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Ruling

Subject: Capital gains tax on the sale of property purchased by your relative on your behalf

Questions and answers

1. Was the property held in trust by your relative for your benefit?

No.

2. Will a full main residence exemption apply to allow you to disregard any capital gain made on the sale of the property?

No.

3. Will a partial main residence exemption apply to allow you to disregard part of a capital gain made on the sale of the property?

Yes.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Some time after 20 September 1985 your relative purchased a property for you to reside in.

The property has at all times been occupied by you as your main residence.

The property was purchased in your relative's name in order to protect your interests.

Your relative passed away several years later.

Your relative's Will was read and there was no specific direction as to how the property was to be dealt with. You have provided a full copy of the Will and this document forms part of this private ruling.

The executor, after consultation with all the beneficiaries, resolved that it had been your relatives's intention for the property to be your main residence. As it had always been your main residence, it was agreed that the property would be transferred to you to satisfy part of your entitlements to your relatives's estate.

You still reside in the property.

You wish to know the capital gains tax (CGT) implications if the property were to be sold.

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 118-195,

Income Tax Assessment Act 1997 Section 118-200 and

Income Tax Assessment Act 1997 Section 128-20.

Reasons for decision

1. Was the property held in trust by your relative for your benefit?

In the absence of information to the contrary, a property is considered to be legally and beneficially owned by the person/s registered on the title.

It is possible for the legal ownership to differ from the beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The creation of a trust falls within the jurisdiction of equity.

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 various kinds of trust: express, constructive, resulting or implied and bare.

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. Therefore express trusts must be 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 the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

Therefore for a finding that a constructive trust exists, there must be an existing court order to that effect.

Resulting or Implied Trusts

A resulting trust, sometimes referred to as 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.

Where an individual purchases and pays for a property and retains legal title to it, it is not possible to infer that the property is held on trust for another, as both the legal and beneficial interests remain with the purchaser.

Bare Trusts

A trust is a bare trust 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 beneficiary or at their direction (see Herdegen & Anor v. Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271).

However it is not the existence of a bare trust that is the crucial concept. It is the establishment of absolute entitlement to the asset by the beneficiary as against the trustee.

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. If there is some basis upon which a trustee can legitimately resist the beneficiary to call for an asset, then the beneficiary will not be absolutely entitled to the asset.

Application to your circumstances

You do not have any documentary evidence that supports the fact that your relative held the property in trust for you as a beneficiary. Such documents would constitute a declaration of trust and make clear the terms of the trust. The absence of such a document means that an express trust cannot exist.

There has not been an order made by the court to the effect that the property was held in constructive trust and accordingly a constructive trust cannot exist.

There is no evidence that you provided the funds used to purchase the property and you have advised that your relative purchased the property for you to reside in. This would indicate that your relative provided the funds required. Therefore a resulting or implied trust cannot exist.

In establishing whether you were absolutely entitled to the property as against your relative it is necessary to consider whether, had you predeceased your relative, the property would have formed part of your estate or would have remained in your relative's name. In your situation it would appear likely that the property would have remained in your relative's name and this means that you were not absolutely entitled to the property as against your relative.

Having examined the facts of your case we find that there is no trust relationship in your situation.

It would appear that your relative has purchased the property and allowed you to live in it rent free. When they passed away and their Will did not deal with the property, the executor and beneficiaries of their estate varied their Will to ensure that you received the property. This means that you acquired the property due to it passing from their estate to you.

2. Will a full main residence exemption apply to allow you to disregard any capital gain made on the sale of the property?

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a property has passed to a beneficiary from a deceased estate any capital gain or capital loss made from a CGT event that happens in relation to the property is disregarded if:

· the deceased acquired the property on or after 20 September 1985, and

o the property was the main residence of the deceased before their death,

o the property was not being used for income producing purposes, and

o the beneficiary has disposed of their ownership interest within two years of the deceased's death.

In your situation, the property was not your relative's main residence therefore section 118-195 of the ITAA 1997 will not apply and you are not entitled to a full main residence exemption.

3. Will a partial main residence exemption apply to allow you to disregard part of a capital gain made on the sale of the property?

Section 118-200 of the ITAA 1997 provides that a partial main residence exemption is available if:

· you are an individual and your ownership interest in a property passed to you as a beneficiary of a deceased estate, and

· section 118-195 of the ITAA 1997 does not apply

The partial exemption is calculated using the following formula:

Capital gain or capital loss amount x non main residence exemption days

total days

The non main residence days are the sum of:

o the number of days in the deceased's ownership period when the property was not the deceased's main residence; and

o the number of days in the period from the deceased death until your ownership interest ends when the property was not your main residence.

In your situation, the total non main residence days are from the date that your relative purchased the property until the date of their death.

The total days are the number of days in the period from the acquisition of the property by the deceased until your ownership interest ends.