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Edited version of your written advice
Authorisation Number: 1051244076405
Date of advice: 29 June 2017
Ruling
Subject: Bare Trust
Question
Do you have a beneficial ownership interest in the investment property?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2015
Year ended 30 June 2014
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You and your spouse purchased an investment property (the property) on behalf of your child.
Both of your names are listed on the title of the property.
A Declaration of Trust was made between you (the trustee) and your child (the beneficiary).
The Declaration of Trust document states that the trustee entered into the contract for and on behalf of the beneficiary and in Trust for the beneficiary as the beneficiary did not qualify for a bank mortgage loan at the date of purchase.
The whole of the purchase price was paid by the beneficiary and by the loan obtained from a bank.
The beneficiary has and will continue to pay all the stamp duty, costs and outgoings payable in respect to the purchase of the property.
The beneficiary has and will continue to pay all interest and principal payments due to the bank in respect to the mortgage secured over the property.
The trustee declares that they hold the property upon trust for and on behalf of the beneficiary.
The trustee agrees to assign or transfer the property to the beneficiary at the beneficiary’s direction when so requested.
You are in the process of selling the property due to the marriage breakdown of your child.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
Taxation Ruling TR 93/32 Income Tax: rental property – division of net income or loss between co-owners explains that the loss or income from a rental 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 (paragraph 6).
A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation. However, it is possible for legal ownership to differ from the beneficial ownership.
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.
Under a bare trust the beneficiary is entitled to possession of the trust assets and the trustees must act in accordance with the direction of the beneficiary. Ultimately the trustees must deal with the property as directed by the beneficiary.
Absolutely entitled
Generally, CGT provisions (Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)) apply to the owners of CGT assets. However, there are some exemptions to this general rule. One of those exemptions provides that the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and the other person was absolutely entitled to that asset as against the trustee.
Section 106-50 of the ITAA 1997 provides that any 'act done by the trustee in relation to the asset’ is treated as if it had been an act of the person absolutely entitled. As a result, if the act triggers a CGT event, then the taxpayer will be the person subject to any CGT liability rather than the trustee.
A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is:
● absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and
● able to direct the trustee how to deal with the asset.
Application to your situation
It is accepted that the arrangement between you and your child amounts to a bare trust arrangement. Your child has a vested, indefeasible and absolute interest in the property. It is considered that you do not have any beneficial ownership in the property and merely hold the property on behalf of your child.
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