Edited version of private advice

Authorisation Number: 1052042721837

Date of advice: 10 October 2022

Ruling

Subject: Pre-CGT asset

Question

Did you acquire your interest in the property before 20 September 1985 for the purposes of paragraph 104-10(5)(a)?

Answer

No. Any capital gain you made from the sale of the property is not disregarded pursuant to paragraph 104-10(5)(a).

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

MM YYYY

Relevant facts and circumstances

You are the son of XX (your father).

Your father purchased a property (the property) in the 19YY's.

Your father departed Australia to live and work overseas in the early 19YY's.

Your father's children resided on the property at various stages in their life, including putting the property to use to derive income from time to time between the late 19YY's and early 19YY's.

Your father's children made capital improvements to the property between the late 19YY's and early 19YY's.

From the early 19YY's one of your siblings and their family moved to the property and paid all of the property's outgoings.

Before 20 September 1985, you and your father discussed the transfer of the property to all the children and that your father would instruct a solicitor to prepare the transfer documents.

In correspondence dated before 20 September 1985, your father refers to the property and his intention to give the property to his children. Your father signed a deed but you do not have a copy of this deed.

The transfer form for the property was signed by your father in 19YY. The transfer of the property was formally registered in 19YY.

The property was transferred for nil consideration.

The ownership interests that were registered correspond to your father's intentions.

The delay in transferring the property were a culmination of a number of factors, primarily being:

•                     Inaction of the part of the law firm instructed to effect the transfer.

•                     Communication difficulties experienced by your father as he was living and working overseas.

You and the other owners of the property signed a contract to sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 104-15

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 109-5

Income Tax (Transitional Provisions) Act 1997 section 109-5

Income Tax Assessment Act 1936 sections 160M and 160U

Reasons for decision

Section 102-20 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).

You have entered into a contract (together with others) to sell the property. The relevant CGT event is A1 Disposal of a CGT asset (section 104-5).

Subsection 104-10 contains the provisions relevant to CGT event A1. 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 (subsection 104-10(2)).

Paragraph 104-10(5)(a) states that a capital gain or capital loss is disregarded if "you acquired the asset before 20 September 1985".

'Acquired' is defined in section 995-1:

'(a) A CGT asset: you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109 (including a provision listed in Subdivision 109-B)...'

You acquire a CGT asset when you become its owner and the time when you acquire the asset is when you become its owner (subsection 109-5(1)). Subsection 109-5(2) has specific rules for the circumstances in which and at the time in which, you acquire a CGT asset as a result of a CGT event happening.

CGT event A1

CGT event A1 happens when an entity disposes of a CGT asset to you. When CGT event A1 happens, you acquire the asset when the disposal contract is entered into or, if none, when the entity stops being the asset's owner (subsection 104-10(3)).

For CGT event A1 to happen you do not necessarily require a change in both legal and beneficial ownership; a change in beneficial ownership will suffice (Ellison v Sandini Pty Ltd ; FC of T v Sandini Pty Ltd 2018 ATC 20-651 (Sandini)).

It was your father's intention to gift the property to you and your siblings. The property was transferred for nil consideration and is consistent with the property interests as stated in your father's correspondence before 20 September 1985. Your father did not transfer the property under a contract, but instead, your father stopped being the owner of the property.

For a change of ownership to happen, the donor must take all steps necessary to enable legal transfer of the asset to take place (Corin v Patton (1990) 169 CLR 540). Where there is a gift of land, the time of disposal under section 104-10(3)(b) is the time when the donor has done everything which is necessary to enable the legal transfer to be effected by the donee without any further action on the part of the donor.

In Sandini, Jagot J referred to obiter dicta in Corin v Patton, "... there can be an effective voluntary equitable assignment of property transferable at law when the donor has done everything that only the donor has the power to do to transfer the legal estate, even if actions remain undone that lie within the power of the donor to do to advance the transfer but that can equally well be done by someone else ".

In your case, the transfer document was signed by your father in 19YY and the registration happened in 19YY. We consider that CGT event A1 applied to your father in 19YY. It was at this time that your father did all that he needed to do to transfer the property to you and your siblings. The registration was a mere formality. Accordingly you acquired your interest in the property on this date.

CGT event B1

CGT event B1 happens when you enter into an agreement to obtain the use and enjoyment of a CGT asset. When CGT event B1 happens, you acquire the asset when you first obtain the use and enjoyment of the asset (unless title does not pass to you at of before the end of the agreement).

