Edited version of private advice

Authorisation Number: 1052250332735

Date of advice: 14 May 2024

Ruling

Subject: CGT - legal vs beneficial

Question

Did CGT Event A1 occur when you disposed of your interest in the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20BB

The scheme commenced on:

30 June 20AA

Relevant facts and circumstances

The taxpayer, the spouse and the sibling purchased the property together on X March 20XX.

The purchase price of the property was $XXX,XXX.

The sibling was not included in the loan for the property.

The sibling provided $XX,XXX cash for their one third share of the purchase price of the property.

The taxpayer and the spouse were listed on the title of the property.

Circumstances changed and the sibling resided in the property as their main residence for four years prior to the sale.

The property was initially rented out prior to the sibling residing there.

The sibling did not pay rent, but paid the mortgage repayments, rates and utilities during their time living in the property.

The sibling also made other contributions in the way of installing new air conditioning, fencing and several other improvements.

The taxpayer and the spouse were at one point, in default of their obligations to the bank and the sibling paid the bank the amount in arrears which was approximately $XX,XXX.

There has since been divorce proceedings which resulted in the sale of the investment property on XX April 20XX.

After the separation of the taxpayer and the spouse, the spouse had his solicitor change the property from joint tenants to tenants in common on XX March 20XX.

A court order dated XX January 20XX, details the applicant as the spouse, first responder the taxpayer and second responder the sibling.

Sale price of the property was $XXX,XXX.

The sale proceeds of the property after fees and other charges of $X,XXX.XX and credits of $XXX.XX were distributed as follows:

City council: $X,XXX.XX.

Utilities: $X,XXX.XX.

Conveyancing: $XXX.

Bank loan: $XXX,XXX.XX.

The taxpayer's lawyer's trust account: $XXX,XXX.XX.

The taxpayer and the spouse held the sibling's interest in the property on constructive trust from its acquisition.

Prior to the distribution of the proceeds, the amount of $X,XXX was paid to the mediator.

The court order granted that the sibling receive the sum of $XXX,XXX.XX from funds which were held in a trust account of the taxpayer's lawyers.

The amounts were formulated to represent the constructive trust and contributions made by the sibling towards the property.

The balance of proceeds is to be equally divided between the taxpayer and the spouse.

The taxpayer calculated the cost base as $XXX,XXX.XX.

The taxpayer calculated the total capital gain as $XX,XXX.XX.

The taxpayer calculated one third amount of capital gain less 50% discount as $XX,XXX.XX.

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) provides that you make a capital gain or loss as a result of a CGT event occurring to a CGT asset that you have an ownership interest in. For this reason, it is important to establish who is the owner of a CGT asset at the time a CGT event occurs.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

What you pay tax on

If you sold assets during the year, such as property or shares, you need to work out your capital gain or loss for each asset.

When you sell an asset for:

•         more than it cost you - you have a capital gain

•         less than it cost you - you have a capital loss.

You pay tax on your net capital gains. This is:

1. Your total capital gains

2. Less any capital losses

3. Less any discount you are entitled to on your gains.

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. A beneficial owner is a person or entity who is beneficially entitled to the income and proceeds from the asset. 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 in 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 paragraphs 41 and 42, 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, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

Any capital gain or loss should also be apportioned on the same basis as the rental income or loss.

Constructive Trust

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, 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, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier act.

Application to your circumstances

The taxpayer, the spouse and the sibling purchased a property together with the intention of renting it out. Only the taxpayer and the spouse were included on the title of the property. A constructive trust was established by the legal owners (the taxpayer and the spouse), holding the sibling's beneficial ownership of the property. The property was sold due to divorce proceedings which resulted in the proceeds of the sale to be distributed as per a court order.

Due to the taxpayer's sibling providing a cash payment towards their share for the purchase of the property, loan repayments and maintenance costs for the property, a court order provided the sibling with a cash amount to cover their share of contributions towards the property. The court order distributed the remaining proceeds, equally between the taxpayer and the spouse. As the taxpayer and the spouse contributed towards their share of the property via a loan, the loan was paid prior to them receiving their remaining proceeds.

Based on the facts, the Commissioner accepts that in the taxpayer's circumstances, although the taxpayer and the spouse were legal owners of the property, it was intended that the taxpayer's sibling have a beneficial ownership of the property. The proceeds of the sale of the property were distributed according to how each individual contributed to the property (cash or loan) and their share of the property. Therefore, the Commissioner is satisfied that the taxpayer, the spouse and the sibling had an equitable ownership in the property.

As per Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997), the Commissioner is satisfied that the taxpayer made a capital gain because of an A1 CGT event occurring on a CGT asset which they had a one third ownership in. Therefore, the taxpayer is liable for CGT on the capital gain received for their part of ownership in the property.

Note: The taxpayer will need to calculate the cost base and capital gain according to their one third share of the property. This will be based on the taxpayer's own cost elements. All cost elements need to be in relation to the property. Any elements not relating to the property, this includes any part of the loan which did not relate to the purchase of the property, will need to be proportioned. For further information go to ato.gov.au and search for QC 66022 Cost base of assets and QC 66020 Calculating your CGT.