Edited version of private advice

Authorisation Number: 1052044511720

Date of advice: 8 December 2022

Ruling

Subject: CGT - legal versus beneficial ownership

Question

Are the Taxpayers the owners of the Property that will be disposed of for the purposes of the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997?

Answer

Yes

This private ruling applies for the following periods:

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayers (Taxpayers) live in City A.

In early 20XX, the Taxpayer's child (child) moved to City B for work opportunities.

The child had accumulated savings and a previous loan approval from the bank and thought they had the financial capacity to acquire a property to live in.

The child commenced the process of finding a suitable property and found a property in City B (the Property). The purchase price was $X.

The Property is a two level home with two living areas. Upstairs is the main residence with X bedrooms. The downstairs area provides a flat with a separate kitchen, bathroom, laundry and separate private entrance (Flat).

The savings plus the previous loan approval from the bank would almost cover the purchase price of the property. As the previous loan approval had lapsed, the child approached the bank to obtain a new loan.

A letter from the bank dated XX/XX/20XX addressed to the child shows the child was approved for a conditional home loan for $X. The approval expiry was XX/XX/20XX.

Rather than lose the property, the child approached the Taxpayers with a view of the taxpayers purchasing the property for the child in their own names as they had the borrowing capacity.

The Taxpayers purchased the property for $X as joint tenants. The contract purchase date is XX/XX/20XX and settlement occurred on XX/XX/20XX.

To fund the purchase, the taxpayer's obtained a loan for $X. The shortfall, stamp duty and legal expenses were paid for from their personal savings.

The property was purchased based on the following arrangement:

•         The child would live in the property

•         The child would be responsible for all costs incurred in maintaining the property

•         The Taxpayer's ownership interest in the property would be transferred to the child as soon as the child had the financial capacity to acquire the property

•         The Taxpayer's would not meet the loan payments on the property

There is no trust deed formalising the arrangement.

The child has lived in the property since acquisition and started making the payments on the Taxpayer's loan.

The child has paid the outgoings on the property including council rates, utilities, one plumbing issue and pool maintenance. The child maintains the garden and other regular maintenance of the property.

Shortly after settlement, the flat was advertised for rent by the child through a real estate agent.

The flat is leased for XX months at $X per week. The lease is in the name of the Taxpayers.

The tenant is an unrelated third party. The tenant does not go into the main residence.

Shortly after settlement, the child and the Taxpayers realised the child had made a mistake on the original loan application to the bank. The bank reappraise the matter.

Email correspondence from the bank to the Taxpayers dated XX/XX/20XX says if a formal lease is in place, we can take the income into consideration. If we can consider the income and the child has no rental expense anymore and resides in the property, then his potential borrowing capacity increases to $X approximately.

The Taxpayers realised they had made a mistake on acquiring the property in their names. The Taxpayer's asked their solicitor if the title deeds could be in the name of their child. They were advised by their solicitor this was not possible as the transfer had been registered with the Land Titles Office.

The Taxpayers have never lived in the property.

The Taxpayers will transfer their legal ownership in the property to their child in the income year ending XX/XX20XX.

The balance of the Taxpayers loan is approximately $X. The Taxpayers plan to reduce the loan to $X. When the property is transferred to the child, the child will take out a loan for $X to enable discharge of the Taxpayer's loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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 Section 109-5

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 acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The property is a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. A CGT event A1 happens if there is a disposal of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of 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 disposal of the 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 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, 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, Gibb CJ found three important principles in relation to the presumption of advancement:

•         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 probable than not that a beneficial interest was intended to be conferred.

•         The presumption of advancement may be rebutted by evidence of contrary 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.

Application to your situation

In this case the Taxpayers purchased the property and registered the property in their own names as joint tenants. The Taxpayers took out a loan and used their personal savings to cover the purchase price, stamp duty and legal expenses.

No documentary evidence was provided to establish that the property was held in trust for the taxpayer's child from the time it was purchased. Therefore, there are no grounds to consider the creation of an express trust. There is also no court order to establish the creation of a constructive trust.

As the contributions to the purchase cost of the property are proportionate to the legal interests in the property, a presumption of resulting trust has not arisen. As it is considered a resulting trust does not exist, there can be no presumption of advancement as there is nothing to rebut.

In this case the persons who advanced the purchase monies for the property, being the Taxpayers, also hold the property in their names. The property is not held in another name, such as their child. Therefore, it is assumed that the beneficial interests reflect contributions to the purchase cost of the property.

To determine if the child had a beneficial interest in the property and the Taxpayers only the legal interest, the facts and circumstances surrounding the property's purchase were considered in light of the Taxpayer's relationship to their child. It is the intention when the property was purchased and the evidence of the dealings between the parties after the time of purchase that need to be considered.

It is stated that the child moved to City B for work purposes. The child found a property to buy and thought he had the financial capacity to acquire the property to live in. Rather than lose the property, the child approached the bank but the loan approved was not sufficient to cover the purchase. It is stated the child asked the Taxpayers to purchase the property in their names as they had the borrowing capacity.

A family arrangement was made where the child moved in on the basis that: the child would live in the property, be responsible for all costs incurred in maintaining the property, the property would be transferred to the child as soon as he had the financial capacity to acquire the property and the Taxpayers would not meet the loan payments on the property.

We acknowledge the child's intention to buy a property to live in. However, we consider the actions and evidence from the time of purchase indicate the taxpayers are both the legal owners and beneficial owners of the property. The key factors in making this decision are:

•         The child's name was not registered on the property title along with the Taxpayers.

•         The child did not contribute monies to the purchase of the property

•         The Taxpayer's entered into a lease agreement for the flat and earned rental income from the property.

•         There is no evidence the child would be approved a loan for $X in order for the Taxpayers to discharge their loan.

•         No documentary evidence was provided to establish that the property was held on trust for the child from the time it was purchased.

Therefore, when the Taxpayers transfer XXX% ownership interest to their child, CGT event A1 will be triggered.

The Taxpayers will be entitled to reduce any capital gain they may make by the 50% CGT discount as they held the property for more than 12 months.