Edited version of private advice

Authorisation Number: 1051561795209

Date of advice: 12 August 2019

Ruling

Subject: CGT and residential property

Question: Will a CGT event happen under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) when legal title of the Property is transferred to the Beneficiaries as joint tenants, particularly in light of section 106-50 of the ITAA 1997?

Answer: Yes.

This ruling applies for the following periods:

2018-19 income year

2019-20 income year

2020-21 income year

The scheme commences on:

XX March 2003

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.

This private ruling relates to a suburban residential property (the Property).

The Property is currently owned by four individuals (collectively referred to as the Trustees) who hold the Property on bare trust for two relatives (collectively referred to as the Beneficiaries).

Background

Some 15 years ago, a Contract of Sale was entered into in respect of the Property between vendors and one of the Beneficiaries as the initial purchaser. By written instrument, this Beneficiary nominated the Trustees as the purchasers of the Property.

From that time, the Trustees were accordingly bound by the terms of the Contract of Sale and became responsible for fulfilling the obligations therein as if they were named the initial purchasers of the Property.

Settlement of the Property subsequently took place and the Property was registered in the name of the Trustees (the Acquisition Date).

A Transfer of Land in respect of the Property was then formally registered with the Land Titles Office.

It has been the intention of the Trustees to acquire and hold the Property from the Acquisition Date for the absolute benefit of the Beneficiaries jointly. The Purchase Price was funded as follows:

The deposit was funded by the Beneficiaries personally

About half of the Purchase Price was funded by way of a bank loan with the Trustees jointly as the borrowers for the same amount.

In respect of this initial loan, a subsequent loan was entered into between the Bank as the lender and the Parties as borrowers for a slightly larger amount as part of a refinancing agreement.

The outstanding principal balance of the initial loan was subsequently transferred between accounts.

Notwithstanding that the initial loan and the refinanced loan were in the joint names of the Trustees, the Beneficiaries have been exclusively responsible for the repayments of the initial loan and the refinanced loan. This is evidenced by a Deed of Confirmation, Indemnity and Release executed by the Trustees and the Beneficiaries.

The payment of the initial loan and the refinanced loan is secured against the Property. A mortgage of land was registered over the Property.

The remainder of the purchase price was funded by the Beneficiaries (and only the Beneficiaries) personally. Most of it was gifted by to relatives to the Beneficiaries for this purpose. A Deed of Confirmation of Gift has been executed confirming this.

Despite the above, it has come to the attention of the Trustees and Beneficiaries that this arrangement in respect of the Property was not documented. The Trustees and Beneficiaries accordingly recently executed a Deed of Confirmation of Trust to confirm that the Property was acquired by the Trustees on the Acquisition Date and held therefrom on trust for the absolute benefit of the Beneficiaries jointly.

In respect of the Property from the Acquisition Date:

The Beneficiaries have jointly held beneficial ownership of the Property absolutely.

The Property has been used as the main residence of the Beneficiaries from the Acquisition Date.

The Beneficiaries have been exclusively responsible for the costs associated with the maintenance and upkeep of the Property from the Acquisition Date, including the payment of council and water rates, utility bills and home insurance premiums.

The Trustees have not and do not contribute to the costs associated with the maintenance and upkeep of the Property.

The Property has never been leased out to any other party and no proprietor has ever claimed any borrowing expenses against their personal income in their income tax return, and

The Beneficiaries wish to remain in and use the Property as their main residence for the foreseeable future.

The Trustees and Beneficiaries have recently executed a Deed of Confirmation and Acknowledgement detailing the arrangement in respect of the Property as outlined above.

As outlined in the Deed of Confirmation and Acknowledgement, the reasons why two of the Trustees were initially put on the title for the Property are as follows:

The Beneficiaries had recently married. During the early years of their marriage, they lived with these relatives

The Beneficiaries then moved interstate, when one of the Beneficiaries was pregnant. At that time, this beneficiary's income was $nil and the other Beneficiary was the sole breadwinner in the family earning a modest income

At the time the Property was purchased, the Beneficiaries required bank finance and sought to take out a bank loan. Because of the above, the bank was unable to lend to the Beneficiaries in the circumstances as they required further security. The other relative withdrew their superannuation when they retired and gifted the total sum into the Beneficiaries' personal bank account to assist with the purchase of the Property (documented in the Deed of Confirmation of Gift).

Even though the other relatives gifted this amount to the Beneficiaries, the bank required them to be on title as further security because the one Beneficiary's (sole) income alone was insufficient to service the loan and the Beneficiaries had no other assets to offer as security for the loan, and

These other relatives were on title and held an equal and undivided shares to reflect the amount they gifted as an approximate proportion of the purchase price of the Property, and held title as mere nominees for the Beneficiaries.

