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Edited version of your private ruling
Authorisation Number: 1012243716014
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Subject: Capital gains tax - real property - trusts - disposal
Question:
Will a capital gains tax (CGT) event happen to a CGT asset that you own when the property is transferred to your child (or sold to a third party)?
Answer:
No.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts:
You and your spouse purchased a property on behalf of your child as they were unable to obtain finance to facilitate this.
The property was registered solely in you and your spouse's name.
It was always you and your spouse's intention that you would hold the property on trust for you child.
You and you spouse began building the property around 2010
Your child paid the deposit for the property.
Upon completion of the property, your child moved into the property as soon as practicable.
Your child pays all the expenses relating to the property.
You and your spouse will prepare a trust deed which will declare that you and your spouse have always held the property on trust for your child.
You and your spouse will execute the deed before the property is transferred to your child.
The trust deed will declare that your child will be absolutely entitled to the property.
The property is not income producing.
You have supplied a number of documents which forms part of and should be read in conjunction with this private ruling:
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 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.
When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the beneficial owner of the asset. In some cases, an individual may hold legal ownership interest in a property for another individual in trust.
If the beneficiary of a trust is absolutely entitled (disregarding any legal disability) to a CGT asset as against a trustee, any act done by the trustee is treated as if it was carried out by the beneficiary.
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 are 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.
In your situation, as you will have a formal trust deed and hold the property on trust for your child who is absolutely entitled to the property then a trust arrangement exists.
Capital Gains Tax Consequences
In your case, you as trustee always had an ownership interest in the property; however you held the property on trust for your child and your child is absolutely entitled to the property.
Accordingly, you will not make a capital gain or capital loss on the transfer of the property by you as trustee to your child as you are not an owner of the property for CGT purposes.