Edited version of private advice

Authorisation Number: 1052271883220

Date of advice: 27 August 2024

Ruling

Subject: Capital gains tax - legal vs beneficial

Question 1

In respect of each of the properties, did CGT event E5 happen because your Sibling became absolutely entitled to the Property as against you as Trustee?

Answer 1

No.

Question 2

If yes, did your Sibling become absolutely entitled within the terms of subsection 104-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) at or around the time legal title to the properties were transferred to you (or at a later time)?

Answer 2

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes, you are a bookkeeper and not in the business of selling properties.

In or around 19XX-19XX, your sibling (Sibling A) purchased a property (Property X).

You have detailed that Sibling A was the owner of another (Property Y). Property Y was sold by a sibling (Sibling D) of Sibling A, who held the property on trust for Sibling A.

On or about XX 20XX, Sibling A sold Property X and Property Y and relocated to City X.

On relocation to City X, Sibling A has stated that they wanted to acquire a property for their family, but did not have secure employment and was unable to obtain a mortgage. Your contentions are that Sibling A asked you to register 2 properties in your name, and they would provide the purchase money and make any and all loan repayments.

You are the legal title owner to the following properties:

•                     Property A.

•                     Property B.

Sibling A stated that the agreement you hold with their, with regard to both Property A and Property B is:

•                     You hold the legal title of both properties for Sibling A.

•                     Sibling A is liable for all costs incurred by you, including holding costs such as taxes, rates and outgoings.

•                     Sibling A is responsible for maintaining both properties.

•                     You will transfer both legal titles at any time, upon Sibling A's request.

Property A

You state that on or about XX XX 20XX, Sibling A purchased Property A, using funds from existing assets, funds loaned from family members, and the proceeds from the sale of Property X.

On or about XX XX 20XX, the Property A title was registered in your name.

The Property A is vacant land.

Property B

In around XX 20XX, your sibling (Sibling C), was the registered title owner of Property B with their then-spouse.

On or about XX XX 20XX, the Property B title was transferred to Sibling C, following their divorce.

Property B was vacant land at this time, and there was a covenant over the property requiring the purchaser to build a dwelling within two years.

On or about XX XX 20XX, Sibling C transferred the Property B Title to you, Sibling A has stated that they funded the purchase of the property, using their existing assets and proceeds from the sale of Property Y and asked for the property to be registered in your name.

Sibling A stated that they decided to construct a family home on Property B, because of the covenant on that property.

On or about XX 20XX, you obtained a mortgage in your name of $XXXX to fund the construction of a dwelling on Property B.

You entered into a building contract in your name. You stated that Sibling A and their ex-spouse supervised the construction of the dwelling and were responsible for and involved with all dealings with the builder and other tradespersons.

On or about XX XX 20XX, construction was completed on Property B. Sibling A and their children moved into the dwelling. Sibling A and their family continue to reside in Property B.

Sibling A has made repayments to the loan account.

Intended title transfers

In accordance with a Deed of Settlement and Release (dated on or about XX XX 20XX) you intend to transfer the Property A and Property B to Sibling A.

The Deed recites that:

•                     You are the registered proprietor of both properties.

•                     Sibling A has covered all costs and expenses, including paying the purchase price for the properties.

•                     You have at all times, held the properties on trust for Sibling A.

•                     Sibling A now wishes to update the Title to the properties to reflect their interest and record their as the legal title owner as well as the beneficial owner.

You state that you are relying on the Deed of Settlement and Release as proof of the declaration of a trust in writing, and that you hold the properties on trust for Sibling A.

From XX 20XX, Sibling A asked you to transfer the properties on several occasions.

On XX XX 20XX, Sibling A lodged caveats for both properties.

In 20XX, Sibling A sent you text messages requesting that you transfer the properties.

The text messages indicate that you were unable to transfer the properties at this time, given you had refinanced and consolidated all your loans, using one of these properties against your refinancing.

On XX XX 20XX, Sibling A lodged a Writ and Statement of Claim against you in the County Court, requesting you transfer your interests in the properties to Sibling A.

The proceedings settled out of Court, with the Deed of Settlement and Release agreeing that you hold the properties on trust for Sibling A, and the intention is for the property transfers to be finalised, pending the outcome of this private ruling.

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 104-75

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

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

The properties are CGT assets under section 108-5 of the ITAA 1997.

Generally, when a property is transferred under a contract for sale or other arrangements, it will be a CGT event A1 disposal of a CGT asset under section 104-10 of the ITAA 1997, unless a more specific CGT event applies.

Entitlement to a capital gain or loss, reporting obligations, and liability for CGT payable, will usually align with legal ownership.

Absolute entitlement to a CGT asset of a trust

Section 104-75 of the ITAA 1997, explains that CGT event E5 will occur if a beneficiary becomes absolutely entitled to a CGT asset of a trust, with the timing of the event occurring when the beneficiary becomes absolutely entitled to the asset.

To be absolutely entitled to an 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 of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, details at paragraph 10, that the Commissioner has the view that the core principle underlying the concept of absolute entitlement in the CGT rules is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Paragraph 74 of TR 2004/D25 explains that for a beneficiary's interest to be a vested interest in a CGT asset, the beneficiary must be bound to take effect in possession at some point and is not contingent on an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession and enjoyment.

