Edited version of your written advice

Authorisation Number: 1012688007105

Ruling

Subject: Capital gains tax

Question

Are you entitled to disregard any capital gain or loss that results from the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse purchased a farm in early 19XX.

You paid extra per acre so as to receive the water rights.

The farm was a bare, unimproved property.

The purchase was funded largely by your respective parents.

Due to a dispute with another family member, the land was registered in the name of one of your children.

Your child has never been involved with farm other than to hold the land on your behalf.

During the time you have lived on the land, the water right was separated from the land and a separate title granted. This title is in the name of your child as the water title had to be in the same name as the land.

You and your spouse wish to retire and sell the farm land.

You are willing to sign a statutory declaration as to the truthfulness of your claim.

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.

Income Tax Assessment Act 1997 Section 118-110.

Reasons for decision

You make a capital gain or capital loss if a CGT event happens to a CGT asset under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Property is considered to be a CGT asset. Under section 104-10 of the ITAA, CGT event A1 occurs if you dispose of your ownership interest in a CGT asset. You dispose of that interest if a change of ownership occurs from you to another entity.

When considering the disposal of a CGT asset, 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 to the contrary, the property is considered to be owned by person(s) registered on the title. It is possible for legal ownership to differ from beneficial ownership. However where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

We have considered the facts that you have provided in order to determine whether a trust was created in relation to the property.

There are three kinds of trusts: constructive, express, or resulting.

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.

For a constructive trust to exist there needs to be a court order. In your case, there was not a court order in place therefore no constructive trust exists.

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.

In your case, you do not have any documentary evidence that supports the creation of an express trust over the property. 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 exist.

Resulting or Implied Trusts

A resulting trust, sometimes called an implied trust, 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 settlor 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 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.

However where the property is transferred to the taxpayer's 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 (that is, an absolute gift).

The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests unless they can rebut the presumption of advancement.

The presumption of advancement may be rebutted by evidence to the contrary such as a declaration of your equitable interest by a Court. Alternatively legal title could have been amended to register you as the legal owner. A statutory declaration signed over 20 years after the purchase of the property is insufficient to prove equitable interest.   

In this case, you and your spouse purchased the farm land but the title was put into the name of one of your children due to a family dispute. The property has always been your main residence. It has never been your child's main residence. Your child has never been involved with the farm other than to hold the land on your behalf.

The mere fact that you live in the property does not extinguish your child's legal or equitable rights in respect of the property.  In the absence of strong evidence demonstrating the existence of a resulting trust, your child still has the legal and equitable right to the property.  As such you cannot disregard the capital gain on the sale of the property under the main residence exemption.