Edited version of private advice

Authorisation Number: 1052241785042

Date of advice: 16 April 2024

Ruling

Subject: CGT - legal vs beneficial

Question 1

Is the main residence exemption applicable from the date of acquisition in 19XX, for CGT purposes?

Answer 1

No.

Question 2

Will a capital gains tax A1 event occur in respect of your ownership interest if the property is disposed of?

Answer 2

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In 19XX, you contracted a serious medical condition.

In 19XX, you suffered several health complications.

In 19XX, your parents purchased a property (the property).

Your parents use the proceeds from the sale of the family home to purchase the property.

The property was mortgage free when purchased.

Your parents purchased the property with the intent that you would reside in the home.

From the date of acquisition, you lived and continue to reside in the property. You consider it your main residence.

You did not pay any rent to your parents and always maintained the outgoing expenses, except for a brief period of time in which you were on a disability pension.

In 19XX, your father passed away.

The property title remained in your mother's name.

In 20XX, you developed several health complications stemming from the original 19XX diagnosis. You were not expected to live.

You survived, with several side effects.

In 20XX, your mother prepared a will that distributed proceeds as follows:

•         $X,XXX to a friend

•         3-way split of the estate between yourself and your 2 siblings, your brother and your sister.

In 20XX, you installed a new kitchen and laundry.

In 20XX, your mother prepared a new and final will (the will).

The will gives you the right to reside for the duration of your life, provided you shall always:

•         Continue to reside at the property

•         Pay and be responsible for all council rates, water rates, and insurances in respect of the property

•         Pay all expenses that relate to the maintenance of the Property, and

•         Ensure that the Property is adequately maintained to a reasonable and proper standard.

In XX 20XX, your mother passed away.

When the administration of your mother's estate was finalised, the title for the property was transferred, in 3 equal shares, to yourself, your brother and your sister.

On XX XX 20XX, you acquired your 100% legal ownership of the property when your brother and your sister transferred their legal interest in the property, to you.

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

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. You became the sole beneficial owner of the property on the transfer of the legal title of the property, following the administration of your mother's Estate. CGT event A1 will occur for you on your disposal of your interest under section 104-10 of the ITAA 1997. Any capital gain or loss you make when you sell the property cannot be disregarded and must be included in your income tax return in the relevant income year.

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.

Application to your circumstances

To determine if you have a beneficial interest in the property, the facts and circumstances surround the property's purchase are considered in light of your relationship with your parents. We consider the intent of the parties when the property was purchased as well as evidence of dealings between the parties both initially and after purchase.

In your 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 constructive trust has arisen.

There is no resulting or implied trust in your circumstances as you did not contribute any money for the purchase of the property.

You did not have beneficial ownership in the property prior to obtaining the legal interest. It is clear from the information provided, that the property was purchased to be your home, this is not the same as being purchased with the intention of you obtaining an ownership interest of the property as a whole. Your mothers will provides you with a right to reside but does not make you the beneficial owner. The will is very clearly worded around this point. The will has the effect that if you predeceased your parents, the property would not form part of your Estate and the property would pass according to your mother's will.

For CGT purposes, you cannot apply the Main Residence Exemption from the date your parent's acquired the property. We do not consider that you are the beneficial owner of the property from the date of acquisition in 1993.

You became the sole beneficial owner of the property on the transfer of the legal title of the property, following the administration of your mother's estate. CGT event A1 will occur for you on your disposal of your interest under section 104-10 of the ITAA 1997. Any capital gain or loss you make when you sell the property cannot be disregarded and must be included in your income tax return in the relevant income year.