Edited version of private advice

Authorisation Number: 1052250418534

Date of advice: 16 May 2024

Ruling

Subject: CGT - foreign resident

Question: Did a capital gains tax event A1 happen to you on the sale of the Property?

Answer: No.

Question: Are you entitled to claim a credit for the foreign resident capital gains tax withholding amount under either section 18-15 or subsection 18-25(2) of Schedule 1 of the Taxation Administration Act 1953 (TAA)?

Answer: No.

This ruling applies for the following period:

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

Several years after you and Person A began cohabiting, they purchased a property (the Property).

Person A was listed as the sole owner on the legal title of the Property and had solely funded the purchase of the Property, obtaining a mortgage to fund the purchase of the Property that was solely in their name.

You and Person A moved into the Property immediately after it was purchased and used it as your family home.

After several years you and Person A separated with you and your children continuing to reside at the Property rent free.

Person A had funded the repayment of the mortgage and related expenses, and all expenses arising in relation to the Property prior to the separation occurring.

Some years after the separation, you and Person A (collectively referred to as the parties) entered into a formal separation agreement (the Separation Agreement) prepared by lawyers which included the following information:

•         The parties separated in 20XX. At separation Person A vacated the former matrimonial home, being the Property, with you and the children remaining there rent free

•         Since the separation Person A had paid the following:

•         The mortgage secured over the Property

•         The utility bills, rates and taxes in relation to the Property; and

•         The children's school fees and other educational expenses and their medical and dental expenses and child support.

•         It was agreed that:

•         Person would do all acts and things and sign all documents necessary to transfer the Property to you, at your expense (Clause 3)

•         Person A would pay the principal and interest in relation to the mortgage over the Property as and when it fell due.

•         The parties' obligations in relation to the Property are:

o   You had the sole responsibility for utility bills, cost of any routine maintenance and all other responsibilities associated with the Property other than mortgage payments; and

o   Person A would meet all the mortgage repayments, rates and taxes and maintenance work costing in excess of a specified amount and would indemnify you for those outgoings.

•         The furniture and chattels in the Property were the sole property of you.

•         You acknowledged and accepted that prior to living in a de facto relationship or remarrying, that you would do the following:

o   Enter into an agreement in accordance with section 90B or section 90UB of the Family Law Act 1975 (FLA) to exclude your interest in the Property from any future claims by your de facto partner or future husband; and

o   Bequeath by Will all your right title and interest in the Property to XXXX and XXXX.

•         Person A would retain to the exclusion of you, their motor vehicle, interests in a specified company and investments through that entity, superannuation, bank accounts and other properties in their name or control.

•         Statements were made to confirm that both you and Person A had received independent legal advice prior to signing the Settlement Agreement.

After several years you entered into a contract to purchase a property (Property B), with Person A paying the deposit amount and funding the purchase of Property B.

The title of Property B is registered solely in your name.

The legal title of the Property had not been transferred into your name in accordance with the Separation Agreement, however you continued to enjoy the benefits over the Property until you moved to Property B.

Several months after Property B was purchased a contract of sale of the Property was entered into for a higher sale price than was paid to purchase Property B, with Person B signing the document in their role as Power of Attorney for Person A.

Person A funded the purchase of Property B.

You did not receive any of the cash from the sale of the Property.

Person A was a non-resident of Australia when settlement on the disposal of the Property occurred and had not obtained a clearance certificate which resulted in 12.5% of the sale proceeds being withheld by the purchaser under the foreign resident capital gains tax withholding (the Withheld Amount), which was remitted to the Australian Taxation Office (ATO).

Some months after the Property was sold, you and Person A entered into a Deed of Confirmation (the Deed) that was prepared by a legal firm, which included the following information:

•         The parties included:

•         you, listed as having the Property B address; and

•         Person A having an overseas address.

•         At the time of separation, you and your children continued to reside at the Property, which was your home.

•         You and Person A entered into the Separation Agreement dealing with the treatment of assets and financial arrangements, and a binding Child Support Agreement.

•         While it was contemplated that the Property would be transferred to you in the Separation Agreement, for various reasons the transaction was not completed. However, for all intents and purposes, it was understood by the parties that you had a life interest in the Property and Person A continued to pay for the maintenance and mortgage payments related to the Property.

