Edited version of private advice

Authorisation Number: 1052195069077

Date of advice: 28 November 2023

Ruling

Subject: CGT - legal ownership - main residence

Question

Is any capital gain made from the disposal of the property located at xxx (the Property) disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

1 July 2021 to 30 June 2022

The scheme commenced on:

16 September 2021

Relevant facts and circumstances

On DD September 20YY Father and Mother (the Taxpayer's parents) purchased a property located at xxx (the Property) for $xxx,xxx. The Property was registered in the Taxpayer's parents' names as the legal owners.

The Property was funded with $xxx,xxx from Mother's late father's estate and a $xxx,xxx loan from the Bank. The Bank loan was in the Taxpayer's parents' names.

The Taxpayer's parents currently reside at xx, they are tenants in common and they do not have a mortgage on their place of residence.

As soon as practicable after xx/xx/20xx, the Taxpayer and her children moved into the Property. In xx 20xx, the Taxpayer's partner and his two children moved into the Property with the Taxpayer and her children.

The Taxpayer paid her parents some payments of around $xx per month between October 20xx to July 20xx. The payments were described as "Rent" on the Taxpayer's parents' bank statements ending in xxxx. The monthly payments completely ceased in xx 20xx. The Taxpayer's partner paid $xx recurring payments of "rent" to the Taxpayer from xx 20xx to xx 20xx.

In xx 20xx, the Taxpayer's partner transferred a total of $xxx to the bank account ending in xxxx and around this time the Taxpayer's parents started to make arrangements to transfer the title to the Property to the Taxpayer. The mortgage over the Property is essentially paid off, a nominal amount left outstanding on the Bank loan to keep the mortgage in place in case any drawdowns were necessary.

On xx/xx/xxxx, the Taxpayer, her two children, the Taxpayer's partner, and his two children, moved out of the Property. From xx to xx, the Taxpayer and her partner rented a property at xxx.

A rental agreement dated xx/xx/20xx to rent out and/or manage the Property at $xx per week inclusive of GST was entered between:

•         Clients: Father Care of Taxpayer and Mother Care of Taxpayer and

•         Real estate agent: xxx Realty.

The Taxpayer's father submitted in the Statutory Declaration that the Taxpayer's parents had no part in dealing with the property manager regarding the renting of the Property; however, you submitted that the Taxpayer has been unable to locate a signed copy of the rental agreements for the Property.

On xx/xx/20xx, the legal title to the Property transferred from the Taxpayer's parents to the Taxpayer. Stamp duty of $xx,xxx was payable on the transfer of the Property.

On xx/xx/20xx, the Taxpayer and her partner purchased xxx and they moved into this house with their children.

On xx/xx/20xx, the Taxpayer ceased renting the Property and renovated the Property before listing it for sale.

On xx/xx/20xx, the Taxpayer entered into a contract to sell the Property. The settlement occurred on xx/xx/20xx.

You provided the following documentation/information to the ATO:

•         Statutory Declarations signed by the Taxpayer's parents, dated xx/xx/20xx by the Taxpayer's mother and dated xx/xx/20xx by the Taxpayer's father.

The Statutory Declarations set out the Taxpayer's parents' recount of the difficulties the Taxpayer experienced in finding an appropriate place she could afford to live with her two children following her separation in xx 20xx. The Taxpayer could not afford the rent for an appropriate property, and she could not obtain a loan from a bank to purchase an appropriate property.

The Taxpayer's parents submitted that on xx/xx/20xx they purchased the Property for the benefit of the Taxpayer and the Property was registered in their names to obtain a loan for the purchase of the Property as the banks would not loan the funds to the Taxpayer. In addition, it was submitted that the Property was registered in the names of the Taxpayer's parents to mitigate the risk that the Taxpayer's ex-husband would attempt to make a claim on the Property as part of their divorce.

•         Investment Home Loan with the Bank in relation to the Property with the following details:

o   Borrowers: Father and Mother

o   Money lent: $xxx,xxx

•         Bank statements (account number ending in xxxx) connected with the Investment Home Loan mentioned above in the name of the Taxpayer's parents from xx/xx/20xx to xx/xx/20xx. We note the following:

o   the first "recurring" $xx payment started in xx 20xx.

o   there were missing payments from the Taxpayer as follows:

§  xx

§  xx

§  xx

§  xx

o   the payments completely ceased as of xx 20xx as the Taxpayer's financial circumstances at that point were difficult and the Taxpayer's parents agreed to forego the payments, and the value of the payments forgone were added to the records the Taxpayer's parents kept of the gifts they made to their respective children.

o   you submitted that the two key payments were the lump sums received from the Taxpayer's partner to discharge the balance of the mortgage, following the resolution of his divorce proceedings and property settlement.

