Edited version of private ruling

Authorisation Number: 1011742606554

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Ruling

Subject: Capital gains tax and property to be transferred to child

Questions and answers

In the income year in which the property is transferred to your child, is any capital gain or capital loss that you make disregarded in full?

No.

In the income year in which the property is transferred to your child, is any capital gain or capital loss that you make disregarded in part?

Yes.

This ruling applies for the following periods:

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 and your spouse jointly purchased a property (herein referred to as the property). The property is less than two hectares in size.

You and your spouse purchased the property in order to provide your child and their family with a place of residence. Due to personal circumstances that were occurring at the time of the purchase, the title was registered in yours and your spouse's names.

The total cost of acquiring the property was a certain amount. Your child provided a significant part of the costs, which they financed using:

· money which they received from their relative's estate and

· a monetary gift which they received from you and your spouse. You and your spouse also made a similar monetary gift to your other children.

You and your spouse contributed the remaining balance by providing your child with an interest free loan.

The loan was made by way of an informal family agreement. It was intended that the title to the property would be transferred from you and your spouse to your child at an appropriate time or when the loan was repaid. You believe that in addition to this arrangement being made verbally there was also a written agreement, however due to the passage of time that has lapsed you are unable to locate this document.

Your child and their family have occupied the property as their main residence since its purchase.

You and your spouse have paid all council rates and land tax charges pertaining to the property, however neither you nor your spouse have received any rent nor claimed any deductions.

You and your spouse have not been required to make any decisions regarding the property as there has not been reason to do so.

Your child has attended to the day to day maintenance of the property and has been responsible for the payment of telephone and electricity accounts as well as normal household bills.

You and your spouse's original contribution was to assist with the successful completion of the purchase of the property and was not intended to provide any financial benefit to your child and their family.

The circumstances that existed at the time that the property was purchased have now changed and you intend to transfer the title of the property over to your child.

For the purposes of this private ruling, you and your spouse will transfer the property to your child in either the 2010-11 or the 2011-12 income year.

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 you and your spouse transfer the property to your child, 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 part of the property in a resulting trust for your child.

The total cost in acquiring the property was a certain amount. Your child contributed an amount of their own funds towards the purchase of the property. It is therefore clear that a resulting trust has been created over the portion of the property for which your child provided the funds.

You and your spouse were merely placed on the title in order to protect the property from any potential negative impact caused by circumstances that were occurring at the time the property was purchased. Therefore the presumption of advancement cannot exist over the portion of the property for which your child provided the funds as you did not actually purchase this part of the property and you did not advance the interests of your child.

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 child has a vested, indefeasible and absolute interest in the portion of the property for which they provided the funds from the day it was purchased. They contributed a significant amount towards the purchase and they also enjoyed all the benefits of residency as a beneficial owner would do.

Therefore your child has an absolute entitlement to the portion of the property for which they provided the funds and they are considered to be the beneficial owner of this part of property.

As your child was always absolutely entitled to this part of the property as against you as the trustee, everything done by you as the trustee in relation to this part of the property is taken to have been done by your child.

This means that when you transfer the property to your child, any capital gain or capital loss that you make in respect of the portion of the property to which your child contributed the funds will be disregarded.

However any capital gain or capital loss that you make in proportion to you and your spouse's financial contribution to the property will not be disregarded and CGT will apply in accordance with your ownership interest in the property.