Edited version of private advice

Authorisation Number: 1052187524256

Date of advice: 30 November 2023

Ruling

Subject: CGT - legal versus beneficial ownership

Question

Did a capital gains tax event (CGT) event A1 happen to you on disposal of the Property?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A and Person B (the Taxpayers) are married. Person C is Person A's parent and Person B's parent in law.

The Property was purchased in 19XX for approximately $X and is less than 2 hectares in size. The Taxpayers and Person C were the registered owners in a joint tenancy co-ownership.

At time of purchase, Person C paid $XX as a deposit on the Property.

Person C did not have sufficient funds to purchase the Property outright in her name only.

Additional funds were required to complete the purchase.

The Taxpayers and Person C obtained a joint loan (Loan 1) of approximately $XX to finance the outstanding amount required to purchase the Property.

The Taxpayers entered into this arrangement to help Person C acquire the Property to live close to the Taxpayers.

At all times the Taxpayers considered the Property to be Person C's home.

The Property has never been used to derive assessable income.

Person C made all the repayments to Loan 1 and paid all costs associated with the Property.

In 20XX, upon the sale of another property, Person C repaid Loan 1 in full and mortgage (Mortgage 1) was discharged.

Following the repayment of Loan 1 and discharge of Mortgage 1, a subsequent loan (Loan 2) was obtained by the Taxpayers to fund their business interests. A mortgage (Mortgage 2) was lodged on the title of the Property for Loan 2.

The Taxpayers made all the repayments to Loan 2.

Person C continued to live in the property and paid all outgoings associated with the Property.

In 20XX, after a period of approximately XX years, Loan 2 was repaid and Mortgage 2 was discharged.

The Taxpayers remained on the Certificate of Title.

In MM 20XX, Person C passed away.

Person C resided at the property since date of acquisition up to date of death.

Due to the right of Survivorship the Taxpayers became joint owners of the Property.

Person C's Will states that her Estate would pass to their children. The Will does not mention any specific asset.

The property was sold in August 20XX.

The Taxpayers intend to disburse sale proceeds to the beneficiaries of Person C's D Estate in equal shares in accordance with the Will. The Taxpayers have made an interim payment to each of Person A's siblings of $XX 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) states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. All assets acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The Property is a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. A CGT event A1 happens if there is a disposal of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

When considering disposal of the property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the Property.

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.

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.

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

•         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 probable than not that a beneficial interest was intended to be conferred.

•         The presumption of advancement may be rebutted by evidence of contrary 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

To determine if the Taxpayers had a beneficial interest in the Property, the facts and circumstances surrounding the Property's purchase are considered in light of the Taxpayers' relationship to Person C. We consider the intent of the parties when the Property was purchased as well as evidence of the dealings between the parties both initially and after purchase.

In this case, no documentation was produced to establish that the Property was held on trust for Person C from the time it was purchased. With the absence of a declaration of intention, an express trust cannot be held.

With respect to a constructive trust, as there is no court order, it cannot be held that a constructive trust has arisen.

We accept that in this case, contributions to the purchase cost of the Property were not proportionate to the legal interests in the Property because Person C advanced the deposit for the Property. We acknowledge that Person C paid Loan 1 out in full and she also held the Property as a joint tenant. Therefore, in the first instance, the presumption of a resulting trust arises in favour of Person C.

However, the presumption of a resulting trust is rebuttable where specific relationships exist. In this case, the fact the Property was registered in the names of the Taxpayers is a rebuttal of the presumption of the resulting trust.

Instead, there is a presumption of advancement (parent to child). To rebut the presumption of advancement there is a requirement to consider the facts and evidence provided. Person C is deceased and there is no documentary evidence to rebut the presumption of advancement. According to the Taxpayers, the reason for the registration of the Property in joint names was to facilitate obtaining finance to purchase the Property. The initial deposit made by Person C and the subsequent repayment of Loan 1 in full solely by Person C supports this position. Further, Person C lived in this Property as their main residence and paid all outgoings associated with the Property. We accept that the Property was at all times the principal place of residence of Person C. We, therefore, accept that Person C did not intend for the Property to be an absolute gift to the Taxpayers. The facts and circumstances surrounding the purchase does not rebut the presumption of a resulting trust in favour of the presumption of advancement.

However, notwithstanding loan 1 being repaid in full and Mortgage 1 being discharged, the taxpayers remained on title and obtained Loan 2 for a business loan. We, therefore, consider that the presumption of a resulting trust was displaced in favour of joint ownership.

The key factors in making this decision are:

•         In 20XX, the Taxpayers obtained Loan 2 against the Property and registered Mortgage 2 on the Property to fund their business interests

•         Mortgage 2 was in place for XX years prior to being repaid in full by the Taxpayers. Following the discharge of Mortgage 2, the Taxpayers remained on the Certificate of Title.

•         Loan 2 obtained in 20XX was solely for the benefit of the Taxpayers and not Person C.

We therefore consider that CGT event A1 was triggered for the Taxpayers when the Property was sold. However, the Taxpayers will be entitled to reduce any capital gain in respect of their original ownership interest by the 50% CGT discount as they held that interest in the property for more than 12 months.