Edited version of private advice

Authorisation Number: 1051828282987

Date of advice: 20 April 2021

Ruling

Subject: CGT - legal and equitable interest

Question 1

Will you make a capital gain or loss from the disposal of the dwelling?

Answer

No.

Question 2

Has the dwelling been your main residence for the purposes of section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) during your legal ownership period?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You purchased a residential property for a relative to live in (the dwelling).

Your relative has lived in the dwelling as their main residence since it was purchased and has paid for all outgoings, including maintenance and repairs, as well as paying for refurbishments and renovations.

You have never lived in the dwelling as your main residence.

The dwelling has never been rented.

The dwelling may be placed on the market.

Some years after the purchase, the ownership of the property was considered as part of a case brought before a tribunal. You gave evidence that that your intention on purchasing the dwelling was that your relative would have full beneficial ownership of the dwelling as a gift; you were to hold the legal interest on trust for the relative only.

In its decision, the tribunal noted that:

•         While interests in land must ordinarily be evidenced in writing, there is an exception in the case of resulting, implied or constructive trusts under state property law

•         The essential features of a constructive trust include an intention to create binding legal relations between the parties, and that there be actions on the part of the person in whose favour the trust is created, in reliance on that agreement and to that person's detriment, such that it would be unconscionable for the legal owner to assert unfettered beneficial interest in the property.

•         The relative had borne all costs associated with the dwelling and had maintained the dwelling. Consequently, these facts lent support to the existence of a trust in favour of the relative, who had relied upon the intention that they had the full beneficial ownership, by continuing to take on financial responsibility for the dwelling.

The tribunal found that the dwelling was held on trust by you for your relative and that no beneficial ownership was to be attributed to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-110

Reasons for decision

Legal and beneficial ownership

A person's legal interest in a property is determined by the legal title to that property under the property law legislation in the State or Territory in which the property is situated.

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

Where it is asserted that the beneficial ownership and legal ownership of a property are not the same, there must be evidence to show that the legal owner holds the property in trust for the beneficial owner.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) contains guidance on the issues involved where the equitable interest in a property may not follow the legal title.

As stated in TR 93/32, the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

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 act.

In your case, the tribunal found that a constructive trust existed with you as the legal owner holding the dwelling on trust for your relative.

Considering the circumstances of this case and the tribunal decision, the Commissioner accepts that the legal and equitable interests in the dwelling are not the same.

Consequently, your relative is considered to have been the beneficial or equitable owner of the dwelling for the time they have been living in it with no beneficial ownership being attributed to you.

Therefore, you will not make a capital gain or loss when the dwelling is sold.

Main residence exemption

You may be able to disregard a capital gain (or capital loss) you make from the disposal of a CGT asset that is a dwelling or your ownership interest in it if the dwelling was your main residence throughout your ownership period (section 118-110 of the ITAA 1997).

Your ownership period of a dwelling is the period you had an ownership interest in the dwelling. You have an ownership interest in a dwelling if you have a legal or equitable interest in it.

In your case, regardless of your legal ownership interest in the dwelling, the dwelling could only be your main residence if you had physically lived in the dwelling as your 'main' residence for all or part of your ownership period. However, this is not the case.

Therefore, you will not be denied being able to use the main residence exemption for another property you have lived in (subject to the other exemption conditions being met).

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