To establish that a beneficiary has absolute entitlement to a CGT asset, paragraph 121 of TR 2004/D25 confirms that an asset that is held for a beneficiary must be consistent with any trust instrument and be evidenced by a contemporaneous written record, made by the trustee, for the benefit of the intended beneficiary.

It should be clear, in writing, that a CGT asset is intended for a beneficiary. There is no prescribed form in which the intention is documented, the only requirement is that there is written evidence that clearly identifies an asset and the intended beneficiary of that asset, to the exclusion of other beneficiaries. In the absence of written records of asset allocation, it is reasonable to conclude that the shared interests in the assets, by their nature, prevent absolute entitlement.

Legal vs beneficial ownership

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. You wish to transfer your legal interest on the titles for both properties to Sibling A, this is a CGT event. Subsection 104-10(2) explains that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. It is the beneficial owner that will have a CGT event upon the sale or transfer of a CGT asset.

When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property. The legal owner of the property is recorded on the title deed of the property issued under the State's legislation. The assumption is that the legal and beneficial ownership is the same.

However, it is possible for the legal ownership of property to differ from the 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 all or part of the legal interest in 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.

There are limited circumstances where the legal and equitable interests in an asset are not the same and there must be sufficient evidence to establish that the equitable interest is different from the legal title and that a party merely holds their interest in the property for the benefit of the other. In particular, to prove that a different equitable interest exists, there must be evidence of the intention of the parties at the time they obtained their interests in the property.

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 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.

The High Court has clarified what is required for the creation of an express trust (Korda & Ors v Australian Executor Trustees (SA) Ltd [2015] HCA 6). The High Court found that in this case, there was no clear intention to create a trust.

Your intention to create an express trust should be made clear in any relevant documentation. The evidence presented in your circumstances do not clearly detail that you intended to create a trust in which Sibling A is clearly identifiable as the beneficiary of both properties.

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 existing 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). A trust is presumed in favour of the party providing the purchase money.

If an individual purchases and then pays for 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.

We look to the objective facts to determine the parties' intentions and to whom ultimately, has beneficial interest. Parties should clearly document, before or immediately after the transaction, their intentions as to who it is intended will have beneficial ownership in the property.

Application to your circumstances

In your case, no documentation was produced to establish that a trust was established over either property at the time they were purchased. With the absence of a declaration of intention, an express trust cannot be held.

We are not satisfied that there is evidence of you holding the properties on express trust for Sibling A from the date of acquisition in 20XX, because:

•                     Evidence of the sale of Property X and Property Y does not evidence that Sibling A contributed to the purchase price of either Property A or Property B.

•                     The explanation you provided as to why the bank loaned to you, to build a dwelling upon land owned by Sibling A does not evidence that a trust was created.

•                     The bank statements evidencing the expenses incurred by Sibling A, are not a contribution to a purchase price and therefore do not evidence that a trust was created.

•                     The bank statements evidencing mortgage payments by Sibling A are not a contribution to purchase price and therefore do not evidence that a trust was created. We note that mortgage payments were also made by your spouse.

•                     The documents provided confirm that Sibling A was requesting the properties be transferred to their, approximately XX years after they were transferred to you. This shows that Sibling A believes they have an equitable interest in the properties; however, this does not evidence your intent at the time the properties were purchased.

•                     In or around 20XX, Sibling A commenced court proceedings to have the properties transferred. This occurred approximately XX years after the purchase of the properties and does not evidence the intentions at the time the properties were transferred to you.

•                     Sibling A has provided copies of the Writ and Statement of Claim. The Commissioner cannot make a decision regarding the evidence of a trust based on an assumption that the Court would rule in favour of a particular party. We have not received copies of correspondence between you and your legal representative in the proceedings.

•                     The Deed of Settlement and Release is not evidence of the existence of a trust being established at the time of purchase. A decision to accept the settlement does not prove the intention to create a trust when the property was purchased.

With respect to a constructive trust, as there is no court order, it cannot be held that a constructive trust has arisen.

In your case, at the time of acquiring the properties, you state that you had a verbal agreement with Sibling A to hold the properties on trust and that you did not meet those terms. Many years have passed with no attempts to address the issue. Despite the claim that Sibling A provided the purchase money for both properties, you cannot evidence that this occurred in order to establish a resulting trust. Although you claim that Sibling A contributed the purchase money to acquire both properties, you cannot produce evidence to establish this as fact and therefore you have not demonstrated that you hold the assets on trust for Sibling A. The Writ and Statement of Claim, along with the Deed of Settlement and Release do not evidence your intention at the time the properties were acquired and your legal interest in them established.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners, at paragraph 41, explains that we consider that there are extremely limited circumstances' where the legal and equitable interests are not the same and there needs to be sufficient evidence to establish that the equitable interest is different from the legal title.

You have not provided the Commissioner with sufficient evidence that you do not have a legal and beneficial ownership interest in both Property A and Property B. You have therefore, not established the existence of a trust. In the absence of a trust, Sibling A cannot be absolutely entitled to the properties at the acquisition date and, therefore, a CGT event E5 has not occurred.

Whilst there is evidence of Sibling A believing they was entitled to the properties; this evidence is a considerable time after the purchase. There is no evidence of the intention of the parties at the time of purchase that a trust was actually created. Your actions in using your interest in the property to obtain other loans, and not transferring the properties despite Sibling A's requests, are inconsistent with the argument that you held the properties on trust. When you transfer your legal title to Sibling A, CGT event A1 will happen pursuant to section 104-10 of the ITAA 1997.

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.