Edited version of private advice

Authorisation Number: 1052165555355

Date of advice: 9 October 2023

Ruling

Subject: CGT - legal and beneficial ownership

Question:

Will you be liable for any capital gains tax on the transfer of a 50% ownership interest in the Property?

Answer:

No.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You and your spouse (Person A) decided to migrate to Australia from Country X some years after you were married.

During your marriage you and Person A had informally combined funds as you were both working, and expenses were paid indiscriminately as to the legal holder of the account or asset.

You and Person A invested in an Australian company (Company A) to comply with your visa conditions (the Investment) which:

•                     Entitled you and Person A to receive periodic profits; and

•                     Had an option for Company A to buy back the investment at the original price you and Person A had paid on or before a specified date.

You came to Australia in preparation for the migration of your family, with Person A and your children remaining overseas.

Shortly after you arrived in Australia you entered into a contract to purchase a property (the Property).

The purchase contract was entered into solely in your name as Person A was physically unavailable to sign the purchase contract and cross-border contract signing would have been a lengthy and complicated at that time.

The purchase price of the Property was funded using funds from your and Person A's joint accounts, with the remainder being sourced from a mortgage you obtained solely in your name, which was repaid in several years using profits from the Investment and a portion of the money you and Person had received when the Australian company had exercised the buy-back option in relation to the Investment.

By the time the Property was purchase your and Person A's combined finances had commingled for some years and there was no conceivable or rational way of discerning, with any reasonable degree of certainty, whose money had been used to contribute towards the purchase of the Property.

You returned to Country X after the Property was purchased.

Person A resigned from their employment in Country X and travelled to Australia with your children, staying with a friend until settlement occurred.

Settlement on the purchase of the Property occurred.

You executed a General Power of Attorney (POA) after settlement had occurred, with Person A listed as the appointee to be your attorney to exercise the power conferred to them under the POA to do anything on your behalf that you may lawfully authorise an attorney to do, authorising Person A to execute an assurance or other document or do any other act whereby a benefit was conferred on them.

Person A and your children moved into the Property several weeks after settlement had occurred.

You and Person A had both included the Property in your list of substantial assets in the instructions for your respective Wills.

The Property was purchased to be used as your family's home, to be occupied as the primary place of residence by Person A and your children. You planned on staying at the Property during your regular visits to Australian. You hoped to retire to Australia within a few years of the Property being purchased to reunite with your family.

It was your plan and expectation that you and Person A would live at the Property as your primary place of residence for the rest of your lives, with no intention or expectation that the Property would be anything other than the family home.

Person A maintains the Property, attending to any liabilities arising in relation to the Property, using funds from several joint accounts and term deposits to pay for any expenses arising in relation to the Property, in addition to investment returns from shares and XXX rental property and amounts received in relation to the Investment and part of the buy-back option payment.

Person A has continued to reside at the Property until the present time and has not undertaken any employment since their arrival in Australia using the funds from the joint accounts and term deposits to pay for ongoing costs of living for the family in Australia.

Person A had full and unfettered access to all joint assets in Australia which included:

•                     Joint bank accounts; and

•                     The Investment and associated profit distributions.

You stayed at the Property for several weeks each year for a significant number of years after settlement on the purchase of the Property had occurred. The length of your stays at the Property were limited due to your work commitments, and carer responsibilities for your elderly parents, in Country X.

Person A's and your Wills bequeath the residue of your respective estate to each other if the surviving one survives the other by thirty days, after debts, costs, taxes and death duties have been paid. If the deceased is not survived by the other by thirty days, then the residue estate would be distributed to your children in specified percentages.

You are suffering from health issues which will prevent you from travelling to Australia, and/or residing in Australia.

You wish to finalise your financial affairs in Australia, which involves the transfer of a 50% interest in the Property to Person A for no consideration. You will gift the remaining 50% interest in the Property equally to two of your children.

Following the transfers of the interests in the Property, you and Person A will update your Wills to reflect your intentions.

You will transfer the 50% interest in the Property to Person A during the ruling period.

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 section 108-5

Reasons for decision

Capital gains tax

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.

A property is a CGT asset under 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 your interest in a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. It is possible for legal ownership to differ from beneficial ownership.

However, the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and that other person was absolutely entitled to that asset as against the trustee.

In such a case, the transfer of the asset from the other person to the legal owner on trust for the other person is not a transfer of ownership for CGT purposes and no capital gain or capital loss will result. This is because the CGT provisions consider the beneficiary to be the asset's owner, not the legal owner.

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.

In Australia, the principle of indefeasibility operates which is a process of title to real property by registration, by which a person holds title against the world. 'Indefeasible title' is subject to some exceptions, such as equitable rights against the person who holds such a title.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset.

The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) contains guidance on the issues involved where the equitable interest in a property may not follow the legal title.

As stated in paragraph 41 TR 93/32, the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

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.

It is stated in the private ruling application that a resulting trust was created with you holding a 50% beneficial interest in the Property for Person A which we have considered below:

Resulting trusts

A resulting trust comes into existence where a person conveys property to another person with the intention that the person to whom the property has been conveyed is to obtain ownership of the property impressed with a beneficial interest in favour of another person or persons.

On the purchase of real property, a resulting trust may arise where the contributions to the purchase cost of the property are not proportionate to the legal interests in the property.

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.

The intention as to whether a trust arises is entirely one of fact. The High Court in Bosanac v Commissioner of Taxation [2022] HCA 34 (Bosanac case) highlighted that the key question is what inference is to be drawn from the objective facts of the situation to infer intention and whether a resulting trust has arisen.

