Edited version of your written advice

Authorisation Number: 1012701615589

Ruling

Subject: Capital gains tax

Question

Are you entitled to disregard the capital gain or capital loss that resulted on the sale of the property?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

All your parents' residences were jointly owned for over 30 years until they made their final move at which time their new residence was placed solely in parent A's name.

Parent A died after 20 September 1985 (after the introduction of capital gains tax).

Your parents' marriage was not a happy one and this was reflected in parent A's Will which specifically excluded any bequest to parent B, effectively leaving parent B without any means of financial support and without a residence.

You are both the sole beneficiaries of parent A's Will.

You both purchased a unit jointly in your names using the funds from the sale of parent A's estate and this was used as parent B's main residence.

There is no paperwork to evidence that it was purchased solely for parent B's use but you both essentially 'gave' the property which should rightfully have been parent B's, to parent B.

Parent B lived in this property from its purchase until parent B's recent death. The property was, to all intents and purposes, parent B's property. No-one ever knew that the property was not in parent B's name.

The only reason that it was not was due to some legal advice you received against breaking a Will and to some sense of loyalty to parent A.

Neither of you have ever lived in the property.

Parent B was the sole occupant and it was their only residence since it was purchased until parent B's recent death.

Neither of you were living close by at the time; one of you was living overseas and the other in a distant location within Australia.

Parent B was responsible for all decisions related to the property including maintenance and paying all associated costs.

All utility bills related to the property were in parent B's name.

The rates notices listed all three names: you and your sibling's as well as parent B's name.

The Body Corporate of the property listed parent B as the owner of the property.

You can provide copies if required.

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 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Capital gains tax

Capital gains tax (CGT) is income tax paid on any net capital gain made as the result of a CGT event taking place. CGT events are the different types of transactions that may result in a capital gain or capital loss. As a general rule whenever a CGT asset, such as a property that was acquired after 20 September 1985 (post-CGT), is sold (or otherwise disposed of) as part of a CGT event, the vendor will be subject to the CGT provisions and will need to determine whether a capital gain or capital loss has resulted.

This type of CGT event is known as CGT event A1 and generally occurs whenever there is a change in ownership of a post-CGT asset from one entity to another.

Any capital gain is added to any other assessable income for the relevant year and is then taxed at the appropriate marginal tax rate. A capital loss can be offset against other current year capital gains or carried forward indefinitely to be offset against future year capital gains.

You both have an ownership interest in a dwelling which you acquired for parent B using the funds from the sale of parent A's property upon parent A's death. When the dwelling is sold, you will each dispose of your interest in the property and CGT event A1 will occur.

Legal v beneficial ownership

In the absence of information to the contrary, a property is considered to be legally and beneficially owned by the person/s registered on the title.

In some cases however, someone may hold a legal ownership interest in a property on behalf of another person in trust.  Where the legal and beneficial ownership of a dwelling is different, a trust situation occurs.  If this is the case the legal owners are the trustees of the dwelling.

The CGT provisions do not apply to the legal owners of a dwelling if the legal owners held it on trust for another person and the other person was absolutely entitled to that dwelling as against the trustees (section 106-50 of the ITAA 1997).

Therefore we need to determine if you were holding your interest in the dwelling in trust and also whether the beneficiary (parent B) had an absolute entitlement to the dwelling.

Was there a trust created? 

The creation of trusts falls within the jurisdiction of equity.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606

a trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary.

There are several kinds of trusts, including Express and Bare.

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 an agreement or common intention held by all parties to the trust.

For an express trust to be created it is a requirement 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 trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. Therefore express trusts must be evidenced in writing.

You do not have any documentary evidence that supports the fact that you held the property in trust for parent B. 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.

Bare Trust

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.

Under a bare trust the beneficiary is entitled to possession of the trust assets and the trustees must act in accordance with the direction of the beneficiary.  Ultimately the trustees must deal with the property as directed by the beneficiary.

You and your sibling purchased the property using the funds from your deceased parent A's estate. At no time did either of you consider the dwelling as yours. You had no active duties to perform as trustees of the bare trust. You merely held the legal title to the property for the benefit of the beneficiary (parent B). Your role as trustees was to simply hold the property during the beneficiary's lifetime or deal with it at the beneficiary's direction. 

Absolutely entitled

The existence of a bare trust does not automatically mean a beneficiary of the trust is absolutely entitled. There may be multiple beneficiaries with interests in the trust property in which case other factors need to be considered. It may be that despite the trust being a bare trust, no one beneficiary is absolutely entitled to the trust property.

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is:

• absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

• able to direct the trustee how to deal with the asset.

Clearly, parent B, as the only beneficiary, had a vested, indefeasible and absolute interest in the property. It is therefore concluded that parent B, and subsequently parent B's deceased estate, was absolutely entitled to the property as against you as trustees of the trust.

Section 106-50 of the ITAA 1997 will apply to treat any act done you as trustees as an act done by the beneficiary. Parent B and subsequently parent B's deceased estate were absolutely entitled to the property therefore we will treat your actions as an act done by parent B's deceased estate.

In these circumstances the sale of the property will be treated as though the deceased estate of parent B sold the property rather than you, the trustees of the bare trust. 

Therefore for the purposes of the capital gains tax provisions you, as the trustees of the bare trust, will be entitled to disregard any gain or loss made on the disposal of the property.