•         You contacted Person A to advise them that you and your children wished to move to new premises as the Property was getting old and you preferred to have a new house.

•         Person A agreed to purchase a new property chosen by you for a similar value as the Property to allow you and your children to quickly acquire a new property and move into it provided that Person A would subsequently be able to dispose of the Property and keep the proceeds from the sale to offset the purchase price of the new property.

•         At all times, the Property was treated by you and Person A as belonging to you for life.

•         The Property was valued with a price range being determined (the Valuation Range), and you looked at a number of properties, including Property B within that price range.

•         Property B was being auctioned and Person A had arranged for an estate agent to act on your behalf at the auction, and to facilitate the payment of the deposit if you were the successful bidder. Person A approved an amount up to the highest amount of the Valuation Range for the purchase of Property B, being the top value of the Property at that time.

•         You signed the contract for the purchase of Property B for total consideration at the lower end of the Valuation Range.

•         Person A used the services of their attorney to enter into a contract of sale of the Property some months after the purchase of Property B for a sale price higher than the top of the determined Valuation Range Price

•         Person A received correspondence from the ATO outlining that they were a foreign resident and up to 12.5% of the sale proceeds in relation to the sale of the Property may be withheld.

•         An amount of foreign resident capital gains tax withholding was withheld by the purchaser of the Property (the Withheld Amount), which was paid to the ATO on Person A's behalf.

•         You and Person A wish to enter into this Deed of Confirmation to restate in full the terms and conditions upon which the Property was provided to you for life, so that the payments made to the ATO can be recovered in full by you.

•         The treatment of the Property, as outlined in Clause X, stated:

•         Both you and Person A had treated the Property as belonging to you for life and had always consistently acted in that respect.

•         At the time the Property was sold your and Person A's treatment of the Property did not change and remained the same; and

•         The purchase of Property B was undertaken by Person A to avoid disruption for you and your children, which would have occurred if the Property was sold first and alternative properties sought thereafter.

You lodged your income tax return for the ruling period without disclosing any capital gains tax event occurring in relation to the sale of 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 104-15

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

Taxation Administration Act 1953 Schedule 1 Subdivision 14-D

Taxation Administration Act 1953 Schedule 1 section 18-15

Taxation Administration Act 1953 Schedule 1 subsection 18-15(1)

Taxation Administration Act 1953 Schedule 1 section 18-25

Taxation Administration Act 1953 Schedule 1 subsection 18-25(2)

Reasons for decision

Issue 1: Capital gains tax

Summary

CGT event A1 did not happen to you due to the sale of the Property.

Detailed reasoning

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 capital gains tax (CGT) event happens to a CGT asset.

A 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.

Generally, CGT event A1 happens to the legal owner of a CGT asset just before the disposal of it.

However, the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for other persons. In such cases, the trust will be the owner of the asset for CGT purposes unless there is another person that was absolutely entitled to that asset as against the trustee making that other person the owner for CGT purposes.

Legal v beneficial ownership

Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated.

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset.

The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner.

If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner under section 106-50 of the ITAA 1997. The effect of the section is that the beneficiary, and not the trustee, is liable for any capital gain or loss that arises in relation to the asset.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 outlines the circumstances in which a beneficiary of a trust can be considered to be absolutely entitled to a CGT asset of the trust as against the trustee.

Paragraph 40 of TR 2004/D25 states that the existence of a bare trust does not automatically mean a beneficiary of the trust is absolutely entitled. There may be multiple beneficiaries with interests in the trust property in which case other factors need to be considered. It may be that despite the trust being a bare trust, no one beneficiary is absolutely entitled to the trust property.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners 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, 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.

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.

Application to your situation

A ruling decision is being sought in relation to whether as a result of you and Person A entering into the Separation Agreement:

•         Person A had acted as trustee for a bare trust over the Property for you; and

•         That you became absolutely entitled to the Property for CGT purposes.

It is stated in the ruling that the Deed of Confirmation (the Deed) was executed on 23 December 20YY to reaffirm your entitlement over the Property as initially intended in the Separation Agreement signed on 26 December 20YY. Clause 2.2 of the Deed restated that both parties had treated the Property as belonging to you which remained the same before and after the sale of the Property.

