Edited version of private advice

Authorisation Number: 1052044202293

Date of advice: 8 November 2022

Ruling

Subject: Capital gains tax

Question

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

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

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

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

Your child moved into The Property as soon as practical following settlement.

You have never resided in The Property.

Your child lived in The Property and paid the mortgage and all other costs. No financial assistance at this time was provided by you.

Your child 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 child.

The statement for the XXXX account that you have provided, shows that mail for this account was sent to your address.

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

You have stated that at no time did you receive any income or pay any expenses relating to the rental property. If a tax bill resulted, then you would be reimbursed by your child.

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 bank account. This is evident from the fact that the rental deposit amounts vary.

The Property was sold on the XXXX.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 106-50.

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 you and your child 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 child 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 you didn't intend to benefit nor did you 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, your child and you 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 child) and you both have declared rental income during the period that The Property was rented out. This would indicate a benefit to both your child and you.

Therefore, any capital gain or capital loss you made from the sale of your interest in the property cannot be disregarded and must be included in your income tax return in the relevant income year.

As The Property was held for over 12 months, there is a capital gains tax (CGT) discount of 50%, which means that you pay tax on only half the net capital gain on that asset.