Edited version of private ruling

Authorisation Number: 1011660353523

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax (CGT) and ownership of property

Can you disregard any capital gain or loss made on disposal of the property?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

After 20 September 1985 your child negotiated to acquire a property (the property).

Your child at all times since the property was acquired has resided in the property and the property was their main residence.

You have provided a copy of a letter from your child's lawyer to an accountant received in the income year summarising the history of the purchase of the property.

You have provided several documents the in support of your ruling application including:

· A letter from the bank discussing circumstances surrounding the inclusion of you and your child as registered proprietors of the property.

· A letter from the bank to your child confirming that you had been released as convenantor on the housing loan.

· A facsimile from you to an accounting firm stating that the sole reason your name was included in the documents was because the bank required a guarantor.

· A letter from your child to a conveyancing company discussing the issues of you and your child being listed as joint tenants of the property.

· A letter from your child's lawyer to an accounting firm providing the lawyer's opinion of the circumstances.

Your name was added by the lender to the title of the property when it was acquired by your child after 20 September 1985.

For registration purposes at the relevant authority you and your child were both recognised as owners of the property as joint tenants.

You have not had any interest in the property, in respect of financial, use of the property or otherwise. In this regard, you have never had any physical use of the property and have not stayed on the property at any time.

You did not make any economic contribution to the acquisition of the property, and did not contribute at any time to the payment of any expenses associated with the property.

Your child has disposed of the property and as agreed between you and your child, your child has retained all the proceeds of sale.

You do not have a signed and written agreement between yourself and your child setting out the circumstances under which the property was acquired.

Your arguments and references

You state:

The issue as to the economic position between the parties leaves it clear that you had no financial interest or true proprietal ownership of the property but were merely a name recorded on various documents.

The position of your child is that your child has all of the indicia of possession and therefore you argue has all of the indicia of ownership.

That ownership is the right to exclusive enjoyment of something and the concept denotes the relation between a person such as your child on the one hand and the right vested in your child to possession of the property then one could say that in the present case all of the appropriate indicia of ownership and possession are found in the child and none of those indicia are found in you.

If a dispute had arisen between your child and you over your child's right to undertake any of these actions your child would by virtue of pointing to the economic evidence and other correspondence provided, be able to demonstrate ownership of the rights in the land for the purposes of dealing with the land.

Given that the concept of ownership involves the right to transfer and have permanent use, the owner can be clearly seen to be only one person, that person being your child. The evidence would show that on the sale of the property all of the proceeds of that sale were granted to your child and none of the proceeds were available for you.

In conclusion therefore, it is submitted that there are grounds for requesting that the Commissioner take the view that any interest in the property you have by virtue of your name being on the certificate of title should be regarded as negligible and nominal as opposed to an indicia of any ownership of the property and that the proceeds of sale are correctly included in the income of your child.

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 106-50

Income Tax Assessment Act 1997 Section 108-5

Conveyancing Act 1919 (NSW) Section 23C

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that CGT is incurred when a CGT event takes place and you receive either a capital gain or a capital loss. A capital gain is included in your annual income tax return. It is not a separate tax, merely a component of your income tax. Your net capital gain is added to your annual income and you are taxed at your marginal tax rate.

CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else.

Land and buildings are CGT assets. Generally, where an item is affixed to land, at common law it becomes part of the land and is legally owned by the owner of the land.

Legal v beneficial ownership

When the disposal of an asset occurs one of the most important elements in the application of the CGT provisions is ownership; both legal and beneficial ownership must be determined. In most cases, in the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title.

It is possible for legal ownership to differ from beneficial ownership. In such cases, a trust relationship exists with the legal owner (trustee) holding the property in trust for the beneficial owner (beneficiary). The CGT provisions do not apply to the legal owner of a dwelling if that legal owner holds it in trust for another person and that other person was absolutely entitled to that dwelling as against the trustee (section 106-50 of the ITAA 1997).

