Edited version of your written advice

Authorisation Number: 1012992333794

Date of advice: 8 April 2016

Ruling

Subject: Capital gains tax

Question

Is the sale of the property considered to be an act done by you?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your child wanted to purchase their first residential property. However, they were unable to satisfy the eligibility requirements to obtain the bank loan necessary to finance the purchase.

You decided to obtain the mortgage to facilitate the purchase.

The property purchase was completed with the property title being registered in your name (a requirement of the bank's legal department).

The property was used by your child as their main residence. They attended to the maintenance and upkeep of the property including all repayments of the bank loan.

All improvements undertaken on the property were done so by your child at their behest and cost.

At no time was it treated as a rental property. No income was received by you and you did not claim any expenses as deductions.

Your child later negotiated the sale of the property and the necessary documents were executed at their request.

All funds arising from the sale were given to your child and were put towards the purchase of another residential property which is their current main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 102-20

Income Tax Assessment Act 1997 - Section 104-10

Reasons for decision

Ownership

Section 102-20 of the Income Tax Assessment Act 1997 provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs when you dispose of a CGT asset to someone else. CGT event A1 occurred when the property was sold.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. A legal owner is the individual who has their name on the legal documents associated with the CGT asset, an example would be the title deed for a property. An individual can be a legal owner but have no beneficial ownership in an asset. Under subsection 104-10(2) of the ITAA 1997, a change of ownership is not deemed to have occurred if you stop being the legal owner of the asset but continue to be its beneficial owner. As a result, it is the beneficial owner of a CGT asset that is liable for capital gains tax upon the sale of the asset. In some cases an entity may hold a legal ownership of interest in property for another individual in trust.

In the absence of evidence to the contrary, the property is considered to be owned by the person registered on the title. However, it is possible for legal ownership to differ from beneficial ownership. 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.

Trusts may be of three kinds: constructive, resulting or express.

We consider that there are limited circumstances where the legal and equitable interests in an asset are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title. Where individuals are related, for example mother and son, the equitable right is generally considered to be the same as the legal title.

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 some agreement or common intention held by the parties to the trust.

For an express trust to be created, it is necessary 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.

In this case, you do not have any documentary evidence that you held the property as trustee for your child. 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.

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.

The facts of this case do not indicate the existence of a court order, therefore no constructive trust exists.

Resulting or implied trusts

A resulting trust, sometimes called an implied trust, is a trust that 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 categories:

• 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 that 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 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 same proportions as their legal interests unless they can rebut the presumption of advancement.

In your situation, it is considered that you held the property in a resulting trust for your child. Your child made all repayments associated with the property and was the beneficial owner. You were merely placed on the title at the bank's request in order to obtain financing. Therefore, the presumption of advancement is rebutted. We accept that your intention was to hold the property on trust for your child.

Absolute entitlement

The CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary (as an individual) where the beneficiary is absolutely entitled to a CGT asset against the trustee (section 106-50 of the ITAA 1997).

The core principle underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115: 49 ER 282, applied in the context of the CGT provisions.

In your circumstances, your child has had a vested, indefeasible and absolute interest in the property from the day it was purchased and has always been able to direct how it should be dealt with (as they did when it was sold at their request). They made repayments with respect to the property and were responsible for all expenses. They also made all the decisions in respect of the property and enjoyed all the benefits of residency as a beneficial owner would do.

Therefore your child had an absolute entitlement to the asset and was considered to be the beneficial owner of the property.

As your child was always absolutely entitled to the property as against you as the trustee, everything done by you as the trustee in relation to the property is taken to have been done by your child. This means that you were not involved in a CGT event when the asset was disposed of. Although a change of ownership occurred when the property was sold, the sale is treated as an act done by the beneficiary (your child) and not done by you. Therefore, you are not liable for CGT on the sale of the property.