Edited version of your written advice

Authorisation Number: 1012684053889

Ruling

Subject: GCT consequences on the transfer of the property

All legislative references are to the ITAA 1997 unless otherwise specified

Question

Will the transfer of the property from the registered owners give rise to a capital gains tax (CGT) event under Division 104?

Answer

No

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The taxpayers are the registered legal proprietors of a property as joint tenants ('registered owners'). They are members of an organisation ('the transferee') established in an Australian state.

The property was purchased in the names of the registered owners over 10 years ago.

A bank loan was taken out by the registered owners for the purposes of acquiring the property.

The property was purchased in the names of the registered owners because at the time of acquisition the transferee did not have sufficient financial documentation to obtain a loan from the bank. Accordingly, the registered owners obtained the loan on its behalf to acquire the property.

The transferee had provided the deposit for the acquisition of the property and made all subsequent mortgage repayments. At no point in time did the registered owners provide any purchase money.

The property was acquired for use as a venue for various activities of the transferee, such as leaders and small group meetings, preparation of teaching materials and organisation of related activities.

The registered owners are proposing to transfer the legal ownership of the property to the transferee so that the transferee becomes the registered legal proprietor of the property (the proposed transaction).

Relevant legislative provisions

Section 104-10 of the ITAA 1997

Section 104-75 of the ITAA 1997

Section 106-50 of the ITAA 1997

Subsection 995-1(1) of the ITAA 1997

Reasons for decision

Under the proposed transaction, the registered owners will transfer the property to the transferee so that the transferee becomes the legal proprietor of the asset. The transfer may constitute the happening of CGT event E5 under section 104-75 or CGT Event A1 under section 104-10, which could result in a capital gain or capital loss being made.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (other than a unit trust or a deceased estate trust) as against the trustee (disregarding any legal disability of the beneficiary): section 104-75.

CGT event A1 happens if a taxpayer disposes of a CGT asset: subsection 104-10(1). The asset is disposed of if there is a change of ownership from the taxpayer to another entity: subsection 104-10(2). However, a change in the legal ownership of an asset without a change in its beneficial ownership will not constitute a disposal.

Further, a change of ownership will not occur where there is a transfer of the legal title of a CGT asset from the asset's legal owner to a beneficiary who is absolutely entitled to the asset as against the legal owner. Under section 106-50, where a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, any acts done by the trustee in relation to the asset are treated for CGT purposes as if they were done by the beneficiary. As a result, the beneficiary, and not the trustee, is liable for any capital gain or loss which arises in relation to the asset.

Is there a trust relationship?

The essential elements of a trust (as set out in Jacobs' Law of Trusts in Australia) are:

• the trustee holds a legal or equitable interest in the trust property;

• the trust property must be property capable of being held on trust (this includes a chose in action);

• one or more beneficiaries other than the trustee, and

• a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.

The term 'trustee' is defined in subsection 995-1(1) to have the same meaning given by subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In addition to every person appointed or constituted trustee by act of parties, by order or declaration of a court, or by operation of law, subsection 6(1) of the ITAA 1936 also includes every person having or taking upon themselves the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

There is no formal trust relationship established between the registered owners and the transferee. The arrangement under which the two parties acquired and serviced the property is not documented, nor is there a trust instrument which sets out the terms and parameters governing the relationship. However, the arrangement exhibits the four essential characteristics of a trust in that:

• the registered owners hold a legal interest in the property;

• the property is capable of being held on trust;

• the transferee is the sole beneficiary of the property, a claim supported by the registered owners who declare that the intention to acquire the property was for the property to be beneficially owned by the transferee at all times and not the registered owners themselves, and at the time of acquisition of the property the transferee could not supply sufficient financial documents to obtain a loan from the bank.

• each of the registered owners has a personal obligation to deal with the property for the benefit of the transferee.

Accordingly, whilst the relationship of the transferee with the registered owners is not formally documented, we acknowledge that a trust relationship exists between the two parties in respect of the property. It follows that in order to establish whether a CGT event occurs on the change of legal ownership of the property, it is necessary to determine if the transferee is absolutely entitled to the property as against the registered owners and if the answer is yes, the time when the entitlement arises.

Absolute entitlement to a CGT asset

The phrase 'absolutely entitled to a CGT asset as against the trustee' is not defined in the tax legislation. However, the decision in Saunders v. Vautier (1841) 4 BEAV 155, 49 ER 282 established the concept of absolute entitlement and Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides guidelines on the application of this concept in the context of the CGT provisions as follows:

The core principle underpinning the concept of absolute entitlement 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: paragraph 10.

A vested interest is one that will take effect in possession at some time and is not contingent upon an event that may or may not happen. A beneficiary's interest is vested in possession if they have the right to immediate possession or enjoyment of the asset: paragraph 74. That is, there are no legal impediments to the beneficiary's right.

