Edited version of your written advice

Authorisation Number: 1012735718648

Ruling

Subject: Absolute entitlement

Question 1

Will you make a capital gain when you transfer title of the property to your parent?

Answer:

No

This ruling applies for the following period(s)

30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

In 19xx you purchased land and built a home. You lived in the property for a period of two years.

In 19xx your parents moved to be closer to medical facilities due to their poor health.

In 19xx your parents moved into the property and from that time you have considered the property to be theirs.

On x your parents paid off the outstanding mortgage in relation to the property.

In April 19xx your parents initiated the transfer of title in the land into their names.

In July 19xx the transfer of title was cancelled as your parents did not have financial capacity to go through with the transfer at the time.

From the time you parents moved into the property in 19xx:

• you have not lived in the property

• you have not received any rent from your parents

• you parents have paid all the expenses relating to the property (including rates, bills and repairs)

• your parents paid of the outstanding mortgage on the property.

Your parent has subsequently passed away.

You now intend to pass title of the property to its rightful owner your other parent.

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

Reasons for decision

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

Since 19xx when your parents moved into the property you have not had any interest in the property, you have merely passively held the title. This is evidenced by the follow facts that since 19xx:

• you have not lived in the property

• you have not derived any rent or income from the property

• you did not have any active duties in relation to the property

• you have not paid any of the expenses related to the property.

The attempted transfer of title is evidence of the common intention of the parties that beneficial interest in the property was held by your parents. The fact that the transfer did not go through was due to the financial situation of your parents and not any objection either party had to whom would hold title. The fact that your parents paid the outstanding mortgage on the property further supports this intention. We consider this is consistent with the definition of a bare trust from Herdegen.

Based on the information provided, the arrangement between you and your parents since they paid the outstanding mortgage has at all times amounted to a bare trust arrangement. It is reasonable to infer that despite you being a legal owner, you have at all times held the property as trustee for your parents who had beneficial ownership 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 parents.

Therefore your parents will be considered to be absolutely entitled to the asset as against the trustee since they paid the outstanding mortgage. Consequently no CGT event will occur when legal title in the property is transferred to your parent.