Edited version of private advice

Authorisation Number: 1052106637538

Date of advice: 12 April 2023

Ruling

Subject: Legal vs beneficial ownership

Question

Is the sale of your ownership interest in the property exempt from capital gains tax (CGT)?

Answer

No.

This ruling applies for the following period:

The income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In DD/YYYY, your parent (the deceased) and sibling returned to Australia, after living overseas for over X years.

Upon the deceased's return to Australia they had minimal ability to speak English, minimal employment opportunities and insufficient funds to purchase a home outright.

Several months later, the deceased wanted to purchase their own home and was advised by the bank that although they had a substantial deposit, they would need a guarantor before the bank would approve a housing loan of approximately $XX.

After 20 September 1985, the deceased purchased the dwelling on the property (the property) for $XX.

You acted as guarantor and were listed on the property title as joint proprietor.

You do not have evidence that you were guarantor of the property only. The deceased did not retain any relevant documentation.

You did not enter into a written agreement with the deceased concerning the ownership of the property, as you were initially unaware that the property was in the name of yourself and the deceased as joint tenants.

You did not contribute to the deposit for the purchase of the property.

From the time the deceased acquired the property, you never:

•         Listed the property as an asset on any of your financial bank statements or lending applications

•         Negatively geared this property, or

•         Obtained a financial gain from the property.

The deceased saw a solicitor regarding changing their will in MM/YYYY. At this time, you discovered that you were named as joint owner of the property with the deceased. The deceased's solicitor advised that they were unable to complete their last will and testament with the desired outcome due to the property's joint tenancy ownership.

After finding that you were joint owner of the property, you immediately commenced steps to change the title of the property from joint tenants to tenants in common with two equal undivided shares.

You received legal advice that changing your ownership of the property with the deceased from a joint tenancy to tenants in common would ensure that you each had a half interest in the property, which upon your respective deaths could be distributed to the beneficiaries of your respective wills.

You were advised that severing the joint tenancy and becoming tenants in common in equal shares would enable the deceased to will 50% of the property to your sibling and the other 50% would automatically transfer to you.

On DD/MM/YYYY, you provided authority for this amendment to the property title and the deceased subsequently completed their will, such that the whole of the deceased's estate be left to your sibling.

From the time the deceased acquired the property until their passing, the deceased lived in the property on their own and paid all property expenses.

The property was the deceased's only residence.

The deceased passed away on DD/MM/YYYY.

The deceased never used the property to produce assessable income.

The property was situated on less than two hectares of land.

Probate of the deceased's will was granted to your sibling.

After the deceased's passing, the property remained vacant for several months.

Your sibling then moved into the property, as they did not own a house and was previously paying rent. This gave your sibling the opportunity to save for a deposit and subsequently obtain a housing loan, enabling them to purchase your 50% interest in the property.

At no time was the property leased, nor did you benefit from it financially, after the deceased's death.

Proceedings were commenced with your solicitors to sell your interest in the property to your sibling around MM/YYYY.

On DD/MM/YYYY your solicitors sent you a letter confirming the settlement date. Settlement was delayed due to the bank.

Settlement was affected on DD/MM/YYYY, and your sibling retained the property in their sole name.

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 112-20

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss when a CGT event happens to a CGT asset that you have an ownership interest in. For this reason, it is important to establish who the owner of a CGT asset is at the time a CGT event occurs.

CGT event A1 occurs when there is a change in ownership of a CGT asset. However, CGT event A1 does not occur if there is only a change of legal ownership and not a change of beneficial ownership.

The legal owner of a property is determined by the property's title, according to the relevant property law legislation in the state or territory in which the property is situated. A beneficial owner refers to a person or entity who is beneficially entitled to the income and proceeds from a property.

In exceptional circumstances, the legal owners of a property may not be the same as the beneficial owners. Where this occurs, there needs to be sufficient evidence to establish that the beneficial owners of the property are different to the legal owners.

Application to your circumstances

You acted as guarantor for the deceased's purchase of the property. Consequently, you were named on the property's title as a legal owner with the deceased as joint tenants.

You explained that:

•         The deceased paid the deposit for the purchase of the property; you did not contribute to the deposit.

•         The deceased lived in the property on their own and paid all expenses on their own, including mortgage, rates and insurance.

•         You never listed the property as an asset on your financial bank statements or lending applications.

•         You never negatively geared the property.

•         You never obtained a financial gain from the property.

You provided water bills, a gas bill, electricity bill and summary of council rates for the property. These bills had pensioner concessions applied, consistent with the deceased being a pensioner and sole occupant of the property.

You explained that you were initially unaware that you were named as joint owner of the property with the deceased. You did not discover that you had an ownership interest in the property until MM/YYYY, when the deceased was seeking to complete their last will and testament.

After this time, yourself and the deceased commenced steps to severe the joint tenancy and become co-owners of the property as tenants in common of two equal undivided shares. This occurred on DD/MM/YYYY.

Based upon the information provided, we accept that from the date the deceased purchased the property and until the joint tenancy was severed on DD/MM/YYYY, it was intended that you did not have a beneficial interest in the property.

When the joint tenancy was severed, you became owner of the property as tenants in common of two equal undivided shares with the deceased. You received legal advice that your property ownership as tenants in common would ensure that yourself and the deceased each had a half interest in the property, which upon your respective deaths could be distributed to the beneficiaries in your wills.

You provided a copy of the deceased's will, which gave the whole of the deceased's estate, both realty and personalty, to your sibling.

On this basis, it is the Commissioner's view that you became legal and beneficial owner of your 50% ownership interest in the property at the time you became co-owner of the property as a tenant in common.

We acknowledge you said you received the funds from the sale of your ownership interest in the property under the deceased's will. While we are empathetic with your circumstances, the legal advice you received demonstrates it was intended that you have control and ownership of your 50% interest in the property at the time you became co-owner as tenants in common with the deceased. Further, the deceased's will did not include a provision regarding your 50% interest in the property. As such, there is insufficient evidence to establish that it was intended, contrary to the legal advice, that you did not beneficially own 50% of the property from DD/MM/YYYY.

As you did not receive your ownership interest in the property or its sale proceeds as a beneficiary of the deceased's will, and you did not use the property as your main residence, there are no provisions in the taxation laws that entitle you to a CGT exemption on the sale of your interest in the property.

Calculating your CGT

Based on the above, you became legal and beneficial owner of your 50% interest in the property at the time you became co-owner as tenants in common with the deceased.

Under section 112-20 of the ITAA 1997, you are taken to have acquired your ownership interest in the property for its market value on DD/MM/YYYY.

Also, because you held your ownership interest in the property for greater than 12 months before selling it to your sibling, you are entitled to apply the 50% CGT discount under Division 15 of the ITAA 1997 to any capital gain you made from the sale.