Edited version of your written advice

Authorisation Number: 1012859094596

Date of advice: 13 August 2015

Ruling

Subject: Capital gains tax: absolute entitlement

Question 1

Is the Person A absolutely entitled to the property, as against the Trustee?

Answer

Yes.

Question 2

Does a CGT event occur when the property is transferred by the Trustee to Person A?

Answer

No.

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

The scheme commences on:

1 July 1991

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.

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of the arrangement are:

(a)   The application for private ruling together with all other documents, information and views attached to that application; and

(b)   Email provided, together with all of the attachments provided with that email.

In the 1980's Person A became disabled and was left virtually wheelchair-bound. Person A had children.

In the 1990's a relative (the relative) arranged to purchase the property for Person A and their children to live in.

Subsequently the company was registered. The relative was the sole shareholder and controller of the company.

The company placed a caveat on the title to the property, consistent with having acquired an option to purchase. It appears that subsequent to this the relative or the company leased the property from the owners and the relative gave effective possession to Person A after this time.

A few years later the company completed the purchase of the property with settlement occurring on in the 1990's. The company mortgaged the property in association with the purchase. That mortgage was subsequently discharged. The company again mortgaged the property a few years later in relation to a loan and this mortgage remained on foot for a period of time.

Person A's evidence is that the relative told them the property was theirs when they gave them the keys and at various times after that. Person A believed they were the registered proprietor and treated the property as their own. The relative was evasive when they were asked about the title to the property. Person A had government-funded modifications made to the house for their disability.

The property was the sole asset of the Company. The company has carried on no trading activity, has no Tax File Number (TFN) and has not lodged income tax returns. Person A was a director of the Company for a period of time but was unaware of this.

A few years later, another relative of the relative and Person A, passed away. The relative was the executor of the Estate. The Estate, was to be distributed equally between the relative and Person A after the payment of liabilities.

The relative did not administer the Estate according to the will. The relative appears to have mixed the estate assets with their own. Person A's evidence is that the relative resisted their questions about the Estate; for various reasons Person A did not pursue this further at the time.

The relative continued to support Person A. The relative provided Person A with a small pension of an amount per week and this continued till the relative's death in in the 20XX-20YY income year. The relative supported Person A by paying rates and utility bills for the property and met some larger bills, such as replacing the hot water system and paying Person A's outstanding credit card balance about the time of their other relative's death.

The relative passed away in the 20XX-YY income year. At the time of the relative's death they were married to a spouse and had children.

The relative's will contained a clause which effectively granted Person A, a life interest in the property with the remainderman being their estate.

The relative's spouse was engaged in a dispute in the Family Court with the executors of the relative's estate. In the 20VV-WW income year Person A intervened in those proceedings. However, due to concerns about the rising costs of the proceedings depleting the estate, the Court did not hear evidence on the intervention.

In the 20VV-WW income year Person A had made an offer to the executors of the relative's estate through lawyers to relinquish all their claims, including those to the Estate, in consideration for the Company transferring title in the property to them, a monetary claim and coverage of their legal costs. All the parties in the Family Court proceedings accepted this offer, agreeing that the Company should transfer the property to Person A. This was formalised in consent orders dated in the 20VV-WW income year (the compromise).

In his unreported Reasons for Decision of the Family Court the Judge noted that the parties had agreed the Court make a declaration that the Company held the property for Person A under a bare trust. The Court did not actually do so. However, his Honour took the view that Person A was likely to have been successful if evidence had been heard because of the way the relative had conducted themselves.

In relation to Person A's claims, the Court concluded that the compromise did not unfairly prejudice relevant parties and affirmed the consent orders, allowing the transfer of title to Person A to proceed.

The contract agreeing to transfer the property to Person A was entered into in the 20VV-WW income year. The property will be transferred to Person A in the 2015-16 income year.

Of further note:

• At all times the relative told Person A that the property was theirs;

• Person A was unaware that the Company was the legal owner of the property until the 20VV-WW income year;

• Person A had at all relevant times lived in the property and considered it their own;

• As a disability pensioner, Person A arranged for government-funded modifications to be made to the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 106-50.

Reasons for decision

Summary

Person A was absolutely entitled to the property as against the Trustee (the Company) from the time of the purchase of the property. Therefore, under section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997), no CGT event occurs on transfer of the legal title to the property from the Company to Person A.

Detailed reasoning

When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset.

Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title.  However, in limited circumstances it is possible for legal ownership to differ from beneficial/equitable ownership for taxation purposes. 

Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner.

The evidence

Person A's evidence was not tested in court.

The compromise indicates that all parties with an interest in the relative's estate accepted that in the 20VV-WW income year Person A had an equitable claim to the property.

The evidence suggests that at least initially the relative was motivated by the best of intentions in regard to caring for Person A and genuinely desired to provide a home for Person A and their children. The relative remained actively interested in Person A's welfare up to their death.

The formation of the Company occurred shortly before the process of acquiring the property and the evidence indicates that the Company was brought into existence for the sole purpose of holding the property. Making Person A a director of the company which held legal title to their house is also consistent with an intention that the property was acquired for Person A.

However, it is also clear that the relative, who enjoyed an expensive lifestyle, was self-interested, controlling and prepared to act without due regard for Person A's legal rights. He/she had Person A appointed and removed as a director of the Company without informing them of their directorship - there is no evidence that Person A was even aware of the existence of the company prior to the relative's death. The relative, through the Company, used the property as a financial security for their own purposes. The relative did not disclose the true position in relation to the property's ownership to Person A at any time during their life. The relative acted in gross breach of their fiduciary duties as executor of the Estate. The relative's will, in effectively granting a life estate to Person A, completely disregarded any interest Person A's children had in the Estate.

Clearly enough, the compromise reached in the 20VV-WW income year was accepted in the light of Person A's claim on the Estate.

Findings of fact

The Commissioner cannot guess what findings the Family Court might have made if Person A's evidence had been presented in court. It is clear, though, that the Judge accepted that Person A's equitable claim to the property was sufficiently strong for the Court to affirm the compromise in the presence of competing claims.

To resolve the CGT issue, the Commissioner is required to make a finding on the available evidence about whether the Company held the property on trust for Person A and, if so, from what date.

The Commissioner considers the statements by and on behalf of Person A to be credible and has no means of obtaining further evidence of the relative's intentions (and therefore the imputed intentions of the Company) at the time the property was being acquired.

In view of the whole of the evidence, the Commissioner accepts, on the balance of probabilities and notwithstanding any subsequent inconsistent conduct by the relative or the Company, that:

• The Company held legal title to the property on trust for Person A from the date of purchase (there is no evidence of the precise date of the sale contract); and

• Person A was absolutely entitled to the property as against the Company as trustee from that date.

The CGT consequences

For the purposes of the CGT provisions, where the beneficiary of a trust becomes absolutely entitled to trust property as against the trustee, the trust property is treated as the property of the beneficiary from just after that time: section 106-50 of the ITAA 1997.

Applying section 106-50 to the present facts:

• The transfer of the property from the Company as trustee to Person A is not recognised a change of ownership for the purposes of the CGT provisions and does not constitute a CGT event.

• Person A is taken to have owned the property from the date of its acquisition by the Company.