When considering the CGT provisions in relation to your situation, if it is viewed that:

•         You did not hold any legal or beneficial interest in the Property, then there will be no CGT implications for you in relation to the sale of the Property; or alternatively

•         You held a beneficial interest in the Property then you would be eligible for a full main residence exemption and would be entitled to disregard any capital gain or capital loss made on the sale of the Property.

As outlined above, 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. When a person has their name on the title in practical terms there needs to be positive evidence about the existence of beneficial ownership, such as evidence of what happened and positive contemporary evidence.

In this case, Person A purchased the Property with them:

•         Being registered as the sole owner on the title of the Property

•         Being the sole mortgage holder in relation to the Property:

•         Solely funding the purchase of the Property.

•         Living at the Property for several years until your separation, after which they moved out and you and your children continued to reside at the Property.

The Separation Agreement was entered in by you and Person A several years after the separation under which you and your children could continue to reside at the Property, with Person A continuing to be responsible for the mortgage repayments, rates, taxes, and maintenance work costing over a specified amount, with the title of the Property to be transferred to you.

As the Separation Agreement had been entered into by you and Person A a significant period after the Property was originally purchased and also after the separation occurred, it would be reasonable to expect that the document would provide an explicit statement and/or wording about the transfer of the Property you and the existence of a trust, that is an express trust, if there had been the intention when the document was entered into for Person A to hold a beneficial interest in the Property for you. However, the word 'trust' is not mentioned in relation to the Property.

Even if we were to conclude that there was a bare trust in existence in the situation being considered then you would not be an absolutely entitled beneficiary of the trust in relation to the Property given that it had been indicated in the Deed that you had no more than a life interest in the Property, and if there is a life interest there needs to be remainder beneficiary/beneficiaries, which could be your children in this case given that you were to transfer the Property into their names if you entered into a de-facto relationship or got remarried.

The Separation Agreement states that it was agreed that Person A would retain to the exclusion of you their motor vehicle, interest in a company and investments through the entity, superannuation, bank accounts and other properties in his name or control. However, the Separation Agreement is silent in relation to any reference in relation to the existence of a trust and/or any beneficial interest in the Property being held for you, with it merely stating that the title of the Property would be transferred to you.

Based on the information provided with the ruling we are not able to conclude that there was an intention to create a trust in relation to the Property and therefore that Person A held any beneficial interest in the Property for you.

The information provided supports that the Settlement Agreement is a legal document that provided you with contractual rights rather than fiduciary rights, providing you with a right to pursue legal action against Person A in relation to the Property if Person A did not transfer the title of the Property to you in accordance with the Settlement Agreement.

The best fit for CGT purposes of the Separation Agreement is that it caused a CGT event B1 under section 104-15 of the ITAA 1997 to occur, being an arrangement to provide you with the use and enjoyment of the Property prior to the title of the Property being transferred to you.

CGT event B1 effectively brings forward the time of a disposal (and the time of a capital gain or loss) under such an agreement from the time when the actual disposal takes place to the time when the use and enjoyment of the asset changes hands. The asset is treated as if it was disposed of when the use and enjoyment of the asset changes rather than waiting until the time when there is an actual disposal.

However, if the title of the asset does not pass under the agreement the CGT event B1 is disregarded. If that occurs and the ownership interest in the relevant CGT asset is transferred/disposed of at a later date the relevant CGT event is CGT event A1.

In this situation, the Separation Agreement is a written agreement which is not viewed as a 'loose family arrangement'. It provided for the transfer of the title of the Property from Person A to you, with you continuing to use the Property after your separation.

CGT event B1 occurred when you and Person A entered in the Settlement Agreement, with Person A remaining the legal owner, and you having the right to the use and enjoyment of the Property with the understanding that you would/should eventually become the owner of the Property.

However, the title had not been transferred to you in accordance with the Separation Agreement. Therefore, CGT event B1 still happened but the ownership of the Property for CGT purposes reverted to Person A as the title of the Property was not transferred to you, with CGT event A1 occurring when the Property was sold.

