Edited version of private advice

Authorisation Number: 1052174122568

Date of advice: 16 October 2023

Ruling

Subject: Capital gains tax

Question

Are you required to declare a capital gain upon sale of the property with capital gains tax (CGT) event A1 occurring under section 104-10 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

Your parents were living in a property owned by you (The property).

The property was purchased a number of years ago by you.

The property had a mortgage over it in your name.

Your parents lived in the property for several years.

You lived with your parents in the property for a few years.

Your parents decided to move out of the property and move into a smaller property.

The property was never rented out.

You purchased a second property for your parents to move into.

The reason for you purchasing the second property in your name is due to your parents not being able to purchase a home in their name due to visa restrictions.

You used the proceeds from the sale of the first property to purchase the second property.

There was no mortgage over the second property.

Your parents are currently on a specific visa.

Your parents applied for and was granted a variation to their visa to be able to work in Australia.

Your parents lived in the second property and paid for all expenses associated with the property.

The second property had a tenant in the property when you purchased it.

Your parents received the rental income and paid the taxes on the second property.

The second property was rented for several months.

The second property was renovated prior to your parents moving into it.

Your parents paid for the renovations on the second property.

Your parents rented a property in a separate area while the second property was being rented.

Your parents moved into the second property.

Your parents decided to move out of the second property and build a Granny Flat in your backyard on a third property.

The construction on the Granny Flat was completed several months ago.

The Granny Flat was paid for by your parents.

You entered into a Granny Flat agreement with your parents.

The Granny Flat agreement states you were the owner of the second property.

Your parents moved into the Granny flat shortly after completion.

The second property sold several months before the Granny Flat was completed.

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

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 capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs when you dispose of a CGT asset. CGT event A1 occurred when the property was sold.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property. An individual can be a legal owner but have no beneficial ownership in an asset. Under subsection 104-10(2) of the ITAA 1997, a change of ownership is not deemed to have occurred if you stop being the legal owner of the asset but continue to be its beneficial owner. As a result, it is the beneficial owner of a CGT asset that is liable for capital gains tax upon the sale of the asset if they are deemed to be absolutely entitled to it (section 106-50 of the ITAA 1997).

In the absence of evidence to the contrary, the property is considered to be owned by the people registered on the title. However, it is possible for legal ownership to differ from beneficial ownership. 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. We consider that there are extremely limited circumstances were 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.

Usually if a person purchases a property in another person's name, there is a presumption that it is held on trust for the purchaser note that this is not the case where there is an immediate family relationship, in that case it is presumed that the legal and beneficial interest are 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 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.

Application to your circumstances

In your case, there has been no evidence provided by you to establish that there was an express trust or a constructive trust.

Further, the Commissioner considers that a resulting trust did not arise having regard to the following:

•         You purchased the first property in your name with a mortgage also in your name.

•         The proceeds from the first property were used to purchase the second property.

•         There is no evidence to show that your parents provided the purchase money for the second property.

As a result, you have not been able to provide sufficient evidence that your parents had a beneficial ownership in the second property.

Accordingly, you have both a legal and beneficial ownership in the second property. You are therefore required to declare any capital gain on the sale of the second property in your tax return.