Edited version of private advice

Authorisation Number: 1051919238959

Date of advice: 8 November 2021

Ruling

Subject: CGT - deceased estate

Question 1

Will the Commissioner exercise his discretion to extend the 2-year period under section 118-195 of the Income Tax Assessment Act 1997 for a property situated in Australia?

Answer

Not applicable.

Question 2

Did Person 1, Person 2, Person 3 and Person 4 own the property from the acquisition date?

Answer

Yes.

Question 3

Did Person 1, Person 2, Person 3 and Person 4 have a capital gains tax (CGT) event when the property was sold?

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

The property was the matrimonial home of Parent 1 and Parent 2, who were the parents of five children.

On purchase of this property it was registered in joint title in the names of four of the children, being:

•         Person 1

•         Person 2

•         Person 3

•         Person 4.

A fifth child was not a joint owner of the title to this property.

The parents migrated to Australia in the late 19XX's. They initially lived with a child at a property in another suburb.

Later the parents obtained Australian citizenship, after which they began actively looking for a property to be their matrimonial home.

While in negotiation to sell a property in Country A they exchanged contracts for the purchase of their home. The parents funded a cash deposit for this purchase.

Pursuant to a power of attorney, Person 3 entered a contract to sell their first property in Country A. Person 3 then transferred funds from the sale to a joint bank account of Persons 1 and 2. The transferred funds were derived from the proceeds of the sale of the parents first house as well as the remaining balance of the parents savings account.

The parents needed a bridging loan to fund the purchase of the property while they awaited the sale of another property in Country A, the second property. This second property was owned by Parent 2 and a relative as tenants in common in equal shares.

As the parents did not have incomes in Australia, they relied upon the borrowing capacity of Persons 1 to 3 as they were employed. This allowed them to arrange a bridging loan for the property with a mortgage on this property as security for the loan.

Later Parent 2 sold their interest in the other property. Person 3 handled the sale on behalf of the parents under a power of attorney. Person 3 then remitted the sale proceeds to the same joint account for Persons 1 and 2 and these funds were used to substantially repay the bridging loan.

The unpaid balance of the bridging loan was eventually repaid by the parents several years later.

The Children understood their parents' intention at that time as being -

1.    The parents would live in the property as their matrimonial home, and

2.    In agreement with the children, after they died the four siblings would sell the property and divide the proceeds equally between the five siblings "as if the sale proceeds were part of the estate of the survivor between the two of them".

The purchase price of the property had been fully financed by the parents via cash, the sale proceeds of both properties in Country A and a bridging loan, which loan was then repaid by the parents.

The property was the matrimonial home and principal place of residence of the parents until they passed away.

During their occupation of the property at least one child and their respective families had at various intervals resided at the property with their parents to take care of them. Under such living arrangements they shared household expenses with the parents, including but not limited to council rates, utilities and capital expenditure.

The property was not used for any income producing activity.

The property was sold by auction. It has settled and the sale proceeds were divided equally between the five siblings. While there was a discrepancy in these payments, this related to certain offsets between siblings regarding certain medical expenses of their late parent and other miscellaneous expenses. The discrepancy was also attributable to one sibling absorbing all withholding taxes deducted by lawyers.

There was no written trust deed or document to document the above arrangements between the parents and their children.

The parents' respective wills do not mention the property or any other specific asset. Their wills state that the estate would pass to the surviving spouse and then grandchildren. The children are not named as beneficiaries of the wills. Two children are named as executors.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs with the disposal of a CGT asset. A CGT event A1 may arise when property is sold.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

To prove that a different equitable interest exists, there must be evidence that a trust has been established - such that one party is taken merely to hold their interest in the property for the benefit of the other.

Trusts may be of three kinds: constructive, resulting or express. There are limited circumstances where the legal and equitable interests in an asset are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title.

Express Trust

An express trust is one intentionally created by the owner of property in order to confer a benefit upon another. It is created by express declaration, which can be effected by some agreement or common intention held by the parties to the trust.

For an express trust to be created it is necessary that there is certainty of the intention to create a trust, subject matter and the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the creation or transfer of interests in land except if evidenced in writing.

Constructive Trusts

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is dependent upon the order of the court.

Resulting or implied trusts

On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price.

A resulting trust arises by operation of law and falls into two broad categories. One such category is where someone purchases property in the name of another (Calverley v Green). A trust is presumed in favour of the party providing the purchase money.