Subsection 104-15(1) states:

'CGT event B1 happens if you enter into an agreement with another entity under which:

(a)           the right to the use and enjoyment of a CGT asset you own passes to another entity; and

(b)           title to the asset will or may pass to the other entity at or before the end of the agreement.'

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

CGT event B1 may happen where an agreement is made with a relative to use and enjoy a property for a specified period, after which title to the property passes to them. However, 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 (Tax Determination TD 1999/78 and ATO ID 2005/216). Furthermore, subsection 104-15(1) contemplates the existence of only one agreement for it to operate.

From your father's correspondence before 20 September 1985, it was your father's intention to gift the property to you and your siblings, or alternatively, to sell the property and distribute the proceeds to his children. It appears your father had little interest in the property whilst working and living overseas, including not paying the associated rates and taxes.

Whilst you and your siblings had use and enjoyment of the property, including carrying on a number of business activities, we consider this personal and business use was undertaken under a loose family arrangement rather than under any binding agreement between you and your father. You and your siblings used the property during different time periods and for different reasons, both before and after your father moved overseas. Improvements you and your siblings made on the property commenced prior to your father going overseas and prior to discussions with your father suggesting he wanted to transfer the property to you and your siblings.

There is mention of a deed and there were instructions by your father in relation to the transfer of the property before 20 September 1985. However, this is not the same as an agreement specifying the entitlement and period of time for use and enjoyment of the property and when the title will pass. Rather, the evidence acknowledges your father's intentions to gift the property to you and your siblings in accordance with specified interests. It is not accepted that the parties reached a consensus in relation to the property before to 20 September 1985 (McDonald & Anor v FC of T 98 ATC 4306).

Whilst the property transfer was delayed, albeit due in part to the solicitor's actions, this is not sufficient to change what in substance is an agreement by your father to gift the property and not one that was for use and enjoyment for which title passes.

We consider that CGT event B1 does not apply because there was no valid agreement for use and enjoyment for which title will or may pass, albeit that title to the property ultimately passed to you and your siblings. As CGT event B1 did not happen, there is no impact on your acquisition date established by CGT event A1 happening for your father.

CGT event E1

CGT event E1 happens when an entity creates a trust over a CGT asset by declaration or settlement. When CGT event E1 happens, you acquire the asset when the trust is created (section 104-55).

If CGT event E1 happens before 12 January 1994, then section 109-5 of the Income Tax (Transitional Provisions) Act 1997 applies. The question of whether those circumstances resulted in an acquisition of an asset by the trustee is determined under the Income Tax Assessment Act 1936 (ITAA 1936) at that time.

Section 160M of the ITAA 1936 dealt with 'What constitutes a disposal or acquisition' and included 'a declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee' (paragraph 160M(3)(a) of the ITAA 1936). Section 160U of the ITAA 1936 dealt with the 'Time of disposal and acquisition', including where the asset was acquired or disposed of otherwise than under a contract (subsection 160U(4) of the ITAA 1936).

A trust is created by declaration when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property (Kafataris v Deputy Commissioner of Taxation [2015] FCA 874 at [26]). A beneficiary will be absolutely entitled to a trust asset as against the trustee when the beneficiary is in a position to call for the immediate transfer of that asset regardless of legal disability (Taras Nominees Pty Ltd v FCT [2014] FCA 1; (2014) 94 ATR 751).

Your father had the legal title of the property and there is no trust deed or other sufficient documentation to show that a declaration of trust was made by your father in favour of you and your siblings, as the beneficial owners.

From your father's correspondence before 20 September 1985, it showed that your father's intention was to absolutely gift the property to his children, or alternatively, to sell the property and distribute the proceeds to his children. There is no indication that your father wanted to retain legal ownership of the property as trustee. In fact, the documents you have provided are consistent with your father's intention to gift the property, including signing transfer documents.

The happening of CGT event E1 requires a 'declaration of trust', rather than attainment of particular equitable rights for beneficiaries. Whilst the intention to gift may have been established there are further requirements that were not met for there to have been a 'declaration of trust'. These are certainty of intention to create a trust, terms, subject matter and objects. There was merely an intent for your father to transfer ownership of the property rather than to hold the property on trust for a period of time. Your father never intended to make a declaration of trust.

We consider that CGT event E1 does not apply because there is insufficient evidence of a declaration of trust occurring before 20 September 1985.