Edited version of private advice

Authorisation Number: 1052182935935

Date of advice: 28 November 2023

Ruling

Subject: CGT - legal v beneficial ownership

Question

Did Capital Gains Tax (CGT) event A1 occur when you transferred legal ownership of the Property into your parents' names?

Answer

Yes - we determine that you have legal and beneficial ownership in the property. Therefore, any capital gain or capital loss you made from the sale of your interest in the property cannot be disregarded and must be included in your income tax return in the relevant income year.

This private ruling applies for the following period:

Year ended X June 20XX.

The scheme commenced on:

X July 20XX.

Relevant facts and circumstances

You purchased the Property in 20XX in your name only.

The Property is situated on less than 2 hectares of land.

It was your intention to reside in the Property with your parent, who required care.

You secured a loan to acquire the Property.

Your parent paid you $X for a life interest in the Property in 20XX.

It was agreed between you and your parent that you would purchase the Property under your name.

You and your parent signed statutory declarations outlining the agreement for a life interest in 20XX.

You resided with your parent in the Property until 20XX, when you moved out to purchase a property ('the second property') with your then partner, which became your principal place of residence.

Around the same time, your other parent paid you $X for a right to reside in the unit and moved into the semi-detached unit at the front of the Property.

Your parent remained living in the main residence of the Property.

In 20XX, you separated from your then partner and went through Family Law Court. As part of the Court proceedings, a Deed of Arrangement was formalised with the intention of protecting your parent's interest in the Property.

The Deed of Arrangement was formalised under the following conditions:

•         You acknowledge and agree that whilst the said property is in your sole name that you hold the same beneficially for your parents equally.

•         You agree not to dispose of the said Property or further encumber (by way of mortgage or security offer) the said Property unless written consent is first had and obtained from your parents.

•         You agree that you will on or before the expiration of X years from the date hereof, discharge the mortgage over the said Property and provide the original Certificate of Title to your parents. You also agreed to sign any transfer document should your parents have sufficient funds to transfer the said property into their names (stamp duty and legal costs).

In addition to the Deed of Arrangement, the Court ordered you to pay your ex-spouse the sum of $X.

You obtained loan approval to refinance your existing loan over the second property to pay this sum however the bank being the mortgagee required additional security and requested that the Property be taken as security due to it being in your sole name.

In 20XX, you moved back into the Property with your parents, and it became your principal place of residence.

In early 20XX, you transferred the property into your parents' names.

The property has never been used to produce income.

Relevant legislative provisions

Income Tax Assessment Act section 102-20

Income Tax Assessment Act section 104-10

Income Tax Assessment Act section 106-50

Detailed reasoning

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.

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.

CGT event A1 occurs when you dispose of a CGT asset under section 104-10 of the ITAA 1997. The time of an A1 event is when the disposal contract is entered into or, if none, when the entity stops being the assets owner.

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.

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: express, constructive, or resulting. 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.

In your situation, there is no evidence here of an express trust being created (the statutory declaration merely evidenced an intention to grant a life interest to your parent).

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.

A constructive trust is not applicable in these circumstances.

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.

Calverley v Green (1984) 155 CLR 242 (Calverley v Green)

In Calverley v Green, the High Court held that it is the assumption of the liability under the mortgage, not the repayments, which constituted the contribution. The contributions and intentions relevant to a resulting trust are those made at the time of purchase. Obtaining the mortgage is considered a contribution to the purchase price, not the repayment of the mortgage itself as that is simply a discharge of the mortgage over the property. The High Court distinguished between contributions made before and after the conveyance. Mason and Brennan JJ in a joint judgment explained: "It is understandable but erroneous to regard the payment of mortgage instalments as payment of the purchase price of a home. The purchase price is what is paid in order to acquire the property; the mortgage instalments are paid to the lender from whom the money to pay some or all of the purchase price is borrowed."

As it was explained in Calverley v Green 56 ALR 483, Dean J said (at p 500):

"It is simply that there are certain relationships in which equity infers that any benefit which was provided for one party at the cost of the other has been so provided by way of "advancement" with the result that the prima facie position remains that the equitable interest is presumed to follow the legal estate and to be at home with the legal title or, in the words of Dixon CJ, McTiernan, Fullargar and Windeyer JJ in Martin v Martin (1959) 110 CLR 297 at 303, that there is an "absence of any reason for assuming that a trust arose".

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).

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.

Application to your circumstances

You have not been able to provide the Commissioner with sufficient evidence that you did not have a legal ownership interest in the property.

The contribution made by your parent for the life interest cannot be regarded as a contribution to the purchase price of the property, notwithstanding your assertion that your parents acquired fractional shares in the property. Your parents' contribution for the life interest means that it cannot be factored in as a contribution to purchase price for the purposes of a resulting trust.

Therefore, any capital gain or capital loss you made from the sale of your interest in the property cannot be disregarded and must be included in your income tax return in the relevant income year.

As The Property was held for over 12 months, you are eligible for the capital gains tax (CGT) discount of 50%, which means that you pay tax on only half the net capital gain on that asset.