Edited version of your written advice

Authorisation Number: 1012856500255

Date of advice: 11 August 2015

Ruling

Subject: Capital gains tax - ownership interest - beneficial interest - cost base

Question 1:

Will your share of the capital gain made on the disposal of the property be calculated in accordance with your legal ownership interest in the property?

Answer:

Yes.

Question 2:

Will 50% of the payment be included in the cost base of your share of the property?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Your parents purchased a property (the property) before 20 September 1985.

A number of years later, a Deed of Arrangement (the Deed) was entered into between you and the following:

• your parents; and

• your siblings (Sibling A and Sibling B).

The Deed related to the property which was used as a family holiday home up to the date of the Deed.

The Deed provided that:

• the title of the property would be transferred from your parent's names into you and Sibling A's names as tenants in common with equal shares; and

• you and Sibling A would pay Sibling B an amount (the payment) calculated in accordance with the Deed.

The title of the property had been transferred into you and Sibling A's names.

The market value of the property was less than $100,000 at the time of the transfer of the title.

Following the death of your surviving parent, the payment had been paid to Sibling B, calculated in accordance with the Deed and paid by the date as stipulated in the Deed.

The property was disposed of during the 2013-14 income year, which had resulted in a capital gain being made on the sale of the property.

During the period of your ownership:

• the property had continued to be used by the family as a holiday home; and

• you and your siblings were equally responsible for paying the holding costs of the property, including repairs and maintenance, in accordance with the Deed.

You have provided copies of documentation which should be read in conjunction with, and forms part of the scheme of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-20

Reasons for decision

Legal ownership and beneficial ownership

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, occurs when your ownership interest in a CGT asset is transferred to another entity.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. In absence to the contrary, property is considered to be owned by person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The Australian Taxation Office (ATO) considers that there are extremely limited circumstances where the legal and equitable interests are not the same, and if they differ, that there is sufficient evidence to establish that the equitable interest is different from the legal title.

In some cases, an individual may hold legal ownership interest in a dwelling for another individual in trust.  A beneficial owner is defined as a person or entity who is beneficially entitled to the income and proceeds from the asset.

Trusts fall into three categories:

1. 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.

2. 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.

3. A resulting trust, sometimes called an implied trust, is a trust that 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.

Application to your situation

In your case, the title of the property located at had been transferred into you and Sibling A's in accordance with the Deed that had been entered into between you, your parents, and your siblings.

In order to determine whether you and your siblings had a legal and/or beneficial interest in the property, we have reviewed the circumstances of your situation and the Deed which had been created in relation to the property.

We have reviewed the Deed which outlines that the property has been transferred to you and Sibling A as tenants in common in equal shares for their own use and benefit absolutely. The Deed also provides that you and Sibling A can sell their half share interest in the property to each other.

The title of the property had been transferred into you and Sibling A's names which supports that you both had a legal interest in the property. Also, the Deed outlines that you and Sibling A own the property as tenants in common in equal shares and also that either you or Sibling A could sell your 50% interest in the property to the other person. These factors confirm that you and Sibling A each had an equal ownership interest in the property.

We have considered the facts that you have provided in order to determine whether a trust has been created in relation to the property in order to determine whether Sibling B had a beneficial interest in the property. Our determinations are as follows:

• In this case, you do not have any documentary evidence that you and Sibling A had held a one third ownership interest in the property for Sibling B. The absence of such a document means that an express trust cannot exist.

The Deed stipulates that you and Sibling A owned the property in equal shares. It also outlines that you could transfer your share to each other if you so desired. The Deed does not demonstrate that Sibling B had a beneficial interest in the property, but that they had a right to receive the payment by a date determined in accordance with the Deed,

• 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; and

• In this case, there was no prior trust. Given this, there is no implied or resulting trust.

We have examined the possible existence of a trust in this situation and have explored avenues such as express trusts, constructive trusts and resulting trusts. From the facts presented, it has been determined that no trust existed in your situation.

Based on the information and documentation provided it is the Commissioner's view that you and Sibling A each had a 50% ownership interest in the property and that Sibling B had neither a legal or beneficial interest in the property.

Therefore, the capital gain made on the disposal of the property must be apportioned in accordance with the ownership interests in the property. That is, the capital gain made on the disposal of the property must be divided equally between you and Sibling A.

Cost base of the property

The cost base of a CGT asset is made up of five elements which are:

• the first element which is the total of the money you paid, or are required to pay, to acquire the asset and the market value given, or required to be given, to acquire the asset

• the second element includes the incidental costs of acquiring the CGT asset or that relate to the CGT event

• the third element includes the costs of owning the CGT asset

• the fourth element includes capital costs incurred for the purpose, or the expected effect, of increasing or preserving the assets value; and

• the fifth element includes any capital costs incurred in preserving or defending your ownership rights to your asset.

The capital gain made on the disposal of a CGT asset is the difference between the capital proceeds and the CGT assets cost base. 

Any capital gain made on the disposal of a property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

Application to your situation

The title of the property was transferred into you and Sibling A's names, without any consideration being paid by either of you. The property had a market value of less than $100,000 at that time. The property was disposed of and a capital gain has arisen.

As outlined above, it is viewed that you had a 50% ownership interest in the property. Therefore, you must include 50% of the capital gain made on the disposal of the property in your ownership interest in the property.

For the purposes of calculating the capital gain made on the disposal of your 50% share in the property, the following amounts should be included in the cost base of the property:

• First element

You and Sibling A did not pay any consideration to acquire your ownership interest in the property. Therefore, the market substation rule will apply in accordance with section 112-20 of the Income Tax Assessment Act 1997 (ITAA 1997) and you will be viewed as having acquired your share in the property for its market value.

Therefore, in accordance with the market substitution rule the first element of the cost base of your 50% interest in the property will be half of the market value of the property at the time the title was transferred into you and Sibling A's names.

• Third element

Expenses incurred in relation to the owning of the property, such as rates and insurance, will be apportioned in accordance with the Deed and included in you and your sibling's cost bases accordingly.

• Fifth element

Section 104-35 of the ITAA 1997 provides that CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. Contractual rights are intangible CGT assets.

In this case, when you and your family members signed the Deed a CGT event D1 occurred for Sibling B who acquired contractual rights, being the right to receive the payment in accordance with the Deed. No CGT event occurred at that time for you and Sibling A. However, for you and Sibling A, the Deed created in you an obligation to make the payment to Sibling B. As a result of the creation of those contractual rights, Sibling B had the right to pursue the payment if those contractual rights were not complied with and the payment was not received by Sibling B.

We view that the payment made to Sibling B in accordance with the Deed related to capital costs incurred in preserving, or defending, your ownership rights to your asset, being your 50% interest in the property. It is reasonable to conclude that if the payment had not been paid to Sibling B that they could have undertaken legal action which may have resulted in the property having to be sold, and you losing your ownership interest in the property.

Therefore, in accordance with your ownership interest in the property, half of the payment amount will be included in the fifth element of the cost base of the property.

Note: If the conditions contained in Subdivision 115-A of the ITAA 1997 are met, the 50% CGT discount can be applied to the capital gain made on the disposal of your share of the property.

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