Edited version of private advice

Authorisation Number: 1051648171254

Date of advice: 1 April 2020

Ruling

Subject: Capital gains tax - acquisition - ownership

Question

Will the transfer of my legal ownership in a property to my sibling result in a capital gain for me for the year ending 30 June 20XX?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX/XX/XXXX, your sibling signed the purchase contract for the property for $XXX,XXX as the sole owner.

At this time you did not sign the purchase contract for the property.

Your sibling sought a bank loan to assist with the purchase of the property but the loan was not approved based on your sibling's income alone.

Your sibling asked you to provide financial assistance to help your sibling purchase the property to reside in and you agreed.

You subsequently entered into a bank loan with your sibling as joint borrowers to purchase the property. A requirement of the bank was for your name and your sibling's name to go on all loan documentation and the property's certificate of title.

The intention was always that the property was to be your sibling's home and principal place of residence and that you would have no ownership of the property. You were simply enabling your sibling to purchase a home. The property was always considered your sibling's home.

You paid some of the deposit for the property and made some mortgage payments.

On or around XXXX your sibling suffered a workplace accident that left them incapacitated and rendered them unable to work for many years. This left them financially stressed and depressed.

On XX/XX/XXXX your other sibling paid off the bank loan in the amount of $XXX,XXX.XX.

Over the years, your sibling made improvements to the property. Your sibling paid for all improvements. You did not pay for these costs.

Your sibling maintains and pays for all of the costs associated with the property.

In XXXX you became concerned about the property being in joint names because your circumstances changed. You did not want the possibility of your sibling losing the property. You became concerned that if something should happen to you, the property might become entangled in probate and division of assets.

On XX/XX/XXXX you removed your name from the property's certificate of title.

You have never lived in the property.

The property has never been rented out or income producing.

You have not benefitted in the property and have not received any monies in relation to removing your name from the certificate of title.

There was never any intent on your part to make money or "capital gain" or derive any benefit whatsoever from the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 102-30

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50.

Income Tax Assessment Act 1997 section 108-5.

Reasons for decision

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 CGT) event happens to a CGT asset. All assets you've acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. In your case, the property is a CGT asset.

Under section 104-10 of the ITAA 1997 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 the 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.

When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. Generally the owner of the property is the person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

In your case, you and your sibling were the legal owners of the property as joint tenants. For CGT purposes, joint tenants are treated as having equal shares in the asset. Each party therefore has an equal share of any capital gain or capital loss from a CGT event. Removal of your name from the title disposed of your legal ownership in the property. This change of ownership to your sibling as sole owner is a CGT event. 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 (TR 93/32). 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.

Paragraph 41 and 42 of TR 93/32

41. We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where the taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title

42. Any capital gain or loss should also be apportioned on the same basis as the rental income or loss.

Example 4 and example 5 of TR 93/32

Example 4

46. Mr and Mrs Y purchase a rental property. Mr Y contributed 80% of the funds used to purchase the property while Mrs Y contributed 20%. They register their purchase as joint tenants. They also sign a written agreement to share any profits or losses from the property in accordance with their capital contributions, but share interests in the property equally.

47. Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Y are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their legal ownership interests, i.e., 50:50. Their agreement to share the profits and losses in proportion to their capital contributions is a private arrangement which has no effect for income tax purposes.

Example 5

48. Mr and Mrs Z rent out a house which they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.

49. Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.

The agreement between you and your sibling for the property to be your sibling's home and principal residence is a private agreement which has no effect for income tax purposes. You stated that your sibling had full responsibility for the property since acquisition such as payment of all costs associated with the property including payment for improvements. However, as per example 5 in TR 93/32, that fact that your sibling paid the expenses on the property, this is of no consequences for income tax purposes.

In your case we have considered the following:

·         Since acquisition, the certificate of title was in your name and your sibling's name as joint tenants

·         You and your sibling paid the deposit to purchase the property

·         You and your sibling obtained a bank loan as joint borrowers for the purchase of the property

·         You paid some mortgage payments

·         There are no documents signed by you that show that you held your interest in the property on trust for your sibling.

·         The title of the property did not change until approximately XX years from acquisition and XX years from when the bank loan was paid out. Notwithstanding that the bank initially required your name to be included on the title to support the bank loan.

Therefore, when you transferred your X% interest to your sibling to become X% sole owner, this triggered a CGT event which results in a capital gain for you. As you did not receive any capital proceeds in relation to this event, it is deemed that you receive capital proceeds equal to the market value of the CGT asset. Consequently, you may have a capital gains tax liability in spite of no money or other consideration changing hands.

We acknowledge your intention that the property was for your sibling's sole beneficial use, home and principal place of residence. 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 legal ownership of the property will be a CGT event under the CGT provisions.

You will be entitled to reduce any capital gain you have incurred by the 50% discount as you held the property for more than 12 months.