Edited version of your written advice

Authorisation Number: 1051187307554

Date of advice: 6 February 2017

Ruling

Subject: Capital gains

Question

Will a capital gains tax event A1 happen when your name is removed from the title deed of the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts

Entity A died several years ago.

As per the Will, the residue of the estate was to be divided equally between two, entity B and entity C. These two people were joint executors of the estate.

At the time of finalising the estate, there were assets to be split between entity B and entity C. They came to agree upon the following:

● Entity B - cash and shares

● Entity C - cash and property.

Despite the above agreement, both entity B and entity C were recorded as tenants in common on the title to the property. The title was registered as tenants in common in equal shares.

At the time entity C thought it was fair that if they died entity B would get the property.

The solicitor did not make you aware of all the implications of having both names on the title deed.

Some years later, entity B was assessed for Land Tax on the aggregate value of the property owned personally and a half share of the property based on the title holding. The assessment was subsequently withdrawn and cancelled on the basis that entity B did not have any beneficial interest in the property and after that entity B's taxable properties were below the threshold at the time.

Since the estate was finalised, entity C has been solely responsible for the property and has had sole use, possession and enjoyment. Entity C has paid for the rates, utilities, insurance, land tax, repairs and maintenance, replacements, improvements including a renovation and any other financial outlays related to the property.

Entity C has had sole use of the property and used it as a holiday home. The property has never been tenanted or rented out.

Entity C married and they continued to use it as a holiday home.

Recently, entity C and their spouse sold their main residence and have been living permanently in the property.

The rates and valuation notice for the property is in entity B and C's name.

Water rates and land tax are in entity C's name only. The electricity account is in entity C and their spouse's name.

Entity B wishes to remove their name from the Certificate of Title.

On a statutory declaration dated recently, entity B advises that records and bank statements relating to the finalisation and settlement of the estate no longer exist. Entity B advised that they had no financial input or responsibility for the property since the finalisation of the estate. Entity B did not and has never used the property without entity C's permission.

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 108-05

Reasons for decision

Capital gains tax provisions

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.

You dispose of an asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Also a change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust.

In this case, entity B and C are currently the legal owners of the property. To change the certificate of title to entity C only, a CGT event A1 generally occurs for entity B, as they are changing ownership interest and transferring it to entity C. We therefore need to examine if there are any exceptions or CGT exemptions in your circumstances.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a property co-owned by husband and wife. The ruling states that the income/loss must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable or beneficial interest is different from the legal title.

Although the property is not a rental property, the principles in TR 93/32 remain relevant.

You stated that entity C has had full responsibility for the property since the deceased estate was finalised. However there is no documentary evidence to show that entity B did not have a beneficial interest in the property. The Will states that the assets were to be shared equally and the title has been registered in entity B and entity C's names for many years. For several years, no change to the title has been made.

Although entity B and entity C agreed for entity C to have the property, there is no documentary evidence to support this. It was stated that at the time, if entity C was to die, they thought it was fair for entity B to have the property.

The statutory declaration does not support the sole ownership of the property. Furthermore the withdrawal/cancellation of the land tax notice does not mean you did not have an interest in the property for tax purposes.

You refer to section 106-50 of the ITAA 1997 and Draft Taxation Ruling TR 2004/D25 which both apply to absolutely entitled beneficiaries.

You advised that entity C had absolute entitlement to the property and entity B had no interest in the property. However there is no documentary evidence to support this.

The principles referred to in Draft Taxation Ruling TR 2004/D25 refer to trusts and trust asset. However in your case, there is no trust deed or any other evidence or information to show that the property is a trust asset.

No documentation including the Wherill refers to the creating of a trust or refers to the property as being a trust asset or that entity C is the sole beneficiary. Furthermore there is nothing to show who are the trustees and/or beneficiaries.

Where a trust exists, there is usually an obligation on the trustee to deal with the trust property for the benefit of the beneficiaries. In Bruton Holdings Pty Ltd (In Liq) v FCT (2011) 83 ATR 864; [2011] FCAFC 79, the Full Federal Court held that a bare trustee has a continuing and active obligation to protect and maintain trust property.

In this case, entity B has not had an active obligation to protect and maintain the property. It cannot be said that entity C was always absolutely entitled to 100% of the property.

Entity B has been legally entitled to 50% of the property for many years.

We acknowledge your intention and that the solicitor may not have fully explained the implications surrounding your situation. However, the Commissioner can only consider what actually occurred rather than what was intended to occur. The Commissioner has no discretion to ignore the certificate of title.

The legislation applies to what in fact happened rather than what may have been in mind at some earlier or later point in time. As such the change of title on the property will be a CGT event under the CGT provisions.

Although entity B did not help financially or otherwise in looking after the property, it remains entity B had a legal interest in the property as evidenced by the Will and title deed. There is not sufficient evidence to show that you had no legal or beneficial interest in the property.

As the title deed shows you have a 50% interest in the property, a change in the legal title to show entity C as sole owner will represent a change in legal as well as beneficial interest. Consequently there will be capital gains tax consequences arising from the change in legal title.

There are no CGT exemptions that apply in your circumstances.