Therefore, we need to determine if you were holding your interests in the property in trust for your child.

Trusts

Trusts are composed basically of three parties: the settler, the trustee and the beneficiary (or beneficiaries) and may be created deliberately, such as through a will or the writing up of a trust deed. A trust can sometimes arise by force of law or by a change in circumstances whereby someone finds themselves holding property as a trustee for another.

There are several kinds of trusts including express, resulting, constructive and bare.

Express trust

An express trust is a trust which is created deliberately and demonstrates, usually in writing, an intention to create a trust. These trusts are sometimes referred to as direct or declared trusts. The creation of a private express trust requires what are called 'the three certainties':

· Certainty of intention to create a trust. This may be an issue where there was only preparation or a desire, rather than an actual intention to create a trust, which is judged by the words used. There must be an actual transfer of property or a sure declaration of trust.

· Certainty of subject matter. The subject matter of the trust must be described with sufficient certainty.

· Certainty of object. The beneficiaries must be identifiable according to the class or criteria set by the trust, either before or at the time of distribution of the property from the trust: McPhail v. Doulton [1971] AC 424; [1970] 2 All ER 228.

Constructive trusts

A constructive trust is one that is enforced by law, regardless of the intentions of those concerned, where it would be unreasonable for the owner of a property to deny the ownership interest in that property by another person. These trusts are however, dependent upon the order of the court.

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. An example would be where one person buys a property but places the title in the name of another person.  

Bare trust

A bare trust exists where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries or at their direction.

Under a bare trust the beneficiaries are entitled to possession of the trust assets and the trustee must act in accordance with the direction of the beneficiary. Ultimately, the trustee must deal with the property as directed by the beneficiary.

Evidentiary requirements

As we have examined the possible existence of a trust in your situation, we must also consider relevant applicable prerequisite conditions.

There are statutory requirements that call for the creation of certain trusts to be evidenced in writing for the trust to be valid. In the case of an inter vivos trust (a trust created by people still alive), the conveyance of land must be evidenced in writing. In New South Wales, subsection 23C(1) of the Conveyancing Act 1919 (NSW) requires that the creation or disposal of an interest in land must be done in writing. This includes the declaration of a trust over a piece of land.

Subsection 23C(2) of the Conveyancing Act 1919 (NSW) states that the writing requirement does not affect the creation or operation of resulting, implied, or constructive trusts.

Application to your circumstances

You do not have a written agreement between you and your child regarding any role as trustee that you may have held in relation to the property. You do have the written opinion of your legal representatives, correspondence from the financial institution and you and your child's separate written explanation of the circumstances surrounding the acquisition of the property.

These documents do not provide certainty of intention to create a trust, and as there was no actual transfer of property or a sure declaration of trust, an express trust could not be applicable.

The facts of your case do not indicate the existence of a court order therefore no constructive trust exists.

There was no prior trust when the property was purchased using a loan in both your name and your child's name. Given this, there is no implied or resulting trust.

As it is been determined that a resulting, implied or constructive trust does not exist in your case, the provisions of subsection 23C(2) of the Conveyancing Act 1919 (NSW) do not apply.

You argue that a bare trust exits in your circumstances as you merely held the legal title to a share of the property for the benefit of your child. Your role as trustee was to simply hold the property and to deal with it at your child's direction. However, regardless of whether a bare trust existed or not in your case, no trust arrangement can be recognised as a declaration of a trust over a piece of land must be evidenced in writing in accordance with subsection 23C(1) of the Conveyancing Act 1919 (NSW). A written trust agreement was not made in your case.

Conclusion

As you do not have a declaration of trust evidenced in writing in accordance with the requirements of subsection 23C(1) of the Conveyancing Act 1919 (NSW), it is considered that your role in the property was one of owner rather than trustee. Accordingly, when the property was sold a change of ownership occurred and as you held an ownership interest in the property you are not able to disregard your portion of any capital gain or loss made on disposal of the property.