Edited version of your private ruling

Authorisation Number: 1012442746507

Ruling

Subject: Capital gains tax and a non- investment property

Questions and answers:

Are you liable to pay capital gains tax on the sale of the property you bought for your relative?

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances:

You and your spouse purchased the property.

You bought the property for your relative under medical advice due to a medical condition.

You never transferred the property into your relative's name.

Your relative passed away

You sold the property for a capital gain.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 100-50,

Income Tax Assessment act 1997 Section 118-185,

Income Tax Assessment Act 1997 Division 43,

Income Tax Assessment Act 1997 Subdivision 118-B,

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985. You make a capital gain if your capital proceeds from the sale of your CGT asset are greater than your cost base for the purchase of that asset, for example, if you received more for an asset than you paid for it. You make a capital loss if your reduced cost base for the purchase of that asset is greater than your capital proceeds resulting from the sale of that asset.

Capital proceeds

Capital proceeds is the term used to describe the amount of money or the value of any property you received or are entitled to receive as a result of a CGT event happening to a CGT asset that you own.

Cost base

The cost base of a CGT asset is generally includes the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. In order to work out how much your capital gain or capital loss is, you must first establish the cost base or reduced cost base of your ownership interest in the property. Section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the cost base of a CGT asset is made up of five elements.

The first element of your cost base includes money or property given for the asset. Element 1 is modified in some circumstances, for example, when a main residence is first used to produce assessable income. The second element includes incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.

You do not include costs if you:

· have claimed a tax deduction for them in any year, or

· omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

The third element of your cost base includes non-capital costs of your ownership of the CGT asset, which include:

· interest on money borrowed to acquire the asset; and costs of repairing, maintaining, or insuring it; and

· interest on money you borrowed to refinance the money you borrowed to acquire the property; and

· interest on the money you borrowed to finance the capital expenditure you incurred to increase the assets value.

You do not include such costs if you acquired the asset before 21 August 1991. Nor do you include them if you:

· have claimed a tax deduction for them in any year, or

· omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired.

The fourth element is capital expenditure that you incurred to increase or preserve the asset's value.

The fifth element is capital expenditure you incurred to establish, preserve or defend your title to the asset, or a right over the asset.

Main residence exemption and special disability trusts

The main residence exemption under subdivision 118-B of the ITAA 1997 may allow to you to disregard all or part of any capital gain or capital loss you made from a CGT event that happens to your ownership interest in a dwelling where the dwelling was your main residence. You may only own one main residence at any time (with limited exceptions).

The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayer's main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person. Furthermore, if a beneficiary is absolutely entitled to a property against a trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) will treat any act done by the trustee of the property as if it were done by the beneficiary.  In this circumstance the main residence exemption may be available for the beneficiary if they resided in the property and the trustee disposed of the property.

For this section to apply it is first necessary to establish the existence of a trust

Property held on trust

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 express trusts can be created orally, Section 53 of the Property Law Act 1958 (Victoria) preclude the creation or transfer of interests in land by express trust except if evidenced in writing.

In your case, you do not have any documentary evidence that you held the property as trustee for your relative. 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 and did not exist in relation to the property in question.

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.

There has been no court order made over your ownership of the property and therefore a constructive trust has not yet been created.

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 settler of an express trust 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 in trust for them. But where the property is transferred to the taxpayers 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 (i.e. an absolute gift).

In your case there was no express trust and the first classification would not apply to you. Secondly, you did not put any property in the name of your relative and since you provided the purchase money the second classification would not apply to this case either. Therefore there is no resulting or implied trust.

Conclusion

In your case you owned the property but were not living in the property for any of the time that you owned it. Your relative who lived in the property had no ownership interest in the property and the property was not held on trust for them. Therefore neither you nor your relative qualifies for the main residence exemption and any capital gains made on the sale of the property cannot be disregarded.