Edited version of private advice

Authorisation Number: 1052146771231

Date of advice: 18 August 2023

Ruling

Subject: CGT - legal and beneficial ownership

Question

Are you liable to declare capital gains tax (CGT) in relation to the sale of your property in your income tax return?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

XX XXXX 20XX

Relevant facts and circumstances

Your parents purchased a property. Your parents did not use a mortgage to purchase the property.

The property was purchased before you were born.

The property required to assist your ill parent.

Your parents did not have sufficient financial stability or borrowing capacity to acquire a loan to pay for the renovations.

The property was transferred to you by your parents and the title was put in your name and your spouse's name.

The property was transferred to you for the purpose of acquiring a loan through the property equity to renovate the dwelling to assist your parents to continue living in the property.

Prior to XXXX you resided at the property, however after XXXX you no longer lived at the property. You have stored possessions at the property.

You did not incur any expenses of ownership of the property (including electricity and water) after the property was transferred to you.

There was no written agreement or trust deed made between you and your parents in XXXX regarding how you would deal with the property.

The renovation loan was taken out with a bank in the names of you and your spouse.

You do not know if you paid off the renovation loan, but you believe that if you did, your parents would have reimbursed you. Several months after the renovation loan was taken out, most of the renovation money was paid back. The renovation loan was paid off within a short period of time.

Your father passed away in XXXX.

Your parent has been in a nursing home since XXXX.

You have power of attorney over one of your parent's affairs.

The property was never used for income producing purposes and remained vacant when your parent entered the nursing home.

You have provided a copy of your father's Will (before the property was transferred to you) and your mother's Will.

Neither of the Wills make any specific reference to the property.

Your late father's will left the whole of his estate to your mother.

Your mother's Will states that the whole of her estate is to be split several ways.

There was no other written agreement regarding the property, including information relating to any beneficial interest, when the property could be sold or how the sale proceeds of the property were to be split.

You facilitated the sale and put it up for auction and did not use a real estate agent.

The sale contract for the property was signed on XXXX and settlement was on XXXX.

In your XXXX tax return you declared the capital gain from the property and used the 50% CGT discount.

The sale price was $X. You retained an amount to cover the CGT payable on the sale and distributed the net proceeds of sale between yourself and your other siblings. You received $X and your other siblings received $X each.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs with the disposal of a CGT asset. A CGT event A1 may arise when property is sold.

When considering the sale of property, an important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property because any capital gain or loss applies to the owner. This is usually the legal owner of the property. However, in some instances where the legal and beneficial owners are not the same, the CGT provisions will attach to the beneficial owner.

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. TR 93/32 Income tax: rental property - division of net income or loss between co-owners sets out the principle that equitable interest is presumed to follow the legal interest and the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same.

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 effected 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, three important principals in relation to the presumption of advancement Gibb CJ found:

• 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 probably than not that a beneficial interest was intended to be conferred.
• The presumption of advancement may be rebutted by evidence of the actual 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 circumstances

In this case, your parents purchased the property and registered it in their own names. They transferred (or as you provide, gifted) the property to you and your spouse. The property was never under mortgage, and you did not contribute the purchase price of the property. You and your spouse took out a loan in your names for the renovation loan. You provided that you unlikely made any payments to the renovation loan, or if you did your parents would have paid it back.

No documentary evidence exists that provides the property was held in trust for your parents or your siblings. A trust deed does not exist and while an oral agreement can imply a trust, the relevant State Property Law Act provides that the creation or transfer of interests in land, including where those interests are equitable interests, must be evidenced in writing. With the absence of a written declaration of intention an express trust cannot be held. Furthermore, there is no court order stating a constructive trust has arisen. Instead, the facts demonstrate that your parents paid for the property, but the legal title was transferred to another. Therefore, in the first instance, the presumption of a resulting trust arises.

However, as the property was transferred from your parents to you (immediate family), the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (i.e. an absolute gift). That is, it is presumed here that unless evidence indicates otherwise, your parents transferred their legal interest in the property to you and also intended on transferring their beneficial ownership in the property to you as well.

The fact that you sold the property and kept some of the proceeds as opposed to including it in the estate and having it distributed as per the wills when relevant would indicate your parents gifted the property outright to you - it was not meant to go into the asset pool of the deceased estate and distributed accordingly, even if the result would have been the same. Further, the lack of written evidence at the time of your acquisition or after acquisition suggests that the presumption of advancement cannot be rebutted.

We are of the view that as a result of the presumption of advancement, you held both legal and beneficial ownership from the acquisition date, and the sale of the property has triggered a CGT A1 event. Therefore, you are liable to declare the capital gain or loss in your tax return. As the legal title was not transferred to your siblings, they would not incur a CGT liability.

The obligation to declare the CGT event arises under section 104-10 of the ITAA 1997, and there does not exist a general discretion for the Commissioner to disregard this CGT event.