•         The Taxpayer's partner's bank statements with account ending xxxx. There were recurring payments of $xx per week described as "rent" paid to the Taxpayer in these statements. We note that the Taxpayer's partner was paying another home loan from this bank account.

•         Certificate of Title of the Property.

•         Transfer of the legal title to the Property document from the Taxpayer's parents to the Taxpayer executed on xx/xx/20xx. The document stated that the Property was transferred by way of gift

•         Contract of sale for the Property

•         Settlement statement of the Property dated xx/xx/20xx indicates that the majority of the sale proceeds was remitted to the Taxpayer for the amount of $xxx,xxx.

•         No land tax was paid in respect of the Property

•         Council rates for the Property for the period of xx/xx/xx to xx/xx/xx were not provided, the only council rates provided was for the period of xx/xx/xx to xx/xx/xx.

•         The Taxpayer's parents did not update their wills to reflect the purchase of the Property. You submitted the Taxpayer's parents considered the Property to be the Taxpayer's property already and as set out in the Taxpayer's father's statutory declaration, the value of the Property was included in his records as a gift to the Taxpayer.

•         No documentation was provided to show that the amounts paid from the Taxpayer's partner were intended to contribute to the mortgage and were not board/rent. You submitted that the absence of a tenancy agreement supports the payments were not rent, but a contribution to joint costs of living, in this case, the mortgage.

•         Owner Statement from xx Realty, addressed to the Taxpayer of xx with some of the subsequent statements addressed to the Taxpayer's partner.

•         The 20xx Financial Year Statement for the Property stated that the net rental income was $xx

•         On xx/xx/20xx the Taxpayer sent an email to her registered tax agent, advising that she needs to amend the previous tax return as she had made an error by not including rental income. It was submitted that the rental income went into a separate account which she had overlooked by mistake. The 20xx tax return was amended on xx/xx/xx.

•         Various documents showing expenses related to the Property and the renovation expenses incurred by the Taxpayer. You submitted that the Taxpayer incurred costs relating to the Property that tenants would not normally be liable for, such as:

o   dishwasher

o   house painting

o   new air conditioning systems

o   staging stylist for the Property

o   taken out of settlement funds:

§  external wash

§  garden work.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 subsection 118-110(1)

Income Tax Assessment Act 1997 subsection 118-130

Reasons for decision

Summary

Based on the evidence provided, we conclude that the capital gain made from the disposal of the Property located at xx (the Property) is not disregarded under section 118-110.

There was no evidence that the legal owners of the Property, the Taxpayer's parents, held the Property on trust for the Taxpayer from xx/xx/20xx to xx/xx/20xx. Consequently, section 106-50 does not apply to treat the Taxpayer as being the owner of the Property from xx/xx/20xx to xx/xx/20xx.

The Taxpayer's ownership period was from xx/xx/20xx.

CGT Event A1 occurred when the Taxpayer's parents transferred the legal title of the Property to the Taxpayer on xx/xx/20xx, by way of gift.

CGT Event A1 occurred when the Taxpayer entered into the contract for the disposal of the Property on xx/xx/20xx.

The Taxpayer is not eligible for the main residence exemption in respect of the Property as it was not her main residence during her ownership period.

Detailed reasoning

In general, you acquire a CGT asset when you become its owner (section 109-5). In this case, the Taxpayer's parents acquired the Property when they become its owner on DD September 20YY.

Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset (subsection 104-10(1)). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law (subsection 104-10(2)). In this case, CGT event A1 happened when the Taxpayer's parents transferred the legal title to the Property to the Taxpayer by way of gift on DD August 20YY and CGT event A1 happened when the Taxpayer entered into the contract for the disposal of the Property on DD September 20YY.

Legal and beneficial ownership

A person's legal interest in a property is determined by the legal title to that property under the property law legislation in the State or Territory in which the property is situated.

In some cases, it is possible for legal ownership to differ from beneficial ownership. An individual may hold a legal ownership interest in a dwelling for another individual in trust. Where it is asserted that the beneficial ownership and legal ownership of a property are not the same, there must be evidence to show that the legal owner holds the property on trust for 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 TR 93/32 paragraph 41, 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 the equitable right is exactly the same as the legal title.

