Edited version of private advice

Authorisation Number: 1052266925302

Date of advice: 22 July 2024

Ruling

Subject: CGT - sale of property

Question

Did you have a CGT event in relation to a 25% interest in the property when it was sold?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The property was purchased more than 20 years ago in four names in equal shares as tenants in common.

The owners were you, your parents (Parent A and Parent B), and your sibling.

Your parents' previous main residence was co-owned by them. It was sold with the sale proceeds used for the deposit to purchase the property.

The mortgage for the property was taken out in all four names included on the title to the property.

At the time of the purchase of the property you were a young adult and you were working part-time while your sibling was a few years older and employed by a large corporation.

You lived in the property with your parents and your sibling until your sibling left home a couple of years after the property was purchased and you left home a few years after that.

The property mortgage was extinguished from the proceeds of a lump sum Parent A received several years after the property was purchased.

Your name and your sibling's name were not removed from the title when the loan was paid out.

Upon Parent B's passing in 20XX, Parent A acquired Parent B's ownership interest in the property under Parent B's will such that the registered ownership interests for the property became 50% as to Parent A and 25% each for you and your sibling.

In 20XX, Parent A decided that they wanted to sell the property to fund their retirement.

A dispute arose in relation to your sibling's interest in the property as Parent A needed their signature to be able to sell the property.

Your sibling lodged a legal claim against Parent A. In their statement of claim they stated:

•         They were added to the title and mortgage so that the bank would loan the necessary funds to their parents.

•         It was because they consented to this that they subsequently suffered financial loss by not being entitled to the First Home Owners Grant and not being able to acquire as many investment properties as they otherwise would have.

In their claim, your sibling sought orders for the property to be sold and the net proceeds to be paid to each owner of the property in proportion to the interest held by the owner as reflected on the Certificate of Title.

Your sibling and Parent A agreed to settle the dispute.

The consent orders stated that the property was to be sold with Parent A to pay your sibling $XXX,XXX upon settlement.

The property was sold for $X,XXX,XXX.

After payment of relevant costs, and the $XXX,XXX to your sibling, the balance of the sale proceeds was received by Parent A.

Parent A used part of the balance to purchase their new downsized residence.

You have not received any of the sale proceeds.

The property was never used as a rental property during your family's ownership period.

Your contentions

You have made the following contentions:

•         It was never the intention of your parents that you and your sibling would have any beneficial ownership interest in the property.

•         You parents included your sibling on the loan and title as they were employed at the time and were required to be on the loan and title in order for your parents to be able to secure the loan on the property.

•         Your parents included you on the title so that no favouritism was shown by them. This was also done to ensure that on the death of your parents, your sibling could not use the fact that their name was on the title to try to support a greater claim over the property than you.

•         All loan repayments were satisfied by your parents.

•         Your parents paid all the property expenses such as repairs, council rates, water rates, body corporate rate fees, house insurance, electricity and gas and maintenance.

•         Parent A had only been receiving a principal place of residence exemption for 50% of the land tax because they had been unaware that they could have applied for an exemption on the land tax relating to the share of the property owned by you and your sibling.

•         The reason your name and your sibling's name were not removed from the title when the mortgage was repaid was because your parents believed that stamp duty would have been payable if this was done.

•         You have always held your 25% interest in the property as bare trustee for the survivor of Parent A and Parent B. This is stated in a document signed by you and Parent A dated within the last six months.

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 106-50

Reasons for decision

Summary

There is insufficient evidence to demonstrate that the legal and beneficial ownership interests in the property were different. That is, there is insufficient evidence to establish that you held your 25% ownership interest in the property on trust for Parent A. Consequently, capital gains tax (CGT) event A1 happened to you for your 25% ownership interest when the property was sold.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs under section 104-10 of the ITAA 1997 when there is a change in ownership of a CGT asset.

Accordingly, when applying the CGT provisions on the sale of property, ownership must be considered. It must be determined who had beneficial ownership of the property.

An individual can be a legal owner but have no beneficial ownership in an asset. This will ordinarily occur where the property is held on trust.