Some payments for the repayment of the loans in respect of the Property may have come from a family discretionary trust of which the Beneficiaries were discretionary beneficiaries. It should be noted that such payments were made for the benefit of either or both of the Beneficiaries and were either returned as distributions of income in their income tax returns accordingly, or debited against any unpaid present entitlement balances they may have had standing to their credit in the books and accounts of the said trust. This trustee recently executed a Deed of Confirmation confirming this.

The Beneficiaries and the Trustees propose to execute a Deed of Transfer and Vesting in respect of the Trust. Under this Deed, the Beneficiaries as the joint beneficiaries of the Trust and absolutely entitled to the Property jointly, will direct the Trustees to transfer legal title of the Property to them jointly, noting that the beneficial or equitable ownership of the Property (vesting with the Beneficiaries jointly) will not change.

Pursuant to the terms of the Deed of Transfer and Vesting, legal title of the Property is to be transferred from the Trustees to the Beneficiaries jointly.

Assumption

For the purpose of this ruling, it is assumed that the transfer will occur during the period of the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Summary

A CGT event will happen under Parts 3-1 and 3-3 of the ITAA 1997 when legal title of the Property is transferred to the Beneficiaries as joint tenants.

Detailed reasoning

CGT event A1 happens if there is a disposal of a CGT asset; that is a transfer of the CGT asset from one entity to another entity.

CGT event E7 happens if the trustee of a trust disposes of a trust asset to a beneficiary in satisfaction of the beneficiary's interest (or part of it) in the trust capital.

Both CGT event A1 and E7 will happen if the transfer of legal ownership of the Property to the Beneficiaries is treated as a disposal for capital gains purposes.

CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a particular form of disposal from a trust to a beneficiary. CGT event E7 is more specific to this situation.

CGT event E7 will be applied to the transfer of the Property if the transfer is considered to be a disposal of it for capital gains purposes because it is the most specific CGT event.

Disposal defined

Disposal is a defined term for capital gains purposes and occurs when there is a transfer of ownership of a CGT asset from one entity to another entity. The disposal can relate to only part of the CGT asset owned by the former owner (or vendor) or they can dispose of interests to multiple new owners.

Generally, there is a disposal of a CGT asset whenever there is a change to the legal owner. There is an exception if the legal owner is holding the asset on trust for a beneficiary who is absolutely entitled to the asset as against the trustee and the change is transferring legal ownership to that beneficiary. The exception applies because the absolutely entitled beneficiary is already considered to be the owner of the asset for capital gains purposes by section 106-50 of the ITAA 1997.

Absolutely entitled beneficiaries - section 106-50 of the ITAA 1997

Subsection 106-50(1) of the ITAA 1997 states:

For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

Subsection 106-50(2) of the ITAA 1997 states:

This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a * CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee).

The Commissioner's view about the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' is contained in Draft Taxation Ruling TR 2004/D25 and refined in the Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 (Kafataris).

Paragraphs 9 and 10 of Draft Taxation Ruling TR 2004/D25 state:

9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust.

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

The Decision Impact Statement for Kafataris adds:

Administrative Treatment

TR 2004/D25 sets out the Tax Office's current administrative treatment of the meaning of the words 'absolutely entitled to a CGT asset as against the trustee' as used in the CGT provisions. (As noted in the header to the ruling, that ruling will remain a draft while consultation with Treasury continues concerning certain problems that arise in the practical application of the provisions.) The draft ruling does not apply to members of a superannuation fund in respect of assets held by a fund (paragraph 6).

We consider that the approach taken by Lindgren J aligns with the 'core principle' adopted in the ruling at paragraph 10. 'The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction' aligns with his Honour's approach expressed at paragraph 61 of the judgment: "the expression 'absolutely entitled to the asset as against the trustee'... as the beneficiary directs." to the construction of the exception to CGT Event E1.

The ruling makes further propositions which were not necessary for his Honour to consider (for example, the effect of having multiple beneficiaries). The Commissioner's practice with regard to these propositions will continue as set out in the draft ruling.

Further, paragraphs 21 to 25 of Draft Taxation Ruling TR 2004/D25 state:

One beneficiary with all the interests in a trust asset

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (see Explanation paragraphs 76 to 79).

More than one beneficiary with interests in a trust asset

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

·        the assets are fungible;

·        the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

·        there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. See Explanation paragraphs 80-126

The explanation to Draft Taxation Ruling TR 2004/D25 begins at paragraph 29 and begins a discussion of the key factors at paragraph 69.

Paragraphs 80 and 81 of Draft Taxation Ruling TR 2004/D25 state:

More than one beneficiary with interests in a trust asset

80. It is evident from the preceding discussion that a beneficiary will have difficulty in establishing that they are absolutely entitled to a trust asset for CGT purposes if one or more other beneficiaries also have an interest in the asset. In the UK capital gains legislation, this problem is addressed, at least in part, by making direct reference to 'two or more persons who are or would be jointly so entitled'. There is no such reference in the Australian CGT provisions and the circumstances in which such a beneficiary may be considered absolutely entitled under those provisions are therefore very limited.