It is also necessary that the interest of a beneficiary to a CGT asset cannot be defeated by the actions of any person or the occurrence of any subsequent event. Paragraph 11 explains that if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to the asset. In effect, if any other beneficiary also has an interest in a trust asset, then a beneficiary will not have an absolute entitlement to it. This is because their entitlement is not to the entire asset and the beneficiary will not be able to demand the asset to be transferred to them or be transferred at their direction: paragraphs 20 and 23.

The test of absolute entitlement is therefore based on whether the transferee has a vested and indefeasible interest in the property and is able to call for that property to be transferred. The corollary is that anything that allows the registered owners to resist its demand for the property will mean the transferee does not have an absolute entitlement to that asset.

The bank statements from the financial institution operated by the transferee indicate that an amount equalled to X% of the purchase price of the property was debited to the account with the annotation "Your chq #xxxxxx". This was two days after the contract for sale of land had been signed. This document lends support to the claim that the transferee paid the deposit for the acquisition.

In addition to paying the deposit, the transferee has been solely responsible for the mortgage with the bank, the mortgagor. Cheques were drawn on its account, initially monthly and then fortnightly, for the loan repayments until the account was closed and replaced by a cash management account with another financial institution. Periodic mortgage repayments via direct debit have continued to come out of this account, usually on a fortnightly basis.

These periodic mortgage repayments correspond to the figures shown in the home loan statements and give credence to the transferee' claim that although the property is held in the names of the registered owners, the transferee has provided the funds for the purchase and the ongoing loan commitment of the property.

There is no documentary evidence to substantiate the periodic mortgage repayments during a period of X months shortly after the acquisition of the property. The transferee claims that the mortgage repayments were funded out of the offerings it had received but a copy of the relevant bank statements for this period has been misplaced. However, it can provide statutory declarations signed by each of the registered owners/mortgagees to confirm the reliability of this statement.

Based on the documentation and explanation provided by the transferee, we accept the assertion that the transferee has been solely responsible for the deposit and periodic repayments of the property since its acquisition.

In Dyer v. Dyer (1788) 30 ER 42 it was held that, in general, when a person paid the purchase price of a property and caused the property to be registered in the name of some other person, it was presumed that the payer intended that the registered owner held the property in trust for them. This presumption may be rebutted by evidence to the contrary.

No such rebuttal is evident based on the information available. The transferee has provided both the deposit and periodic mortgage repayments. The property is used for religious and related services. No other party has claimed an interest in the property. Accordingly, the transferee is considered to have an undivided beneficiary interest in the property.

In the case of a sole beneficiary, paragraph 78 of TR 2004/D25 points out that, given the absence of any other beneficiaries, the sole beneficiary would have a beneficial interest in the entire asset. This totality of beneficial interest means a sole beneficiary satisfies the requirement that their interest in the asset be vested in possession and indefeasible if the beneficiary has the ability to terminate the trust by demanding the asset be transferred to them or to transfer it at their direction in circumstances where that entitlement cannot be defeated. This would be the case if there are no legal impediments to the beneficiary in obtaining immediate possession and enjoyment of the asset.

Given that there is no other entity that claims to have an interest in the property, the transferee would have a beneficial interest in the entire asset that is vested and indefeasible if the transferee can terminate the arrangement by directing the registered owners to transfer the property to it as planned under the proposed transaction or to transfer it at its direction.

The registered owners have each signed a statutory declaration confirming the statements made by the transferee in respect of the purchase and mortgage repayments of the property. The declarations reiterate the assertions that the property was intended at all time to be beneficially owned by the transferee and not the registered owners themselves. It was only due to the fact that the transferee did not have sufficient financial documentation to obtain a loan from the bank that the property was purchased in the names of the registered owners and it is common knowledge amongst the registered owners and the members of the transferee that the legal ownership of the property will be transferred back to the transferee as and when requested. The registered owners are bound by the statutory declarations under the Oaths Act 1900 to adhere to the terms set out in the document. They are further obliged to fulfil their duties under the codes of behaviours attached to their roles.

The minutes of the Interim Meeting provided by the transferee documented the discussion of the purchase of the property among the committee members and are indicative of the intention that the transferee was the beneficial owner of the property.

On the basis of information provided, we accept that the transferee is the sole beneficiary of the property and has been absolutely entitled to the property since acquisition. The transferee's interest is vested and indefeasible in that there are no legal impediments to its ability to demand the registered owners to transfer the property to it. There is no indication of anything that would allow the registered owners to resist the transferee's demand for the transfer, nor that they would consider taking any step to resist the demand.

Conclusion

The transferee is absolutely entitled to the property as against the registered owners for the purposes of section 106-50. Any act done by the registered owners in relation to the property, including the acquisition of the property, is treated for CGT purposes as if they were done by the transferee and the transferee will be liable for any capital gain or loss associated with the property. However, as the transferee's entitlement arose at the time when the property was purchased and has remained unchanged since acquisition, the transfer of the property will not lead to a change in beneficial ownership nor constitute a disposal. Accordingly, it will not trigger CGT event E5 or CGT event A1.