Edited version of your written advice

Authorisation Number: 1012739317681

Ruling

Subject: Capital gains tax consequences on transfer of legal ownership of property

Question 1

Will you make a capital gain (or loss) on the transfer of legal title of the property to the trustee of the fund?

Answer:

No

This ruling applies for the following period(s)

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

The fund commenced in 200X.

The original trustees of the fund were A and B.

A property was purchased in 200X.

Record of Certificate of Title in 200X shows you as title holder of the property.

The current trustee of the fund is X Pty Ltd.

The fund bank statements show payments made for the acquisition of the property.

The fund Balance Sheet shows the property as an investment.

The fund Profit & Loss Statement shows rental income (and rental expenses) in relation to the property.

On advice from the settlement agent, you state you were convinced that an offer and acceptance land of sale contract was the simplest method to correct an original recording error that you were the legal title holder of the property.

Minutes from a meeting of the trustees of the fund, in 20XX, state that you intend to correct the legal title of the property to be held by the fund.

Record of Certificate of Title in 20XX shows X Pty Ltd as title holder of the property.

No consideration, either money or property, was made by the fund to you on transfer of legal title.

The property is still reported in the balance sheet of the fund.

The fund still receives rental income (and pays rental expenses) in relation to the property.

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 entity 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.

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

Based on the information provided;

• the fund provided the consideration to purchase of the property

• the fund has reported all rental income (and expenses) from the property in its income tax returns since its acquisition

• the fund lists the property as an investment in its accounts in the acquisition year and the current year

• you did not receive any consideration from the fund on transfer of legal title

Accordingly, the actions of you and the fund since the time of the acquisition of the property, and subsequently, constitute conduct from which it is reasonable to infer that despite being the legal owner, you have at all times held the property as trustee for the fund.

Therefore the fund would be considered to be absolutely entitled to the property as against the trustee since its acquisition.

As the fund is already considered to be the beneficial owner of the property, there will be no change of beneficial ownership when the legal title of the property is transferred to X Pty Ltd as trustee for the fund. As beneficial ownership has not changed, CGT event A1 will not happen and no capital gain or loss on the transfer of the legal title will be made.