Edited version of your private ruling

Authorisation Number: 1012136534711

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Subject: Capital gains tax (CGT) - real property - trusts - disposal

Question:

Is the capital gain that you made on the sale of your property disregarded?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

3 March 2009

Relevant facts

A relative (relative A) agreed to mortgage their property and to invest the proceeds in a school in a foreign country in conjunction with their relative (relative B) (your parent and parent-in-law).

Relative A acquired 99.9% of the equity in the school as a result of the transaction.

Relative A was legally represented in this transaction as was relative B.

A mortgage was obtained. The mortgage was an interest only mortgage and could be rolled over at the end of each year with the consent of the lender.

Around this time, relative A advised relative B that should the investment fail, they would be relying on relative B to cover the cost of the mortgage.

After a period of time, after a series of setbacks, the school failed and it was closed.

At this time, relative A health began to fail and they retired from their position.

After a further period of time, relative A signed a Power of Attorney authorising relative B to look after their financial affairs, given their failing health.

The mortgagee advised around this time it was not in a position to roll over the loan and required it to be paid out.

Relative B approached you and your spouse about the possibility of assisting relative A refinance the mortgage, so that relative A could remain in their home.

Relative B arranged the finance, solicitors and agreed to pay all the associated costs including servicing the loan.

A figure was placed on the property and finance was obtained through a bank.

The mortgage was paid out and you and your spouse became the ostensible owners of the property, knowing it was held in trust for relative A.

Relative A maintained the property as their main residence from purchase which was after 20 September 1985 until they passed away.

The property was subsequently sold to relative Bs child, (your sibling and sibling-in-law) for an amount. It was agreed by you and your spouse that the remaining equity in the property after all expenses were paid was to become an asset of the estate of relative A and that you and your spouse did not in any way profit from the transaction.

Upon settlement of the property it was agreed by you and your spouse that an amount be held on trust by your solicitors to cover any capital gains tax liability that you may incur.

You made a capital gain as a result of the sale of the property.

You have supplied a number of documents which form part of, and should be read in conjunction with this private ruling.

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 112-15

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 116-30

Reasons for decision

The most common capital gains tax (CGT) event happens if you dispose of an asset to someone else, for example, if you dispose of a property.  The time of the event is when you enter into the contract for the disposal or if there is no contract when the change of ownership occurs.  The disposal of your interest in the property constitutes CGT event A1. 

In order to determine the CGT implications upon the disposal of your interest in the property it is necessary to establish the ownership of the property. 

It is possible for legal ownership to differ from 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 on trust for the beneficial owner.

If the beneficial owner is absolutely entitled to the asset as against the trustee, it is the beneficial owner that is considered by the capital gains provisions to be the owner of the asset and the person who makes any capital gain or loss due to a CGT event happening.

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.

In your situation it is necessary to consider three kinds of trusts: express, constructive and resulting.

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.

In this case, you do not have any documentary evidence that you held the property as trustee for relative A. 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.

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.

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

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.

Where an individual purchases and pays for a property but legal title to it is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held on trust for them. 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.

The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests.

While it is possible to rebut the presumption of advancement, any rebuttal would essentially create a resulting or implied trust. From the information provided, we have concluded that no resulting or implied trust has been established.

In your situation, we have examined the possible existence of a trust, based on the information provided and we have determined that no trust has been created.

There are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. Where taxpayers are related, for example, husband and wife or brother and sister we consider that the equitable right is exactly the same as the legal title.

It is not relevant that your relative paid the costs associated with the purchase and upkeep of the property and that you will not receive any monies from the disposal of the dwelling nor receive any benefit from the sale to your sibling/sibling in law. This was part of a family arrangement so that the mortgagee company would not take possession of the property.

As such it is concluded that you hold both a legal and a beneficial interest in the property and you and your spouse are liable for any capital gain made on the disposal of your interests in the property.

Whilst we acknowledge and accept your particular circumstances the Commissioner has no discretion to disregard any capital gain due to your circumstances.

Note

There are special rules that may apply if the sale of a CGT asset is between related parties.  Such transactions may be considered to be non-arms length transactions and require modifications to the cost base and capital proceeds used to calculate your capital gain.

If you do not deal at arm's length with another entity in connection with the CGT event the market value substitution rule takes effect. Broadly speaking, this is when the first element of the cost base of a CGT asset is replaced with the market value of the asset at the time of the acquisition and the capital proceeds that you receive upon the sale of the asset are replaced with the market value of the asset on the date of sale.