The Bosanac case involve the following background and judicial history:

•                     Ms Bosanac purchased a property, to be used as the matrimonial home (the Home), in her own name with the deposit being paid via a pre-existing joint loan account in the names of Ms and Mr Bosanac, and the rest of the purchase price was paid via new joint loans in the names of Ms and Mr Bosanac.

•                     Ms and Mr Bosanac moved into the home in late 2006. The couple separated in 2012 or 2013, but they continued to live in the Home until 2015, when Mr Bosanac moved out.

•                     The Australian Taxation Office was a creditor of Mr Bosanac and sought declaratory relief that Mr Bosanac held a 50% equitable interest in the Home through a resulting trust. The ATO argued there was a presumption of resulting trust.

•                     The Federal Court decided there was a presumption of advancement, instead of resulting trust, and the ATO appealed to the Full Federal Court.

•                     The Full Federal Court overturned the Federal Court decision, concluding that because there was no advancement, there was a resulting trust.

•                     The High Court granted Ms Bosanac special leave to appeal the Full Federal Court decision.

The High Court unanimously decided that a resulting trust did not exist, and that the objective intention was for Ms Bosanac to be the sole beneficial owner of the Home. In making their decision, the High Court had highlighted the following key actors:

•                     Mr Bosanac was a sophisticated businessman who must have appreciated that the name in which the property was held had significant consequences.

•                     The Bosanac's had historically purchased and held their matrimonial assets separately and in their own names

•                     The Bosanac's had a pattern, established over time, to take out debt / mortgages in both names and use other properties (often held by the other spouse) as security for the debt

•                     Ms Bosanac was the sole contracting party for the purchase: she made the offer which was accepted by the vendor and there was no reason to think that she was put up to purchase by Mr Bosanac.

There are instances where the presumption of a resulting trust can be rebutted, such as 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'.

Presumption of advancement

A presumption of advancement is a presumption that the contributor intends to give away a part, or all, of their contribution to the legal titleholder, which has the effect that the parties hold their beneficial interests in the same proportions as their legal interests.

It 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 husbands and their wives and parents and their children.

The presumption of advancement is an exception to the presumption of resulting trust so that in cases such as when a husband either provides the purchase price or makes contributions to the purchase price of a property in which the wife is given a legal interest, there is a presumption of advancement, or a presumption that the purchaser intended that the beneficial interest would pass with the legal interest.

However, the presumption of advancement has historically not applied to advances from a wife to a husband where the wife has made the contributions to the purchase price of a property with the husband solely holding the legal interest.

Application to your situation

The Property was purchased with you being recorded as the sole legal owner.

Your health has been deteriorating for some time and you wish to finalise your financial affairs in Australia so that there will be minimal administrative burden on your family upon your passing as well as providing your family with some current benefit. This involves the transfer of a 50% interest in the Property to Person A.

We have taken the following into consideration when making our decision on whether a resulting trust exists in relation to the interests in the Property:

•                     You and Person A wanted to migrate to Australia and to comply with your visa conditions you had jointly invested in the Investment

•                     You came to Australia to purchase a property, with Person A and your children remaining in Country X. The contract of purchase was in your name only due to Person A not being able to be physically in Australia to sign the contract and cross-border signing being lengthy and complicated at that time

•                     Consideration for the purchase price of the Property was funded by joint funds held in your and Person A's bank account and borrowed funds from a mortgage in your name only. Repayments of the mortgage was made using proceeds from the Investment you and Person A had jointly invested in

•                     It is stated that you and Person A have an explicit and expressed mutual understanding that any marital wealth was equally shared between you, irrespective of the legal title, with Person A having absolute and unfettered right to live in the Property as their own, with Person A considering the Property to be yours and theirs.

•                     Person A was granted the power of attorney by you, which gave them authority to deal with assets on your behalf while you were absent from Australia, which doesn't conclusively support that Person A had ownership rights of the assets and additionally would not negate any CGT implications for you on the transfer ofany interest in a CGT asset, or a CGT asset, if you were liable

•                     Person A and your children moved into the Property after settlement on its purchase occurred. She has had the use and enjoyment of the Property from then until the present time. She maintained the Property and obtained insurance for it.

We accept that the objective intention when the Property was purchased was to provide a family home with jointly held funds, and funds you had borrowed being used to pay the purchase price.

It is noted that the facts of your situation are different to those in the Bosanac case where High Court determined that a resulting trust did not exist given the way you and Person A used joint funds in relation to the purchase of the Property and held joint assets.

After considering all of the above matters, the Commissioner considers it appropriate to conclude that you held a 50% interest in the Property on trust for Person A and a resulting trust had been created when the Property was purchased.

As outlined above, the presumption of advancement will not rebut a resulting trust when a wife contributes to the purchase price of a property that their husband is the legal owner of. Therefore, the presumption of advancement will not occur in this situation.

Consequently, the Commissioner will conclude that the equitable interests in the Property are not the same as the legal interests in it and that you held a 50% beneficial interest in the Property for Person A in a resulting trust.

A beneficiary of a trust is absolutely entitled to an asset of the trust if the beneficiary, who has a vested and indefeasible interest in the entire trust asset, has the ability to call for the asset to be transferred to them or to be transferred at their direction.

Section 106-50 of the Income Tax Assessment Act 1997 states that from just after the time a beneficiary of a trust becomes absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being an asset of the beneficiary (instead of being an asset of the trust).

In your case, Person A is the beneficiary of the resulting trust and is absolutely entitled to the trust asset, being a 50% interest in the Property. Therefore, the 50% interest in the Property is treated as being an asset of Person A.

Accordingly, you can disregard any capital gain that arises when the CGT event A1 occurs on the transfer of the 50% interest in the Property to Person A.