Edited version of private advice

Authorisation Number: 1052200739366

Date of advice: 11 December 2023

Ruling

Subject: CGT - legal v beneficial ownership

Question

Is the capital gain or loss from the sale of the Property apportioned according to the legal interest of the owners?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On DDMM19XX, an investment property (the Property) was purchased in the names of the Parents, along with their adult Child.

The Parents funded the purchase of the Property from their joint savings account.

At the time of purchase, the Child did not have the funds to contribute to the purchase of the Property.

There is no documentation evidencing any agreement between the Parents and the Child, or their intention, in relation to the purchase of the Property in all their names even though the funds were only provided by the Parents.

The property settlement statement is addressed to the Parents and the Child.

Several years later, the Parents paid Entity Z an amount close to one third of the original purchase price of the Property. This amount is the settlement value for a parcel of land for the Child to build their own home. A handwritten note was provided as reference for the transaction. After this transaction, the Child's name was not removed from the Property title and the Child did not record a sale of their one third ownership interest in the Property in their relevant income tax return.

During the ownership period, all rental income from the Property was paid into the Parents' joint bank account and all rental expenses were paid from the Parents' joint bank account.

During the ownership period, all rental income and expenses relating to the Property were declared in the Parents' income tax returns in equal shares.

The Property has now been sold.

The proceeds from the sale of the Property were paid into the Parents' joint bank account.

During the ownership period, the Child had no involvement with the Property. The Child did not pay for any expense associated with the Property and did not receive any rental income from the Property.

During the ownership period, the Child never lived in the Property.

The Child did not receive any proceeds from the sale of the Property.

Your contentions

You contend that:

•         The intention of the purchase of the Property was to use the rental income from the Property to fund the Parents' retirement.

•         The intention in putting the Child's name on the Property title was to help them to save for a deposit to purchase their own home.

•         There was a verbal agreement between the Parents and the Child that the Child's one third share was funded through an interest free loan from the Parents. The Child was required to make monthly repayments to the Parents over X years to repay the loan. The loan was repaid.

•         The Parents thought the amount of the settlement value for a parcel of land for the Child to build their own home in 19XX was close enough to buy out the Child's one third ownership interest in the Property though no market valuation was undertaken on the Property at the time.

•         The Parents did not remove the Child's name from the title after they made the payment to Entity Z as they intended to keep the Property for their lifetime and after they passed away the Property would transfer to their two beneficiaries, one of whom was the Child.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

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 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 56 ALR 483). 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 other's 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) 115 ATR 35the 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

In this situation when the Property was purchased, the Parents and Child were registered as the owners of the Property, each with one third ownership interest.

In relation to the purchase cost of the Property, the Parents used their personal savings from a joint bank account to cover the total purchase cost of the Property. Generally, it is considered money from a joint bank account is the joint account holders' equal contribution to the purchase cost.

However, it was advised there was a verbal agreement between the Parents and Child that the Child's one third share in the Property was funded by an interest free loan from the Parents with the Child being required to make monthly repayments to the Parents to repay the loan. This indicates the Parents lent the money to the Child to purchase their one third share and each party contributed to the purchase of the Property in proportion to their legal interests in the Property.

No documentary evidence was provided to establish that the Child held their one third share on trust in favour of the Parents. Therefore, there are no grounds to consider the creation of an express trust. Nor is there a court order to establish the creation of a constructive trust.

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. As the Parents lent the Child the funds for their one third share of the Property, the contributions to the purchase cost of the Property are proportionate to the legal interests in the Property and consequently, a presumption of resulting trust has not arisen. Therefore, there can be no presumption of advancement as there is nothing to rebut.

You contend that the payment the Parents made to Entity Z was for the Child to settle on a parcel of land to build their home and that they considered the payment bought out the Child's one third interest in the Property.

However, taking into account the following, we consider that the Parents and the Child were the legal and beneficial owners of the Property when it was sold:

•         No documentary evidence was provided that establishes that the Child held their one third ownership interest on trust for the Parents.

•         The amount the Parents paid to Entity Z was not calculated in reference to the market value of the Property at that time.

•         The Child's name was not removed from the Property title following the payment.

•         The Child did not record a corresponding CGT event in their relevant income tax return.

•         If the verbal agreement occurred on the purchase of the Property, the Child would have been entitled to one third of the rental income and liable for one third of the rental expenses until the purported buy back of their one third ownership interest. It would only be from that point onwards that the Parents owned 50% each and were entitled to the rental income and liable for the rental expenses on that basis. Yet, you have advised that from when the Property was acquired, the Parents received all the rental income and paid all the rental expenses, and declared these amounts in their income tax returns on a 50:50 basis. This is not consistent with their explanation that they initially purchased the one third ownership interest for the Child with them loaning them the relevant funds, and which they bought back from them later after the Child repaid their loan. As the receipt of the income, the payment of the expenses and the declaration of these amounts for income tax purposes, was not consistent with their explanation of the arrangement, we do not consider those matters to be evidence that the beneficial ownership of the Property differed from the legal title.

To summarise, we do not consider that there is sufficient evidence to establish that the beneficial ownership of the Property differed from the legal title when it was sold. Therefore, the capital gain or loss from the sale of the Property must be apportioned according to the legal interest of the owners.

The Parents and the Child are entitled to reduce any capital gain in respect of their ownership interest by the 50% CGT discount as they held that interest in the Property for more than 12 months.