Edited version of private ruling

Authorisation Number: 1011463799363

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Ruling

Subject: Capital gains tax and property purchased on behalf of relative

Question and Answer

Will you be liable for capital gains tax (CGT) when the property is sold?

No.

This ruling applies for the following period/s:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Some time after 20 September 1985 you purchased a property on behalf of your relative.

At the time the property was purchased you were residing in a rental premises and you have never resided in the property.

Just prior to the purchase of the property your relative received monies from a settlement.

Your relative and you agreed that, unless any available monies were invested to provide a home for your relative, the likelihood was that the settlement monies would be dissipated due to circumstances. Accordingly your relative and you agreed that the property should be purchased in your name and that you would hold it for your relative.

At the time of the purchase and transfer of the property all monies for the deposit, balance and adjustments, stamp duty, registration fees and other disbursements and costs were provided by your relative and they have paid, and continue to pay, all rates due on the property.

The property has never been mortgaged.

Your relative and their child have lived in the property since the date of transfer.

Some time later you were declared bankrupt.

The trustee in bankruptcy lodged a caveat over the property.

You explained your circumstances to the trustee in bankruptcy. They were satisfied that you held the property in trust for your relative and they determined that the property did not vest as an asset in the bankrupt estate. Accordingly, the trustee in bankruptcy withdrew the caveat over the property.

Your relative may sell the property in the future.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 102-20,

Income Tax Assessment Act 1997 - Section 104-10 and

Income Tax Assessment Act 1997 - Section 106-50.

Reasons for decision

Generally, you acquire a capital gains tax (CGT) asset when you become its owner.

You then make a capital gain or capital loss when a CGT event happens in relation to that asset (for example you dispose of a property that you own).

In order to determine whether you will make a capital gain or capital loss when your relative sells the property, we need to determine whether you were the beneficial owner as well as the legal owner of the property.

Where the legal ownership differs from the beneficial ownership, a trust situation occurs. In these cases the legal owner is the trustee of the asset.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606:

A trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary.

There may be three kinds of trust: express, resulting or implied and constructive.

Express Trusts

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 can be effected by some agreement or common intention held by the parties to the trust.

For an express trust to be created it is necessary that 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.

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 a court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

Resulting or Implied Trusts

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.

But 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 (i.e. an absolute gift). However for the presumption to have force, the taxpayer must be standing in loco parentis to that family member.

In your situation, it is considered that you held the property in a resulting trust for your relative. Your relative purchased the property with their own funds. You were merely placed on the title in order to protect the property from any potential impact of your relative's circumstances. Therefore the presumption of advancement cannot exist as you did not actually purchase the property and your relative did not advance you.

Absolute entitlement

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee 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 how that asset shall be dealt with.

In your circumstances, your relative has had a vested, indefeasible and absolute interest in the property from the day it was purchased and has always been able to direct how it should be dealt with. They provided all of the finance for the purchase. They also made all the decisions in respect of the property and enjoyed all the benefits of residency as a beneficial owner would do.

Therefore your relative has an absolute entitlement to the asset and is considered to be the beneficial owner of the property.

As your relative was always absolutely entitled to the property as against you as the trustee, everything done by you as the trustee in relation to the property is taken to have been done by your relative. This means that no CGT event will happen to you when the asset is disposed of. Although, a change in ownership will occur when the property is sold, the sale is treated as an act done by the beneficiary and not one done by you. Therefore, you will not be liable for CGT when the property is sold.