81. The fact that under the rule in Saunders v. Vautier multiple beneficiaries may together terminate the trust is of no assistance to such beneficiaries wanting to establish absolute entitlement for the purposes of the Australian CGT provisions. As already discussed, those provisions require a single beneficiary to be absolutely entitled to the whole of a trust asset, whereas the entitlement of a beneficiary who shares their interest with others will generally be to a share of each trust asset.

Draft TR 2004/D25 then follows with a discussion about the exception for fungible assets held by a trust.

As stated in the Decision Impact Statement for Kafataris, the header to Draft Taxation Ruling TR 2004/D25 notes that there is a problem in relation to absolute entitlement where there are joint or multiple beneficiaries.

The matter of multiple beneficiaries and a single trust asset is also discussed in ATO Interpretative Decision ATO ID 2004/428 (which was withdrawn by the issue of Draft Taxation Ruling TR 2004/D25) which specifically stated that a taxpayer will not be absolutely entitled to a trust asset as against the trustee if there is another beneficiary with an interest in that trust asset. The reasons for this decision were:

If the taxpayer is absolutely entitled to each of the children's interests then CGT event A1 will happen to the taxpayer in respect of those interests when the property is sold.

This is because where a beneficiary is absolutely entitled to the asset of a trust as against the trustee, section 106-50 of the ITAA 1997 treats an act done by the trustee as if the beneficiary had done it. Therefore, if section 106-50 applies, the disposal by the children of their interests will be regarded as a disposal by the taxpayer.

It is considered that a beneficiary is absolutely entitled to a CGT asset of a trust as against the trustee if the beneficiary is able to terminate the trust in respect of the asset by demanding that the asset be transferred to them or at their direction. A beneficiary can terminate the trust in respect of the asset if there is no other beneficiary or person with an interest in the asset. That is, if the beneficiary has an interest in the asset that is vested in possession and is indefeasible. This is known as the rule in Saunders v. Vautier (1841) Cr & Ph 240; 49 ER 282.

However, a taxpayer will have difficulty in establishing the requirements for absolute entitlement under section 106-50 of the ITAA 1997 if one or more other beneficiaries have an interest in the trust asset. This is because section 106-50 requires identification of a specific trust asset that is held on behalf of a specific beneficiary. It is not sufficient for a beneficiary to show they have an undivided interest in the trust asset. Instead it must be possible to identify a particular asset being held for a particular beneficiary.

The asset in respect of each of the trusts is the interest in the property held by the relevant child and in each case that asset is held not just for the taxpayer but for the taxpayer and their spouse. While under the rule in Saunders v. Vautier the taxpayer and their spouse could together terminate the trust in respect of that asset, section 106-50 of the ITAA 1997 requires an identification of a specific asset to which the taxpayer is entitled in their own right, to the exclusion of others. Given that the taxpayer's spouse also has an interest in each trust asset, the taxpayer merely has an undivided interest in each trust asset and is unable to establish that they alone are entitled absolutely to each asset as is required by section 106-50.

Therefore, the taxpayer is not absolutely entitled to the interests in the property held by the children in accordance with section 106-50 of the ITAA 1997. Accordingly, CGT event A1 will happen to the trustees (that is, the children) in respect of their interests when they are disposed of as a result of the sale of the whole of the property. Each trust will make a capital gain or loss on the disposal of its interest. The trust will then be assessed on that gain or loss in accordance with the rules in Division 6 of Part III of the Income Tax Assessment Act 1936.

Section 106-50 of the ITAA 1997 is a re-write of subsection 160V(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and is couched in similar terms. The Explanatory Memorandum supporting the re-write of the capital gains provisions did not indicate that any change was intended. The Explanatory Memorandum for the Income Tax Assessment Amendment (Capital Gains) Bill 1986 which introduced of subsection 160V(1) of the ITAA 1936 clearly contemplated a single absolutely entitled beneficiary and states:

Sub-section 160V(1) applies where an asset is held by a trustee for a person who has an absolute entitlement to the asset which may be exercised against the trustee. The sub-section deems Part IIIA to apply to such an asset on the basis that the asset is vested in the person who has the absolute entitlement and is not vested in the trustee. The sub-section also deems any acts of the trustee in relation to the asset to be the acts of the person who has the absolute entitlement.

In effect, in relation to an asset which is subject to this sub-section, Part IIIA will apply as if the asset was owned by the person who has an absolute entitlement to the asset and without regard to the actual legal ownership of the asset by the trustee.

