Edited version of private advice

Authorisation Number: 1052297632750

Date of advice: 5 September 2024

Ruling

Subject: CGT - legal vs beneficial ownership

Question

Are you entitled to any main residence exemption on disposal of the Property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On Date one, Person A and Person B bought a property (the Property) as joint tenants.

Person A and Person B had several children Child A, Child B and Child C

On Date two, Person A passed away.

The Property title was updated the following year to reflect that Person B was the sole owner.

On Date three, Person B appointed one of their children, Child A, as their Attorney pursuant to a Power of Attorney.

On the same date, Person B also appointed Child A as their Enduring Guardian.

On Date four, Person B, their child (Child B), Child A's spouse (Person C) and Child A attended the relevant government authority's office (Authority A) to check the Property title and see if there was any way it could be protected. Child B, Child A's spouse and Child B were concerned that Person B was experiencing financial and emotional abuse by Person B's child, Child C. Their actions were an attempt to protect the Property such that Child C would not be able to change the Property title and have access to it.

They were told that it was not possible to put a caveat on the Property, as there was no debt owing to Authority A.

An Authority A staff member suggested that they could put an administrative note on the computer folio. They agreed to this and the staff member then placed an administrative note on the file at the time. The purpose of this note was to advise that if there was any change to the Property title, the family would be informed.

On Date five, Child A and their spouse visited the relevant government authority (Authority B) to seek advice on matters of financial abuse in relation to Person B. Child A, Child B and Person C were advised that unless the relevant government body would declare Person B incapacitated, Authority B could do nothing.

On Date six, Child A and Person C received a letter from Authority A regarding their attendance there on Date four. Authority A advised that the administrative note on the file that required them to notify them if changes were made to the Property title would be removed in a set number of days from the date of the letter.

On Date seven, Authority A removed the administrative note from the file requesting that the family be informed if there was any change to the Property title.

The following year, Person B decided to consult a solicitor. Person B spoke very limited English so consulted a solicitor who spoke their first language.

In that same month, Authority A removed the administrative note from the computer folio.

On Date eight, a Deed of Life Estate (the Deed) was entered into between Person B, Child A and Child B.

The recitals of the Deed are produced below:

A. Person B is the registered proprietor of the property (the Property)

B. Person B agrees to transfer a set proportion of their right, title and interest in the Property to Child A and Child B.

C. Child A and Child B, in consideration of the property being transferred to them, agree to hold a set proportion of the Property subject to a life estate in favour of Person B on the terms and conditions herein.

The Deed also provided that:

4. Person B agrees that during their lifetime they are responsible for all outgoings, council rates, water rates, and any other local or state taxes, and that they shall be responsible for fire, storm and tempest insurance and the general maintenance of the property.

5. Person B shall also be entitled to any rental derived from the Property.

6.Person B may at any time direct the property to be sold if required to enter a nursing home.

After Person B's death, the remaining proportion of the Property was to pass to their child, Child C.

In consideration for becoming owners of a set proportion each in the Property, Child A and Child B provided an amount to Person B.

On Date 8, Person B also made their will. Person B's will stated at clause 3:

3. I GIVE my particular share of the property to my child, Child C.

On Date nine, a new Certificate of Title was issued listing Person B, Child A and Child B as tenants in common in equal shares.

Person B revoked the appointment of Child A as their Attorney on Date ten.

On Date eleven, Person B reappointed Child A as their Attorney pursuant to a Power of Attorney.

On Date twelve, an application was brought by Child C to the relevant tribunal for appointment of a guardian and a financial manager.

The tribunal found that Person B did have a disability which prevented them from making important life decisions. However, they found that appointment of a guardian was unnecessary as decisions could be made informally by their family members. The application for a guardianship order was dismissed

The tribunal found that Person B was incapable of managing their financial affairs. They also found that significant conflict among family members meant that them continuing to manage her financial affairs was now unworkable. The family members all agreed that an independent financial manager was required.

