Edited version of private ruling

Authorisation Number: 1011773574432

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Ruling

Subject: Legal versus beneficial ownership

Question

Will the transfer of your one third share in a property trigger capital gains tax event (CGT) event A1?

No.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2010

Relevant facts

Your relative purchased a property.

You and your partner assisted your relative by giving them the deposit and establishment fees.

The bank approved finance on the condition that you and your partner were listed in the title deed as joint tenants.

Since purchasing the property your relative has been the sole resident of the property and is responsible for the mortgage, rates, services, and up-keep.

You have a written agreement (statutory declaration) confirming this.

Centrelink determined that your interest in the property was not an 'assessable asset' belonging to you or your spouse.

You are going to transfer your one third interest in the property to your relative.

You will not receive any money upon transfer of your one third interest.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 109-5.

Income Tax Assessment Act 1997 Section 108-5.

Reasons for decision

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset. 

CGT event A1 will happen when you dispose of a CGT asset to someone else.  

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).

Trust

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset. Where the legal and beneficial ownerships of an asset is different, a trust situation occurs. If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner.  

An express trust is one intentionally created by the owner of the property in order to confer benefit upon another. It is created by an 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. 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 situation, it is reasonable to conclude that you held the property in trust for your relative. This is based on the following: 

· Your relative wished to purchase the property.

· The sole reason you became involved in the purchase was because of the condition to approve the finance.

· Your relative has paid all expenses relating to the property.

· Your relative has used the property as their main residence since the property was purchased.

· You have not derived any benefit from the property.

· You have written documentation in the form of a statutory declaration from all parties involved which supports the existence of an express trust.

As you have a written agreement as evidence you were holding the property in trust, a CGT event will not occur upon the transfer of your one third interest in the property to your child.