relative, in relation to the property, constitutes a bare trust arrangement. Therefore, it is considered that your relative is absolutely entitled to the property. Accordingly, you will make no capital gain or loss as no capital gains tax (CGT) event will happen to a CGT asset you own.

Detailed Reasoning

Section 100-20 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 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, however, a change in ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Accordingly, it is the beneficial ownership of the property that is of importance.

Holding a property in trust

When considering the disposal of a property, the most important element in the application of the CGT provisions is beneficial 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, such as occurs under a bare trust arrangement. 

A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.

Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. 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.

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

As a sole beneficiary, in respect of an asset, has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible.

Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. In these cases, no CGT event will happen when the legal title in the asset is transferred to the beneficiary as the beneficiary is already considered to be the 'owner' of the asset. The beneficiary would be considered to be the 'owner' of the asset from the time they became absolutely entitled.

Application to your circumstances

It is accepted that the arrangement between yourself and your relative amounts to a bare trust arrangement. It is considered that you have never had any beneficial ownership in the property and merely hold the title on behalf of your relative who is absolutely entitled to the property.

Therefore, there will not be a CGT event for you when the property is transferred to your relative.

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