After considering all of the above matters, and the information provided with the ruling, the Commissioner does not consider it appropriate to conclude that Person A held any beneficial interest in the Property for you. Therefore, it has been concluded that the equitable interests in the Property are exactly the same as the legal interests in it. That is that Person A held the legal and beneficial interests in the Property.

Therefore, CGT event A1 did not occur for you in relation to the sale of the Property as you did not hold any legal and/or beneficial interests in the Property.

Issue 2: Withholding regime for non-resident - capital gains tax

Summary

You are not entitled to claim a credit for the foreign resident capital gains tax withholding amount under either section 18-15 or subsection 18-25(2) of Schedule 1 of the Taxation Administration Act 1953 (TAA).

Detailed reasoning

The foreign resident CGT withholding (FRCGW) regime in Subdivision 14-D of Schedule 1 of the Taxation Administration Act 1953 imposes an obligation on a purchaser who acquires from a foreign resident a CGT asset consisting of:

•         taxable Australian real property (TARP)

•         an indirect Australian real property interest; or

•         an option or right to acquire such property or interest.

The withholding obligation generally applies to acquisitions made under contracts entered into on and from 1 July 2016 to Australian properties being sold for a contract price of $750,000 or more.

The obligation consists of a requirement for the purchaser of a TARP from a foreign resident to withhold 12.5% of the first element of the cost base of the asset (usually the acquisition consideration), ignoring any financial benefits under earnout rights, and remit that amount to the Commissioner of Taxation at the time of acquisition, such as at settlement.

Entitlement to credit of withholding payments

The general rules about an entity's entitlement to a credit for an amount withheld from a withholding payment are contained in section 18-15 of Schedule 1 of the TAA and section 18-25 of Schedule 1 of the TAA for beneficiaries of a trust as follows.

Direct credit to payee

Subsection 18-15(1) of Schedule 1 of the TAA states that an entity is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the entity during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable, by the entity for the income year.

To the extent that an entity's entitlement to a credit referred to in section 18-15 of Schedule 1 of the TAA is in respect of an amount paid to the Commissioner under Subdivision 14-D of Schedule 1 of the TAA, the TAA treats the entitlement as arising in the income year in which the transaction causing that application of Subdivision 14-D of Schedule 1 of the TAA is recognised for income tax purposes for the entity.

Payee is a trustee

If the payee is a trustee, the entitlement to a credit is worked out under section 18-25 of Schedule 1 of the TAA according to the following rules.

A beneficiary of the trust is entitled to a credit under subsection 18-25(2) of Schedule 1 of the TAA if:

1.            An amount is included in their assessable income under section 97 of the Income Taxation Assessment Act 1936 in respect of a share of the net income of the trust

2.            The share is wholly or partly attributable to the withholding payments, and

3.            An assessment has been made of the income tax payable or an assessment has been made that no income tax is payable by the beneficiary for the income year.

That is a credit is available to a beneficiary of a trust for amounts withheld from a payment made to a trustee of a trust during an income year. This provision requires that, amongst other things, an amount be included in the assessable income of a beneficiary under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of a share of the net income of the trust, such as income arising in relation to the sale/disposal of a TARP.

Application to your situation

Person A was a non-resident of Australia when settlement on the disposal of the Property occurred. They had not obtained a clearance certificate which resulted in 12.5% of the sale proceeds, being the Withheld Amount, being withheld by the purchaser under the FRCGW, which was remitted to the ATO.

You lodged your income tax return for the ruling period without disclosing any capital gains tax event occurring in relation to the sale of the Property.

As outlined above, it is viewed that you did not hold a legal or beneficial interest in the Property and therefore no CGT implications applied to you in relation to the sale of the Property.

Therefore, as you were not the owner of the Property you cannot claim a credit for the Withheld Amount you do not meet the conditions for eligibility to the credit under section 18-15 of Schedule 1 of the TAA.

Additionally, you did not receive any trust distribution under section 97 of the ITAA 1936 that was included in your assessable income in the ruling period. Therefore, the conditions in subsection 18-25(2) of Schedule 1 of the TAA have not been met.

In conclusion, you do not meet the conditions under the relevant provisions to eligible to claim a credit for the Withheld Amount.