Your arguments

You argue that the Beneficiaries should be considered as absolutely entitled to the Property for the purposes of section 106-50 of the ITAA 1997, on the basis that they have always held their interest in the Property as joint tenants (as evidenced by the terms of the Deed of Confirmation of Trust).

You contend that Taxation Ruling TR 2004/D25 does not provide clear guidance on the point of joint tenancy.

You state that your submission is based on similarities between the facts of this case and your understanding of those in the edited version for private ruling 33308 in which a property was transferred to beneficiaries jointly.

You interpreted the reasons for the decision in the edited version for private ruling 33308 as being that it would be appropriate to treat the beneficiaries as a single beneficiary for the purposes of applying section 106-50 of the ITAA 1997 because the evidence showed that they always held their interest in the property as joint tenants.

You believe that if your understanding of the edited version for private ruling 33308 was applied, each of the Beneficiaries has a right, shared with the other Beneficiary to the whole of the Property, but no individual right to any undivided share in it, and it is not possible to look at each individual beneficiary and their distinct interest in the Property in isolation from each other.

You further add that under property law principles, where an asset is 100% jointly held by multiple proprietors, those proprietors (collectively, jointly and importantly not severally) have an interest in the property as a whole. You contrast this from assets held as tenants in common, where such assets would be deemed to be held in discrete shares or portions by the proprietors separately according to the discrete interests each have in the particular assets.

The Commissioner's response to your arguments

You have cited the edited version for private ruling 33308 as support for your contention that the Beneficiaries should be considered to be absolutely entitled to the Property as against the Trustees.

However, Practice Statement PSLA 2008/4 (about publication of edited versions) states at paragraph 2 that a taxpayer cannot rely on edited versions. They are not intended to provide taxpayers with advice or guidance. They are merely a public historical record of the issue of written binding advice by the ATO.

Further, edited versions are not listed as precedential ATO views at paragraph 3 of Practice Statement PSLA 2003/3 (which is about what are considered to be precedential ATO views).

Even if the edited version for private ruling 33308 had been a precedential ATO view, it would have effectively been withdrawn by the later issue of ATO Interpretative Decision ATO ID 2004/428 and Draft Taxation Ruling TR 2004/D25 which both contain contrasting views.

In addition, the disclaimer for edited version 33308 states that it has been archived due to the length of time since it was originally published. It also states that it should not be regarded as indicative of the ATO's current views as the law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

Consequently, the statements you have extracted from the edited version for private ruling 33308 have no standing or precedential value in relation to this private ruling.

You contend that Draft Taxation Ruling TR 2004/D25 'does not provide clear guidance on the point of joint tenancy'. However, the header to it refers to an issue with joint and multiple beneficiaries and paragraph 80 states that the Australian CGT provisions do not provide the joint beneficiary concession contained in the UK capital gains legislation.

Further, paragraph 81 of Draft Taxation Ruling TR 2004/D25 clearly states the single beneficiary requirement. The 'very limited' exception mentioned in paragraph 80 of Draft Taxation Ruling TR 2004/D25 relates to fungible assets (which the Property is not).

All of this is an indication that the joint tenancy of beneficiaries was considered when reaching the ATO view outlined in Draft Taxation Ruling TR 2004/D25.

In addition, the Decision Impact Statement for Kafataris indicates that Draft Taxation Ruling TR 2004/D25 comprehensively covers the concept of absolutely entitled beneficiaries.

And finally, it would be an absurd situation if the joint owners of a property transferred it to a bare trust that they were the only beneficiaries of (which would be either CGT event E1 or E2) if they were considered to be absolutely entitled beneficiaries of the property while it was held by the trust. The exception for CGT events E1 and E2 requires a sole beneficiary of the trust who is absolutely entitled to the asset as against the trustee (and the trust is not a unit trust).

Conclusion

This situation involves the Trustees owning an asset that they hold on bare trust for the Beneficiaries.

There is only one asset owned by the Trustees - the Property. The Property is not easily divisible.

There are two beneficiaries who have interests in the sole asset of the Trust being the Property - they are the Beneficiaries.

The Deed of Confirmation of Trust does not provide either Beneficiary with a vested an indefeasible interest in the whole of the Property. Nor does the Deed of Confirmation of Trust authorise either Beneficiary alone to call for the Property to be transferred to them or be transferred at their sole direction.

However, the Beneficiaries combined can call for the Property to be transferred to them or be transferred at their direction. But, as stated at paragraph 81 of Draft Taxation Ruling TR 2004/D25, this is not sufficient to establish that the Beneficiaries are absolutely entitled to the Property.

For the reasons outlined above, we will not conclude that the Beneficiaries are absolutely entitled to the Property as against the Trustees.

Therefore, the Trust is the current owner of the Property for capital gains purposes and CGT event E7 will happen when the Trustees transfer the legal title of the Property to the Beneficiaries.