Edited version of private advice

Authorisation Number: 1052044196021

Date of advice: 8 November 2022

Ruling

Subject: Capital gains tax

Question

Will Capital Gains tax be payable on your 50% share on the sale of The Property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

XXXX (your parent) and you purchased a property at XXXX (The Property), as joint tenants on XXXX.

Your parent and you are both registered on the Title Deed.

You moved into The Property as soon as practical on settlement.

Your parent has never resided in The Property.

You lived in The Property and paid the mortgage and all other costs. No financial assistance at this time was provided from your parent.

You moved out of The Property and began renting it out on XXXX.

All income from the rental property was paid into a XXXX account that was held in joint names with your parent.

The statement for the XXXX account that you have provided, shows that mail in relation to the account was sent to your parent's address.

Your parent and you included your split of any rental income in your respective income tax returns.

You have stated that at no time did your parent receive any income or pay any expenses relating to the rental property. If a tax bill resulted, then you would reimburse your parent to ensure she was in no way affected by the rental property.

All rates and water charges were paid by the real estate agent from the gross rent received. The net amount was then deposited into the XXXX account. This is evident from the fact that the rental deposit amounts vary.

You are nominating this property as your main residence under the 6-year absence rule.

You have not treated any other residence as your main residence during the relevant income years.

The Property was sold on the XXXX.

The Settlement Adjustment Sheet, XXXX, provided by XXXX, which was sent to your parent's address, stated that proceeds from the sale were to be deposited solely into your account, following a directive from your parent sent via email on XXXX.

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 106-50

Income Tax Assessment Act 1997 Subdivision 118-B

Income tax Assessment Act 1997 Subsection 118-110(1))b)

Income Tax Assessment Act 1997 Section 118-190

Income Tax Assessment Act 1997 Subsection 118-145(1).

Income Tax Assessment Act 1997 Subsection 118-145(2)

Income Tax Assessment Act 1997 Section 118-170

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 capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner that will have a CGT event upon sale of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust.

When considering the disposal of a 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 asset.

We consider in circumstances where the beneficial ownership and the legal ownership are not the same, there must be evidence that the legal owner holds the property on a trust for the beneficial owner. There must be a valid trust over the property and that the equitable owner is entitled to benefit from the property.

In your case, the Title to The Property showed that your parent and you each legally owned a 50% share of The Property.

Legal v beneficial ownership

Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated. A beneficial interest refers to a person or entity who is beneficially entitled to the income and proceeds from such property. In some cases, an entity may hold a legal ownership interest in property for another individual in trust.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset. Where the legal and beneficial ownership of an asset is different, a trust situation occurs. If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner.

An express trust is one intentionally created by the owner of the property in order to confer benefit upon another. It is created by an express declaration, which can be affected 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, certainty of the subject matter of the trust and certainty as to the object of the trust.

While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. The declaration does not necessarily need to be evidenced in writing at the time that the trust was created, it may be written at a later date.

Your parent and you are both listed as legal owners of The Property. There is no formal trust deed in place in this situation to alter the position that you both hold legal and beneficial ownership. In addition, you have not provided any information to demonstrate the existence of an informal trust. Although you state that your parent didn't intend to benefit nor did they receive any funds from the sale of The Property, these factors don't support the existence of an informal trust.

As there was no written evidence to the contrary, you and your parent are considered to each own 50% of The Property in accordance with the Title deed. Additionally, as there is not a valid trust, the requirements of section 106-50 of the ITAA 1997 have not been met.

You have also received rental income into a joint account (held with your parent) and you both declared rental income during the period that The Property was rented out. This would indicate a benefit to both your parent and you.

Main residence exemption

Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence.

To get the full exemption from CGT:

•         The residence must be your main residence for the whole period that you owned it (subsection 118-110(1))b) of the ITAA 1997), and

•         You must not have used the dwelling to produce assessable income (subsection 118-190 of the ITAA 1997)

Continuing main residence status after dwelling ceases to be your main residence

In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it, for example it is left vacant or rented out (section 118-145(1) of the ITAA 1997). You can only make this choice for a dwelling that you have first occupied as your main residence.

Rules that limit the main residence exemption - spouses having different main residences

Section 118-170 of the ITAA 1997 deals with a situation where, during a particular period, you have a main residence and your spouse has a different main residence.

Section 118-170 of the ITAA 1997, states:

(1) If, during a period, a dwelling is your main residence and another dwelling is the main residence of your spouse (except a spouse living permanently separately and apart from you), you and your spouse must either:

(a) choose one of the dwellings as the main residence of both of you for the period; or

(b) nominate the different dwellings as your main residences for the period.

(2) If you nominate the different dwellings as your main residences for the period, you split the exemption in accordance with subsections (3) and (4).

(3) If your interest in the dwelling you chose was not, during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your main residence during the period. Otherwise, the dwelling is taken to have been your main residence for half of the period.

(4) If your spouse's interest in the dwelling your spouse chose was not , during the period, more than half of the total interests in the dwelling, the dwelling is taken to have been your spouse's main residence during the period. Otherwise, the dwelling is taken to have been your spouse's main residence for half of the period.

The nomination rule applies to each home the spouses own whether or not they have sole ownership or own the home jointly (either as joint tenants or tenants in common). That is, there is no requirement that they both have an interest in the nominated dwelling.

For each spouse to make a nomination, each dwelling must have separately qualified as the main residence of the respective spouse during the same period. In other words, a nomination will not apply where the spouses merely own 2 dwellings; each must have qualified as the main residence of a spouse for a particular period.

This rule applies also if you choose to treat a dwelling as your main residence when you no longer live in it, and this choice results in your having a different main residence from your spouse for a period.

In your case, if your spouse and you are to nominate different dwellings as your main residence for the relevant period and your interest in your main residence is less than 50%, a full main residence can be applied to your 50% share of The Property.