Edited version of your written advice

Authorisation Number: 1013118250199

Date of advice: 7 November 2016

Ruling

Subject: - Transfer of Jointly Owned Property

Question

Will X and Y be liable for capital gains tax on the transfer of the title of the jointly owned real estate?

Answer

Yes

This ruling applies for the following period(s)

Year ended 30 June 201X

The scheme commences on

1 July 201X

Relevant facts and circumstances

A and B had insufficient borrowing power on their own to satisfy the banks' lending criteria for the purchase of the dwelling.

X and Y, A's family members, contributed additional funds to the purchase of the dwelling and were included on the title of the dwelling (to satisfy the bank) with a XX% share each.

A and B are on the title to the dwelling with a XX% share each as well.

The dwelling is not the main residence of X and Y.

Since the purchase A and B have resided in the dwelling and treated it as their main residence.

At or around the time of the purchase X and Y prepared Wills that gave the respective family members' interest in the dwelling directly to A.

All costs for the dwelling have been paid by A and B including (but not limited to) loan repayments, loan interest, council rates, water rates, insurances and significant capital improvements.

X and Y will transfer their ownership interest directly to A during the 201X income year.

Assumption(s)

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

Further issues for you to consider

Anti-avoidance rules

Reasons for decision

Summary

In this case X and Y will be subject to capital gains tax on the proposed transfer of title to A.

Detailed Reasoning

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.

Section 108-7 of the ITAA 1997 states that if you own a CGT asset as joint tenants; you are treated as if you owned a separate CGT asset.

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 Draft 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 circumstance

You have stated that the dwelling was originally purchased in 200X, in your names jointly with A and B.

You have stated A and B have always been the beneficially entitled owners of the dwelling and you merely held it in trust for them when the dwelling was initially purchased in 200X.

You are contending that at the proposed disposal of your portion of the dwelling to A, A was already absolutely entitled to the dwelling against you, who were the joint legal owners and the trustees holding the dwelling on behalf of A.

You further contend that at the proposed transfer of legal ownership to A, there was no change in beneficial ownership and as a result, a CGT event did not happen.

For A to be absolutely entitled to a property as against you (the trustees), A must have a vested and indefeasible interest in the property. This means that at the relevant time a beneficiary must have been able to demand the immediate possession or enjoyment of the asset from the trustees and this right to demand the asset must not be able to be defeated by any person or event.

In this circumstance there is more than one beneficiary that can claim an interest in the trust asset for CGT purposes (A and B).

Where there are two beneficiaries absolute entitlement can be met if the asset is able to be divided equally (fungible).

In your circumstance, the trust asset at issue is real property located at XYZ. Paragraph 102 of Draft Taxation Ruling TR 2004/D25 provides that if there is only real property in the asset class, then the test of fungibility is not satisfied. That is, where there are multiple beneficiaries claiming absolute entitlement to a share of real property, no beneficiary is entitled to the whole of the real property.

At the time of the proposed legal transfer of the property, A was not the beneficial owner of the property. The reasons for this being that:

● the asset in question is real property; and

● the asset fails the fungability test.

You (X and Y) are therefore liable for the CGT liability at the time of the proposed disposal of the dwelling to A.

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