To establish occasions where legal and beneficial ownership are not the same (i.e. a trust), there needs to be evidence to rebut the standard presumption that legal and equitable interests are the same.

This evidence ordinarily includes:

•         contemporaneous documentation that clearly shows the parties' intentions at the time the property was purchased, and

•         documentation that clearly shows that the parties treated the property in accordance with those intentions during the ownership period.

Gibbs CJ stated in Muschinski v. Dodds [1985] HCA 78 that the relevant principles included there being contemporaneous evidence:

Where both transferees have contributed to the purchase money, the intentions of both are material, but where only one has provided the money it is his or her intention alone that has to be ascertained. The evidence admissible to establish the intention of the real purchaser will comprise 'the acts and declarations of the parties before or at the time of the purchase ... or so immediately thereafter as to constitute a part of the transaction' (Charles Marshall Pty Ltd v Grimsley [1956] HCA 28; (1956) 95 CLR 353 at 365)

In relation to evidence of a trust arrangement, the following should also be noted:

•         contemporaneous evidence includes any documents such as e-mails, diary entries, bank documents, correspondence with third parties involved in the transaction, etc., that were created at the time of the property's purchase,

•         where there is little or no contemporaneous evidence of intention and the terms of an arrangement, formal documents prepared many years after a property was purchased will be of little probative value, and

•         the evidence must be unambiguous.

In the absence of clear and compelling evidence to the contrary, the property is considered to be owned by the people registered on the title.

Trusts may be of three kinds: express, constructive, or resulting.

Express Trust

An express trust is one intentionally created by the owner of 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 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 [1984] HCA 81).

If a resulting trust arises, the party, or parties, who hold the legal title is, or are, presumed to hold the property upon resulting trust in favour of those who contributed to its purchase cost.

That is, 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.

The presumption of resulting trust may be rebutted by:

•         a presumption of advancement that arises and is not rebutted, or

•         evidence of the contributors' common intention at the time of the property purchase contrary to the resulting trust arising: Calverley v. Green.

Application to your circumstances

In your case, there was not a constructive trust.

For the other two types of trust, clear contemporaneous evidence is required in order to either establish that there was an express trust or to rebut the presumption of advancement such that a resulting trust may have arisen.

We make the following comments in relation to documents you have provided:

•         Parent B's will passed their legal ownership interest to Parent A. It provides no evidence that you and your sibling held your shares on trust. It reflects the legal interests in the property.

•         Your signed deed clearly states the intention regarding the property, but it is a very recent document so has little weight in the absence of contemporaneous evidence.

•         Your sibling's statement of claim referred to both their legal interest of 25% and their reasons for being a party to the loan. This is not contemporaneous evidence of the intention to hold their share of the property on trust.

•         The consent orders show that under the settlement your sibling agreed that they would make no future claims against the property or Parent A's estate. This is not evidence that they originally intended to hold their share of the property on trust for their parents.

•         Sale settlement documents - Distribution of proceeds of sale to a particular person is not evidence that a trust was created at the time the property was purchased. Parties can agree to a distribution of proceeds of sale that is different to their legal or beneficial interest.

•         Some of the documents for expenses in relation to the property are addressed to Parent A only while others are addressed to Parent A, your sibling and yourself. The payment of property expenses by a particular person is not evidence that there was a trust created when the property was purchased.

None of these documents evidence the intention to hold the property on trust - some point towards the property being dealt with as if the legal and beneficial interest were the same. None of them are contemporaneous.

As a result, we do not consider that sufficient evidence has been provided to establish that the equitable interests in the property were different from the legal title.

Consequently, CGT event A1 happened to you in relation to your 25% ownership interest in the property when it was sold.

Additional information

You may be entitled to a partial main residence exemption on your 25% share of the property for the period you lived at the property. Also, you may be able to use the absence rule under section 118-145 of the ITAA 1997 to continue to treat the property as your main residence after you moved out. However, if you treat the property as your main residence for CGT purposes you will not be able to claim the main residence exemption on any other property you have an ownership interest in, for the same period. That is, you are not able to claim the main residence exemption on more than one property for the same period.