Edited version of your private ruling

Authorisation Number: 1012593500064

Ruling

Subject: CGT - Bare Trust - Main Residence

Question 1

Will you make a capital gain or loss on the sale of a residential property?

Answer:

No

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

The arrangement that is subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with this description. The relevant documents are:

· your private ruling application;

· settlement statement dated;

· letter from your solicitor.

In 19XX after the recent death of a family member, your relative decided he/she could no longer live in their family farm and would purchase a house. Due to the nature of this property he/she had difficulty finding a buyer.

Your relative approached his/her bank for a loan which was rejected as he/she had had no income.

Your relative subsequently approached your bank for a loan which was rejected. The loan manager indicated that if you and your spouse appeared along with the relative on the title deed then the bank would lend the money.

You and your spouse agreed to be placed on the title deed and the loan was approved and your relative bought the property in August 19XX. You appeared as tenants in common with equal parts share.

You contributed towards mortgage payments for the period of August 19XX until November 19XX as your relative had no income.

In November 19XX your relative sold the family farm and repaid both the loan and the repayments you had made.

You suggested at this point you should be removed from the title however your relative indicated that he/she thought you should stay on the title deed as you had helped him/her out. You did not press the issue as you were not aware of the CGT consequences at the time.

Your relative has lived in the house until July 20YY when he/she had to move into a nursing home. The property was subsequently sold in 20YY.

You did not any time live in the house, have use of the house or at any point derive income from the house.

Your relative has agreed to be responsible for the payment of any CGT in the event that this application is unfavourable. Any payment made towards your tax liability would negatively affect his/her pension. Therefore he/she agreed to assign an amount estimated to cover the proceeds of any CGT on the understanding that if this application is favourable the money will be returned to your relative.

Reasons for decision

Summary

The arrangement between you and your relative, in relation to the property, constitutes a bare trust arrangement. Therefore, it is considered that your relative is, and always has been, absolutely entitled to the property since its acquisition. Accordingly, you have made no capital gain or loss as no CGT event has happened to a CGT asset you own.

Detailed Reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if, and only if, a capital gains tax (CGT) event happens to a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, however, a change in ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Accordingly, it is the beneficial ownership of the property that is of importance.

Holding a property in trust

When considering the disposal of a property, the most important element in the application of the CGT provisions is beneficial 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, such as occurs under a bare trust arrangement. 

A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.

Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. It is considered that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled.

Draft Taxation Ruling TR 2004/D25 discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:

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.

Further, at paragraphs 21 and 22 of TR 2004/D25 it states;

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction

As a sole beneficiary, in respect of an asset, has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible.

Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it. In these cases, no CGT event will happen when the legal title in the asset is transferred to the beneficiary as the beneficiary is already considered to be the 'owner' of the asset. The beneficiary would be considered to be the 'owner' of the asset from the time they became absolutely entitled.

Application to your circumstances

You did not contribute any funds toward the purchase price, the costs of acquiring the property or the costs of maintaining the property.

You briefly contributed towards the repayments of the loan for a period of months. However this loan existed only because your relative was having difficulty realising the equity available in the family farm. As soon as the farm was sold your relative paid off the loan and you were repaid in full the amount you had contributed to the repayments.

From the time of acquisition to the sale of the property you have not lived in the property, had any use of the property or derived any income from the property and have not received any of the proceeds. You have no active duties in relation to the property.

Therefore since November 19XX you and your spouse have not had any interest in the property you have merely passively held the title of the property. This is consistent with the definition of a bare trust from Herdegen.

The settlement statement shows that you and your spouse received a payment from the proceeds from the sale in order to cover any CGT liability if this application is unfavourable. Normally payment of any proceeds would be detrimental to establishing a bare trust arrangement however in this instance it is considered that the explanation you have provided is reasonable. In support of this is the fact that the amount is not indicative of what would be paid to you and your spouse if you had an equitable share or beneficial interest in the property.

Based on the information provided, the arrangement between your spouse, your relative and yourself at all times amounts to a bare trust arrangement. It is reasonable to infer that despite you being a part legal owner, you have at all times held your share of the property as trustee for your relative who had beneficial ownership of the full share of the property. You did not hold any power over the property and merely held the title to be transferred at the direction of your relative.

Therefore your relative will be considered to be absolutely entitled to the asset as against the trustee since its acquisition. Consequently no CGT event has happened to a CGT asset you own and no capital gain or loss has been made by you.

Assumption(s)

Nil

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

ATO view documents

Draft Taxation Ruling TR 2004/D25

Other references (non ATO view)

Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271