Edited version of your written advice

Authorisation Number: 1051360009642

Date of advice: 23 April 2018

Ruling

Subject: Capital gains tax

Question

Will any capital gain be disregarded when you transfer property to your son?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased the property.

You used your own money to purchase the property from a joint account.

Your dependant has lived in this property since it was purchased.

Your dependant did not contribute any funds towards the initial purchase of the property.

Your dependant sold a property in their name. From this sale, your dependant instructed $XXXXXX to be paid to your joint account.

All bills relating to the property have been paid by your dependant during the past XX year.

Your dependant was paying a weekly payment directly to your financial institution of $XXX. This was increased to $XXX a week to repay the funds you used to purchase the property.

You have also purchased two motor vehicles for your dependant.

You have stated that your dependant will pay you what is owed to you for the property and the cars once applying for a home loan to take over the over property.

When you divorced from your spouse, it was noted in the family court order that even though the property was purchased with matrimonial funds that you and spouse agreed that the property did not form part of the asset pool for the purposes of the Orders.

These orders also state that you are holding the property in a trust for your dependant.

You do not have a trust deed in place.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 115-25

Conveyancing Act 1919 Section 23C

Reasons for decision

When considering the sale of the 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 property.

A person’s legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.

In absence to the contrary, the property is considered to be owned by person(s) registered on the title. 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.

There are limited circumstances where the legal and equitable interests 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 parent and child, we generally consider that the equitable right is exactly the same as the legal title.

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

Express Trusts

An express trust is one that is deliberately established by express declaration. It is necessary that the intention to create a trust, the subject matter of the trust, and the object of the trust are certain.

The creation of a trust over land must be manifested and proved in writing.

Resulting Trusts

A resulting trust, sometimes called an implied trust, 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 classifications:

● 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.

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.

Section 23C of the Conveyancing Act 1919 contains provisions that preclude the creation or transfer of interests in land except if evidenced in writing. The absence of writing does not make the declaration of trust over land void, but merely unenforceable.

In your case, you purchased a property outright with the intention to transfer it to your dependant. You consider that you are holding this property in a trust and that your dependant is the beneficial owner of this property. Your dependant did not contribute any of the initial cost for the purchase of the property. There is no end date that is required to pay the balance back to you. You also do not have a trust deed in place or any documentation to show that a trust has been created in favour of your dependant.

We consider that the arrangement in place is a family arrangement and not a trust, as you have both legal and equitable ownership of the property (Muschinski v Dodds (1985) 160 CLR 583). Therefore CGT event A1 will occur when you transfer the property to your son and you will be liable to pay CGT.

Capital gains tax (CGT)

You make a capital gain or capital loss if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset (e.g. property). For example, if you sell an asset for more than you paid for it, the difference is your capital gain. You make a capital loss if your reduced cost base of your CGT asset is greater than the capital proceeds.

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. The time of CGT event A1 is:

● when a taxpayer enters into the contract for the disposal; or

● if there is no contract – when the change in ownership occurs.

50% CGT discount

Section 115-10 of the ITAA 1997 provides that a discount capital gain can be made by an individual. A 50% discount (section 115-100 of the ITAA 1997) may be applied to a discount capital gain realised by an individual where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997