If an individual purchases and then pays for a property, but legal title is transferred to another person at their direction, the presumption of a resulting trust arises - the property is held in trust for them. The law presumes that the purchaser, as the person providing consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the others name.

However, there are instances where this application may not apply. This is where the property is transferred to the purchaser's immediate family such as a spouse or a child. In such circumstances, the presumption of a resulting trust is replaced by the 'presumption of advancement'.

The rebuttable presumption of advancement deems the purchaser to have prima facie intended to advance the interests of the family members (i.e. an absolute gift).

Presumption of Advancement

A presumption of advancement is an equitable principle where a person puts property in the name of a spouse, child or other person. The presumption only applies to transfers and purchases made by people who stand in particular relationships, such as parents and their children.

Under a presumption of advancement, the property is transferred with the intention of transferring both the beneficial interest in the property as well as the legal title. The parties hold their equitable interests in the property in the same proportions as their legal interests.

In Calverley v Green, three important principals in relation to the presumption of advancement Gibb CJ found:

•         Where one party purchases property in the name of the other, it will be presumed that the first party did not intend the other to take a beneficial interest unless there is such a relationship between the parties as gives rise to a presumption of advancement.

•         The sort of relationship where the presumption will arise is where the relationship is such that it is more probably than not that a beneficial interest was intended to be conferred.

•         The presumption of advancement may be rebutted by evidence of the actual intention of the purchaser at the time of purchase. If two parties have contributed to the purchase and the legal interest does not reflect the proportions of their contributions, the intentions of both parties at the time of purchase are important.

The onus of rebutting the presumption of advancement lies with the party who is considered as having gifted the property to another (usually the purchaser). Evidence is required that demonstrates that the purchaser did not intend the property to be a gift to the other party.

In Commissioner of Taxation v Bosanac (No 7) the argument of a resulting trust versus the presumption of advancement was discussed at length. The court outlined the following principles:

•         Although it is referred to as a presumption of advancement, the dominant approach in Australia is that it is strictly not a presumption.

•         Rather it is a description of certain circumstances, being the existence of particular relationships, where the presumption of a resulting trust does not arise.

•         Generally, the court will look to the dealings, documents and communications at the time of the purchase to determine whether there was intention to retain a beneficial interest. However, evidence of the dealings between the parties after the time of purchase may be a relevant factor.

Conclusion

In this case, the parents purchased a property and did not register the property in their own names. Instead, they registered the property in the names of some of their children. The children did not contribute to the purchase of the property. They did not pay the mortgage or provide for the deposit.

No documentary evidence was provided that the property was held in trust for the parents. With the absence of a declaration of intention an express trust cannot be held. Furthermore, there is no court order stating a constructive trust has arisen.

Instead, the facts demonstrate that the parents paid for the property, but the legal title was transferred to another. Therefore, in the first instance, the presumption of a resulting trust arises.

However, the presumption of a resulting trust is rebuttable where specific relationships exist. In this case, the fact the property was registered in the names of the children of the purchaser is a rebuttal of the presumption of a resulting trust. Instead, there is a presumption of advancement.

Can the presumption of advancement be rebutted on the evidence?

To rebut the presumption of advancement there is a requirement to consider the facts and assertions provided by the applicants.

As the purchasers are deceased, and there exists no documented reasoning for their decisions, any rebuttable evidence can only be drawn from evidence provided by the children.

According to the children, the reason for the registration of the property in the name of the children include:

•         the parents wished that they would sell the property and divide it equally amongst the five siblings once they died and

•         the other sibling was not yet an Australian resident at the time of property registration.

Other relevant evidence includes the fact the property was not itemised in either parents' will, and the children are not named as beneficiaries of the estate. The wills state the assets of the estate go to the surviving spouse, and thereafter the grandchildren. Whilst the children are not named as beneficiaries, two of the siblings are executors of the estate.

This indicates the property had purposefully been omitted as an asset of the estate. Furthermore, the children have sold the property and kept the proceeds (i.e. as opposed to including it in the estate and having it distributed per the will). This would indicate the parents gifted the property outright to the children - it was not meant to go into the asset pool of the deceased estate and distributed accordingly.

Consequently, for the children who (as a result of the presumption of advancement) held both legal and beneficial ownership, the sale of the property has triggered a CGT A1 event.

As such, the question of whether Section 118.195 applies does not arise as the sale of this property is a CGT event and should be reported as taxable capital gains.

For the child who is not on the title, the subsequent receipt of part of the sale price does not attract CGT.

As such, this child is not obliged to report any capital gain.