Edited version of private advice

Authorisation Number: 1052231201588

Date of advice: 13 March 2024

Ruling

Subject: CGT - legal vs beneficial

Question 1

Are you the sole beneficial owner of the property for CGT purposes?

Answer 1

No.

Question 2

Will the main residence exemption under section 118-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply on the disposal of the Property?

Answer 2

No.

A partial main residence exemption will apply, for your 2/3 ownership interest, due to the period the property was used for investment purposes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX X 20XX, you acquired a property (the property) alongside your then spouse (person B) and person C.

The property was acquired by all parties as tenants in common, with 1/3 equal shares.

It was originally intended, via a verbal agreement, that the property would be purchased in an equal third's basis where:

•         Person C would pay 1/3 of the purchase price and outgoings

•         Person C would live in the property.

The conditions of the purchase of the property did not eventuate:

•         Person C did not pay thier intended 1/3 share of the purchase price and outgoings

•         Person C did not live in the property.

You obtained a home loan with Person B from the bank (the bank loan).

Between 20XX and 20XX, the property was an investment property.

Between 20XX and 20XX, you reported your share of rental income and deductions in your income tax returns.

In 20XX, you and person B separated.

In 20XX, you moved into the property and have continuously resided in the property.

From the time that you moved into the property, you have incurred all ongoing expenses to maintain the property.

As part of the financial settlement from your divorce from person B, person B transferred to you their 1/3 legal and beneficial ownership interest in the property.

In 20XX, person C relocated to country X. person C still resides in country X.

In XX 20XX, person B passed away. You were the only remaining mortgagee on the bank loan.

On or around XX 20XX, you advised person C of your intention to sell the property.

On XX XX 20XX, you signed a Deed of Release with person C to state that property belongs to you and that you are the sole legal and beneficial owner of the property.

Person C has not taken any steps to assert or make any claim that they have a beneficial interest in the property.

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 108-5

Reasons for decision

Issue

Question 1

Are you the sole beneficial owner of the property for CGT purposes?

Answer 1

No.

Summary

CGT event A1 occurs when you dispose of a CGT asset. The beneficial owner of the CGT asset will be liable to determine the capital gain or loss from the CGT event. In your case, we determine that you have a legal and beneficial ownership in 2/3 of the property and the property was not held on resulting trust.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset.

The property is a CGT asset under section 108-5 of the ITAA 1997.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset.

Legal vs beneficial ownership

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 and legal ownership 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 the 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 objection of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the create 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 a 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 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 (ie. an absolute gift).

Presumption of Advancement

A presumption of advancement is an equitable principle where a person places 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 probably that 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 another 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 you have a beneficial interest in the property, the facts and circumstances surrounding the property's purchase are considered in light of your relationship with 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 the purchase.

In this case, no documentation was produced to establish that the property was held on trust for you, 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 construct trust has arisen.

In your case, you intention at the time of acquiring the property was not for person C to hold his share of the property on trust for you. You had an agreement with person C, person C did not meet those terms, and many years have passed with no attempts to address the issue. Despite your claim that person C did not contribute to the purchase price, person C, along with yourself and person B, declared rental income and deductions in the relevant income years in which the property was used for investment purposes. The Deed of Release does not evidence your intention at the time of purchase. Although person C did not contribute to the purchase price, we do not accept that a resulting trust has arisen in your favour, because the intention, at the time of purchase, was that person C would have a 1/3 interest in the property.

Instead, there is a presumption of advancement, from you and person B to person C, at the time of acquisition. To rebut the presumption of advancement, there is a requirement to consider the facts and evidence provided and, in your circumstances, there is no documented evidence to rebut the presumption of advancement. The property was originally purchased for person C to live in. Whilst this did not eventuate, you did rent out the property for a period of time and you, alongside person B and person C, received 1/3 of the rental income. After your divorce, you moved into the property, and it became your main residence. However, there is no evidence to support the argument that the beneficial interest changed at this time.

Taxation Ruling TR 93/32 - Income tax: rental property - division of net income or loss between co-owners (TR 93/32) at paragraph 41, explains that we consider that there are 'extremely limited circumstances' where the legal and equitable interest are not the same and that there needs to be sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, that the equitable right is exactly the same as the legal title. The presumption must be rebutted with contemporaneous evidence of intention. The standard of evidence we require to show a separation of these interests is quite high.

You have not provided the Commissioner with sufficient evidence that you have 100% of the legal and beneficial ownership interest in the property. CGT event A1 will occur for you on your disposal of your interest under section 104-10 of the ITAA 1997, with both legal and beneficial ownership having been held by you at all times. Any capital gain or loss you make from the removal of your name from the property title 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, there is a CGT discount of 50%, which means that you pay tax on half of the net capital gain on that asset.

Question 2

Will the main residence exemption under section 118-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply on the disposal of the property?

Summary

A partial main residence exemption will apply, for your 2/3 ownership interest, due to the period the property was used for investment purposes.

Detailed reasoning

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 happens if you dispose of a CGT asset.

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for the full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

As the Property was your main residence for part of your ownership period, you are entitled to a partial main residence exemption for your 2/3 ownership interest, due to the period the Property was used for investment purpose. The amount of the capital gain or capital loss is apportioned by working out the number of non-main residence days compared to the total ownership days pursuant to section 118-200 of the ITAA 1997.