Edited version of private advice

Authorisation Number: 1012642110794

Ruling

Subject: Capital gains tax

Question:

Did a capital gains tax (CGT) event happen to you, when the property was sold?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse, together with two family members, purchased a property after 1985 for the family members to live in as their residential home. That is, there were four names on the title.

The property was purchased and you contributed half of the purchase price plus half of the statutory charges. Your contribution was made in cash and you did not need to borrow any funds to provide the contribution.

Your intention was that the funds you contributed were a loan to the family members and you had a verbal agreement that the loan would be repaid with no interest charged. In order to secure your interest on the loaned amount you were registered title holders to the property.

More than 10 years later, the property was sold.

The family members used the majority of the sale proceeds to purchase a property in a retirement village. The remainder of the funds were used to repay a portion of the loan.

The family members have no way of repaying the balance of the loaned amount.

Your family members lived in the property for the whole time it was owned.

Your family members were the only occupants of the house and met all the usual costs of ownership and maintaining the house.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 110-25.

Reasons for decision:

CGT is the tax that you pay on certain gains you make. You may make a capital gain as a result of a CGT event happening to an asset in which you have an ownership interest. The most common CGT event, CGT event A1, occurs when you dispose of your ownership interest in a CGT asset to another entity.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property. In absence of evidence to the contrary, property is considered to be owned by person(s) registered on the title.

Taxation Ruling TR 93/32 (TR 93/32) deals with the division of net income or loss between rental property co-owners. If the equitable interest does not follow the legal title, there is some basis for the profit or loss to be distributed on the equitable and not the legal basis. However, paragraph 41 of TR 93/32 states the following:

We consider that 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. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

While this ruling deals with net income or loss from a rental property, paragraph 42 explains that any capital gain or loss should be apportioned on the same basis.

In some cases, an individual may hold legal ownership interest in a dwelling for another individual in trust.  A beneficial owner is defined as a person or entity who is beneficially entitled to the income and proceeds from the asset.

We have considered your situation in order to determine whether a trust has been created in relation to the dwelling and find as follows:

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 when relating to the transfer of interests in land, must be evidenced in writing. In this case, you do not have any documentary evidence that you had held the unit as trustee for your family members. The absence of such a document means that an express trust cannot exist.

A constructive trust is a trust imposed by operation of law. The facts of this case do not indicate the existence of a court order and therefore it can be concluded that a constructive trust does not exist.

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, an example would be where a person buys land but places the title in the name of a 3rd party.  In your case there was no prior trust when the property was purchased using funds provided by you, your spouse and the other two family members. Given this, there is no implied or resulting trust.

In your case, we have found that no trust exists.

As such, it is concluded that you held an equitable and legal interest in a share of the dwelling. 

While we acknowledge your circumstances and your reasons for providing the funds to help your family members to purchase the dwelling, the Commissioner considers that you were the legal and beneficial owner of a share in the dwelling.

Therefore, for CGT purposes you are viewed as having disposed of your interest in the dwelling when the dwelling was disposed of. 

Cost Base

The cost base of a CGT asset is defined in section 110-25 of the ITAA 1997. It consists of five elements: 

1. Money or property given for the asset.

2. Incidental costs of the CGT event, or of acquiring the CGT asset.

3. Costs of owning the CGT asset.

4. Capital costs to increase or preserve the value of your asset or to install or move it.

5. Capital costs of preserving of defending your ownership of or rights to your asset.

In your case, your individual share is one quarter. Your share of the cost base includes your share of the purchase price and your share of the statutory charges. Your share will also include the costs associated with owning the property which were paid by the family members. However your cost base may be different to the family members as your cost base will not include any interest costs the family members may have incurred on monies borrowed to fund their share of the property.

Capital proceeds

Your capital proceeds will be your share of the amount of money that you received (or were entitled to receive). In your situation the capital proceeds will be one-quarter of the sale price each. There would be no reduction of your capital proceeds because you did not physically receive the proceeds. The Commissioner considers that you merely on-lent your share of the proceeds to your family members to purchase the retirement village property.