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".

Application to your case

The ATO considers that where the beneficial ownership and the legal ownership are not the same, there must be evidence that the legal owner holds the property on a trust for the beneficial owner.

Non-Express Trust

Non-express trusts are not intentionally created, they arise as a result of a particular act or circumstance. There are two main types of non-express trusts: resulting trust (arises when one person pays for a property held by another) and constructive trust (arises as a result of a breach of fiduciary duty which creates a new trust over profits or property obtained as a result of the breach, this is not relevant to your circumstances).

As per Caverley v Green, in your case there was no resulting trust as the Taxpayer did not contribute to the purchase price for the Property held by Taxpayer's parents.

Express Trust

Express trusts are intentionally created, usually by way of a trust deed or by a will. Express trusts can be created by declaration (when one person declares that they hold property on trust for someone else), or through the transfer of property with an intention to make the recipient the beneficiary of the property.

You have not provided evidence that at the time of purchase it was the intention of the Taxpayer's parents that the Property would be held on trust for the benefit of the Taxpayer. We took the following factors into account in determining that there was no express trust created:

•         the Property was purchased in the names of Taxpayer's parents and hence the Taxpayer's parents were the legal owners of the Property until the time they disposed of their ownership interest on xx/xx/20xx by way of gift to the Taxpayer

•         ;the Taxpayer was not the legal owner of the Property at the time of purchase, she became the legal owner on xx/xx/20xx when the Property was transferred to her by way of gift

•         there was no declaration of Trust at the time of the purchase of the Property on xx/xx/20xx

•         prior to the transfer to the taxpayer, the Property was rented out (from xx to xx) in the names of the Taxpayer's parents, care of the Taxpayer. The Taxpayer is unable to locate a signed copy of the rental agreements for the Property

•         the Statutory Declarations by the Taxpayer's parents were created in xx and no contemporaneous documents have been provided evidencing the intention at the time the Property was purchased

•         as per Calverly v Green, it is the assumption of the liability under the mortgage, not the repayments, which constitute the contribution to purchase price. The Taxpayer's "recurring" payments to the Taxpayer's parents which ceased completely in xx 20xx, the $xxx,xxx lump sum payment by the Taxpayer's partner, and his recurring $xx rental payments to the Taxpayer, are not contributions to the purchase price of the Property. The Taxpayer is not a party to the loan obtained to purchase the Property, and therefore, the Taxpayer did not contribute to the purchase price, and

•         the Taxpayer did not pay for any of the water rates and council rates whilst she was living in the Property.

Considering the circumstances of this case, in accordance with TR 93/32, the Commissioner does not accept that the legal and equitable interests in the dwelling are not the same. The taxpayer's parents are the legal owners of the Property from xx to xx. Consequently, the Taxpayer is not considered to have been the beneficial or equitable owner of the Property from xx to xx.

Absolute entitlement

You submit that the Taxpayer had a vested and indefeasible entitlement in the Property, and she was entitled to require her parents to deal with the Property as she directed. You further submit that if the Commissioner does not accept that the Taxpayer was absolutely entitled to the Property as described in section 106-50, the Taxpayer nonetheless had an 'equitable interest' in the Property from xx to xx.

TR 2004/D25 Income tax: capital gains: meaning of the words ''absolutely entitled to a CGT asset as against the trustee of a trust'' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25)

TR 2004/D25 sets out the ATO view with respect to absolute entitlement. TR 2004/D25 explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. Section 106-50 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust then the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary.

We consider the following paragraphs of TR 2004/D25 are relevant in this case:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

We have set out our view above that there is no evidence that the Taxpayer's parents held the Property on trust for the Taxpayer. The legal and equitable interests in the Property are the same, they belong to the Taxpayer's parents from xx to xx, and therefore the taxpayer does not have a vested and indefeasible entitlement in the Property and the Taxpayer does not have an equitable interest in the Property from xx to xx.

Right to occupy

You submitted that if the Commissioner does not accept that the Taxpayer's parents held the Property on trust for the Taxpayer, the Taxpayer nonetheless had an ownership interest in the Property from xx to xx on the basis that she had a right to occupy the Property during this period, evidenced by a contractual agreement between the Taxpayer and her parents which gave her the right to occupy the Property during this period. However, you did not provide a copy of a contractual agreement between the Taxpayer and her parents in relation to the Taxpayer's right to occupy the Property from xx to xx.

