Edited version of private ruling

Authorisation Number: 1011758103560

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Ruling

Subject: Capital gains tax and beneficial ownership

Question and answer:

Are you entitled to disregard any capital gain or loss that results from the disposal of the trust asset?

Yes

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You purchased a property after 19 September 1985. You are not an individual.

Upon settlement, the property became the main residence of another party.

The responsibility for all payments relating to the property including mortgage payments and rates belong to the other party.

You have stated that the other party is absolutely entitled in equity to the asset (that is, has a vested indefeasible and absolute interest in the asset), and is able to direct how the asset shall be dealt with.

You have provided documents with your ruling application including the contract for the purchase of the property, the declaration of trust and documentation indicating the creation of a fixed trust showing you as the trustee, and the other party as the beneficiary.

You are intending to dispose of the property.

Your arguments

You have referred to ATO ID 2003/804 and Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997).

ATO ID 2003/804 was withdrawn on 12 March 2010 and replaced with TR 2004/D25.

We have considered both Section 118-110 of the ITAA 1997 and TR 2004/D25 in making our decision. Please see 'reasons for decision' for more information.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-2

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 128-50

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and you receive a gain from the event. It is not a separate tax, merely a component of your income tax. Your net capital gain is added to your annual income and is 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.

Main residence exemption

Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if:

· you are an individual (paragraph 118-110(1)(a) of the ITAA 1997)

· the dwelling was your main residence for the whole period it was owned

· you have not have used the dwelling to produce assessable income, and

· any land on which the dwelling is situated on and adjacent to is two hectares or less

In your case, as you are not an individual you are not entitled to apply the main residence exemption, under paragraph 118-110(1)(a) of the ITAA 1997.

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 the other party and if he was absolutely entitled to the property.

Trusts

Trusts are composed basically of three parties: the settler, the trustee and the beneficiary, 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 or another.

An express trust is one that is purposely created by the legal owner of the property in order to benefit someone else. It is created by an explicit declaration, which can be effected by an agreement or common intention held by the all 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 prevent the creation or transfer of interests in land except if evidenced in writing. The declaration does not necessarily need to be evidenced in writing at the time that the trust was created, it may be written at a later date.

In your circumstances, you have provided written evidence to support the certainty of the intention to create a trust in terms of a 'Fixed Trust-Notice of Beneficial interest in Land' and the Declaration of Trust. The subject matter is the property that you have purchased and the object of the trust is identified as the other party. Therefore, the criteria that support the existence of an express trust have been met. Further, the need for the creation or transfer of interests in land to be in writing has also been satisfied by these documents.

Absolute Entitlement

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

If the beneficiary of a trust is absolutely entitled to a CGT asset as against a trustee, any act carried out by the trustee is treated as if it was carried out by the beneficiary. In these cases, as an example, if the trustee disposes of a CGT asset, then it is seen that the beneficiary was the one who actually disposed of the asset, not the trustee.

The foundation that supports the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a secured and unbeatable interest in the entire trust asset, to call for that asset to be transferred to them or to be transferred to someone else at their direction.

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. Land is not a fungible asset.

In your circumstances, there is only one beneficiary and you have stated that he has a vested indefeasible and absolute interest in the property, and is able to direct how the property shall be dealt with. Accordingly, it is considered that the beneficiary is absolutely entitled to the property.

Your circumstances

As it has established that there is an express trust in existence, and that the other party has absolute entitlement to the asset held in trust, you (in your capacity as trustee) are entitled to disregard any capital gain or loss that results from the disposal of the property, under section 106-50 of the ITAA 1997.