Edited version of private advice

Authorisation Number: 1052274615426

Date of advice: 11 July 2024

Ruling

Subject: CGT - sale of property

Question

Are you required to declare a capital gain upon sale of the property with capital gains tax (CGT) event A1 occurring under section 104-10 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The property was purchased by you and your spouse several years ago.

You and your spouse purchased the property for your child and their children to live in.

Your child had just been through a marriage brake-down and your child was homeless and destitute.

Your child was not able to obtain a loan or a rental property due to their poor credit rating.

You and your spouse borrowed 100% of the value of the property.

Your child paid for all of the costs associated with the property such as loan repayments, rates insurance, utilities and renovations such as kitchen, bathroom and fencing.

When the property was sold all proceeds less the balance of the loan went to your child for the purchase of another property.

You and your spouse had no enjoyment from the property.

The property was never used to produce assessable income.

You and your spouse had no written agreement with your child in relation to 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 106-50

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs when you dispose of a CGT asset. CGT event A1 occurred when the property was sold.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property. An individual can be a legal owner but have no beneficial ownership in an asset.

Under subsection 104-10(2) of the ITAA 1997, a change of ownership is not deemed to have occurred if you stop being the legal owner of the asset but continue to be its beneficial owner. As a result, it is the beneficial owner of a CGT asset that is liable for capital gains tax upon the sale of the asset if they are deemed to be absolutely entitled to it (section 106-50 of the ITAA 1997).

In the absence of evidence to the contrary, the property is owned by the people registered on the title. However, it is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner.

We consider that there are extremely limited circumstances were 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.

Usually if a person purchases a property in another person's name, there is a presumption that it is held on trust for the purchaser. Note that this is not the case where there is an immediate family relationship. In that case it is presumed that the legal and beneficial interest are the same.

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 them interest in the property for the benefit of the other.

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

In your case, there has been no evidence provided by you to establish that there was an express trust or a constructive trust.

Further, the Commissioner considers that a resulting trust did not arise having regard to the following:

•         You purchased the property in your name with a mortgage also in your name.

•         Your child did not contribute to the purchase price.

•         There was no written agreement between you and your child that the property was held on trust.

As a result, you have not been able to provide sufficient evidence that your child had a beneficial ownership in the property.

Accordingly, you have both a legal and beneficial ownership in the property. You are therefore required to declare any capital gain on the sale of the property in your tax return.