TR 2006/13 Income tax: CGT: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2006/13)

We consider the following paragraph "Mere right of occupancy" of TR 2006/13 is relevant in this case:

105. a right to reside in property for life (or a term of years) is not equivalent to a legal or equitable life interest. The right is a mere personal right which cannot be assigned. CGT event D1 in section 104-35 happens when such a right is granted. These arrangements should be contrasted with mere informal family arrangements where relatives may reside at each other's dwellings for a period but where there is no intention to create legal relations. In these circumstances CGT event D1 will not happen. CGT event D1 happens if you give someone a right to reside in a dwelling. The capital proceeds include money (but not rent) and the value of any property you receive.

Even if the Taxpayer established that she had the right to occupy the Property sufficient to satisfy the definition of ownership interest in section 118-130, the CGT event A1 is happening to the ownership interest in the actual property.

Main residence exemption

According to subsection 118-110(1), a capital gain you make from a CGT event that happens in relation to a CGT asset that is a dwelling of your ownership interest in it is disregarded if:

•         you are an individual and the dwelling was your main residence throughout your ownership period, and

•         the interest did not pass to you as a beneficiary in, and

•         you did not acquire it as a trustee of, the estate of a deceased person.

Section 102-20 provides that you make a capital gain or capital loss as a result of a CGT event happening. Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act of event, or by operation of law.

For this reason, it is important to establish who is the owner of a CGT asset at the time a CGT event. On disposal of a CGT asset, it is the beneficial owner who will be liable for any capital gain or loss.

You may be able to disregard a capital gain (or capital loss) you make from the disposal of a CGT asset that is a dwelling or your ownership interest in it if the dwelling was your main residence throughout your ownership period (section 118-110). Your ownership period of a dwelling is the period you had an ownership interest in the dwelling. You have an ownership interest in a dwelling if you have a legal or equitable interest in it.

In this instance, it is the Taxpayer's parents who have both the legal and beneficial ownership interest in the Property from xx to xx.

The Taxpayer is the legal and beneficial owner of the Property from xx/xx/20xx, when the Taxpayer's parents transferred the Property to the Taxpayer.

The Taxpayer rented out the Property on xx/xx/20xx, before her ownership interest started on xx/xx/20xx and she sold the Property on xx/xx/20xx.

CGT event A1 happened on xx/xx/20xx when the Taxpayer's parents transferred the Property to the Taxpayer, and CGT event A1 happened on xx/xx/20xx when the Taxpayer disposed of the Property.

The Taxpayer is not eligible for the main residence exemption in respect of the Property as per subsection 118-110(1) as the Property was rented out prior to being transferred to the Taxpayer on xx/xx/20xx, and she was not the beneficial owner of the Property from xx to xx.

Other Private Binding Rulings that you mentioned

You mentioned some of the favourable private binding rulings in your letter dated xx/xx/20xx. The edited versions of written binding advice that we publish cannot be relied upon by taxpayers or their advisers. They cannot be relied upon as precedent or used for determining how we will apply the law. The records are not binding and provide no protection. An edited version of binding advice is not an authority for the purposes of establishing a reasonably arguable position. However, we would like to point out the differences in facts to the Taxpayer's particular circumstances as follows:

•         PBR 1052165224919: the property was purchased in both the applicant's father's and the applicant's names. The applicant entered into a private loan agreement to assist with the purchase of a residential property for their father and the loan agreement confirms that the applicant held fifty percent ownership interest in the property as trustee for their father.

•         In your case: the Property was not purchased in the Taxpayer's name. The Taxpayer did not enter into a private loan agreement with her parents.

•         PBR 1052166045732: both the applicant and Person A are the registered owners of the property. Both the applicant and Person A are co-borrowers on the loan obtained to purchase the property. Sufficient evidence was provided to establish that the applicant had no beneficial interest.

•         In your case: the Taxpayer is not the registered owner of the Property. The taxpayer is not a co-borrower on the loan obtained to purchase the Property.

•         PBR 1052167367264: both parents and their child hold legal ownership interest in the property. Sufficient evidence was provided to show that the parents were merely guarantors for the loan used to purchase the property and had no beneficial interest in the property.

•         In your case: the Taxpayer did not hold legal ownership interest in the property until the Property was gifted to her in August 20YY and the Taxpayer's parents were not mere guarantors for the loan.