Edited version of your written advice

Authorisation Number: 1051451607001

Date of advice: 8 November 2018

Ruling

Subject: Capital gains tax

Question 1

Was there a capital gains tax (CGT) event in 20XX in relation to the property?

Answer

No.

Question 2

Did CGT event A1 happen in 20XX?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Your relation received inheritance several years ago. The inheritance was invested as the deposit on a property in your name. At that time your relation was young and under 18. Your solicitor advised that the property title should not be in your relation’s name. The title was in your name.

Money was used for the part deposit of the property from your relation’s inheritance money. The balance of the deposit and stamp duty was paid by you.

The loan for the property was in your name. You borrowed money for the purchase of the property.

The property was negatively geared against your income from the time of purchase until the end of 20XX.

Your relation resided in the property from the end of 20XX rent free on the understanding that the property would be transferred at a time when they could acquire a loan to payout your loan. No set time was set for the transfer.

You paid out the loan balance when your relation moved into the property.

Property expenses including loan repayments were made by you until the property was transferred to your relation in 20XX.

There was no formal agreement. Rent free was considered as a gift. Your relation contributed to the power and rates while living in the property.

Your relation acquired a loan in 20XX and the property was transferred.

Your relation paid xxx for the property. xxx was the balance of the loan paid out when your relation took up residence in 20XX, less a discount as you had benefited from the negative gearing when the property was rented. The loan principal reduction had been funded by your negative gearing tax credit when the property was rented.

You understood that your relation was unable to acquire a loan until such time that they had a work history and salary.

You did not declare any CGT event in your 20XX tax return.

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 104-15

Income Tax Assessment Act 1997 section 108-05

Income Tax Assessment Act 1997 section 109-5

Reasons for decision

Ownership of a property

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 the 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.

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.

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.

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 with the intention to later transfer it to your relation. Whether you are holding this property in a trust for your relation as the beneficial owner of this property needs to be considered. There is no trust deed in place or any documentation to show that a trust has been created in favour of your relation. There was no set date that required your relation to get a loan to payout your loan.

It is acknowledged that your relation’s inheritance paid for some of the deposit for the property, however, you provided the majority of the purchase money.

We consider that the arrangement in place is a family arrangement and not a trust, as you had both legal and equitable ownership of the property (Muschinski v Dodds (1985) 160 CLR 583).

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).

CGT event B1 – Use and enjoyment before title passes

CGT event B1 happens if you enter into an agreement with another entity under which the right to the use and enjoyment of a CGT asset you own passes to the other entity and title in the asset will or may pass to the other entity at or before the end of the agreement (subsection 104-15(1) of the ITAA 1997).

CGT event B1 happens when the other entity first obtains the use and enjoyment of the asset (subsection 104-15(2) of the ITAA 1997).

Examples of CGT event B1 include hire purchase agreements and instalment sale agreements.

As outlined to Tax Determination TD 1999/78 Income tax: capital gains: for the purposes of CGT event B1, what is meant by the expression 'at the end of an agreement' in section 104-15 of the Income Tax Assessment Act 1997?, the Commissioner considers that, in order for CGT event B1 to happen, the relevant agreement must be one under which title will or may pass at the end of a specific period or, on the occurrence of a specific event. CGT event B1 will not happen if, under a loose family arrangement, title to an asset may pass at an unspecified date in the future.

In your case, the verbal agreement did not specify a time for the transfer of the property to your relation. Although it is acknowledged that family discussions occurred in relation to the property, there is no evidence to show that there was a binding agreement in place. Rather there was a general family arrangement that could be changed depending on family circumstances.

As highlighted in McDonald v Federal Commissioner of Taxation [2001] FCA 305; (2001) 46 ATR 426; 2001 ATC 4146 (McDonald’s case) clear evidence of an intention needs to be produced. In McDonald’s case, the evidence showed that the first time that the parties had reached a consensus with the intention to form legal relations occurred on exchange and the parties could not rewrite history by backdating the contract.

It was found that an oral agreement was insufficient to bind each of the parties to the agreement. It went on to specify that the procedure for exchange of contracts was so entrenched that a party contending for an intention to precede other than in accordance with established procedure, would need clear evidence to support that contention.

Similarly, in your case, the property was not to be transferred to your relation until such time that they could obtain the loan. Consequently, the property transfer did not occur until 20XX. Any previous family verbal discussion is not sufficient evidence to show that you transferred the property for CGT purposes to your relation before this date. Therefore it cannot be said that a CGT event occurred in 20XX or any other date before 20XX.

Although your relation has used the property before 20XX, there is no evidence to show that this use and enjoyment was as a result of a binding agreement between you and your relation. Rather, such use is regarded as a private and family arrangement.

It is not considered that the family arrangement, constitute an agreement between your relation and you for CGT event B1 purposes. Therefore, it is considered that CGT event B1 did not happen.

As CGT event B1 does not apply to your situation consideration needs to be given to CGT event A1, and whether you transferred the property under a (verbal) contract.

CGT event A1 – Disposal of a CGT asset

Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset.

You dispose of a CGT 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 (subsection 104-10(2) of the ITAA 1997).

Under subsection 104-10(3) of the ITAA 1997, the time of the event is:

(a) when you enter into the contract for the disposal; or

(b) if there is no contract - when the change of ownership occurs.

When CGT event A1 happens, your relation acquires the CGT asset when the disposal contract is entered into, or if none, when the entity disposing of the asset stops being the asset’s owner (subsection 109-5(2) of the ITAA 1997).

A contract is a legally binding agreement between two parties. An expression of an intention to gift or donate property to another party does not give rise to a contract between the donor and the intended recipient.

A contract is required to have the attributes prescribed by common law for the formation of a contract. Generally, a binding contract is entered into where one party communicates unconditional acceptance of an offer made by the other party. In some cases difficulty may arise in determining at what point of time a binding contract is made. This is particularly so in the case of a contract that is wholly or partly oral.

An oral contract may be a contract, provided it has the attributes required by common law, for example, an intention by both parties to be bound by it.

A number of cases have considered the date when a contract was formed. In Gardiner v FC of T 2000 ATC 2018, the AAT held that a property was acquired when a taxpayer's offer was accepted by the vendor, not when the contracts were formally exchanged two months later. The formal correspondence of the offer and the acceptance of it constituted a contract for the acquisition of the property by the taxpayer.

The Commissioner’s view is that, without anything further, the family agreement did not give rise to a contract at common law. That is, you had an unfettered discretion to decide whether or not to transfer the property to your relation.

Any agreement between you and your relation did not give rise to a contract at common law.

There is insufficient evidence to show that a mutual intention to enter into a legally binding relationship existed before 2017. Although matters in relation to the property were raised in previous years, there is no documentary evidence to show that a binding oral contract existed before 2017.

In your case, the absence of any contract between you and your relation has led to the conclusion that no binding and enforceable agreement or contract existed.

The family discussions and/or agreement did not give rise to a contract between your relation and you. You did not transfer the property under a contract.

A gift is complete if the donor has taken all steps necessary to enable the legal transfer of the asset to take place without any further action needed by the donor (Corin v Patton (1990) 169 CLR 540). In your case you had not done everything necessary to enable the transfer to your relation before September 20XX.

As there is no contract, it follows that you transferred the asset at the time when you stopped being the asset’s owner, that is, when the title to the property was transferred to your relation in 20XX. CGT event A1 happened at that time.