Child A was appointed as Person B's lifestyle guardian and the relevant state authority (Authority C) was appointed as Person B's financial manager on Date twelve.

The following year, Person B was placed in residential aged care following a fall and broken wrist.

Shortly after, Authority C decided to lease out the Property.

The following year, the Property was leased for the first time.

All income from the Property went to Authority C. They did not distribute any of the income.

The Property was leased to the same tenant for several years. The tenant left the house in bad condition, such that it was not liveable and could not be rented out again.

Authority C has been paying land taxes for the Property for several years.

After the tenant left the Property, no income was earned from the Property.

Person B died on Date 13.

The Executor of their estate is Person C.

The Property was sold at auction on Date 14.

Settlement occurred on Date 15.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1997 section 118-195

Income Tax Assessment Act 1997 section 118-200

Reasons for decision

Summary

You are not entitled to any main residence exemption on disposal of the Property.

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 capital gains tax (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.

CGT event A1 is the most common CGT event and happens if you dispose of a CGT asset.

Section 108-5(1) of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property.

If you have disposed of your ownership interest in a CGT asset during the year, you may have a capital gain.

Main residence exemption

Where you have occupied a Property as your main residence for at least some of your ownership period, you may be eligible for a partial or full main residence exemption on disposal of your interest.

As you have not resided at the Property for any of your ownership period, you are not eligible for any main residence exemption based on your use of the Property.

Section 118-110 of the ITAA 1997 provides that any capital gain or loss you make from the disposal of your property can be disregarded if:

(a)         you are an individual; and

(b)         the dwelling was your main residence throughout your ownership period; and

(c)         the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the

estate of a deceased person

Section 118-185(1) of the ITAA 1997 provides that you get only a partial exemption for a CGT event that happens in relation to a dwelling or your ownership interest in it if:

(a)  you are an individual; and

(b)  the dwelling was your main residence for part only of your ownership period, and

(c)   the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the

estate of a deceased person.

However, you may be eligible for a partial or full main residence exemption where you have inherited your ownership interest. If you inherited an ownership interest, you may be eligible for a partial or full main residence exemption on disposal where the relevant conditions are met.

Section 118-195(1) of the ITAA 1997 applies to entities that acquire an ownership interest in a dwelling as trustee of a deceased estate or beneficiary of a deceased estate. If the requirements of section 118-195(1) are met, the trustee or beneficiary will be entitled to a full exemption from CGT on disposal of their interest.

Section 118-200 of the ITAA 1997 provides that you will be eligible for a partial or no main residence exemption if all of the requirements in section 118-195 of the ITAA 1997 are not met.

Legal vs beneficial ownership

When disposal of a CGT asset occurs, it is necessary to consider who is the legal owner of the asset at the time of disposal. Usually, the legal owner or owners will also be the beneficial owner. However, in exceptional circumstances, legal ownership and beneficial ownership may be held by different owners.

When legal ownership is vested in one person or persons on behalf of another, the asset is held on trust. To displace the general presumption that legal and beneficial ownership are held by the same entity, there must be evidence to support this.

There are three types of trust: constructive, resulting and express.

Constructive trusts

Constructive trusts are imposed by operation of law. They are imposed by the court in instances where it would be unjust for either party to deny the existence of the other's interest in the asset.

Resulting trusts

Resulting trusts arise by operation of law. They are imposed when the respective contributions of the parties to the purchase price of a property are not equal. Where a resulting trust arises, the parties who hold the legal title are presumed to hold the property on trust in favour of those who contributed to the purchase cost.

Express trusts

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.

Application to your circumstances

From the information provided by you, including XXX's will and Deed of Life Estate, we consider that from the time XXX transferred a 1/3 interest to each of you for consideration of $XXX, XXX intended for you to become both the legal and beneficial owners. At that time, you acquired an interest in the Property as a result of CGT event A1. There was no trust in existence which would displace the presumption that you become both the legal and beneficial owners at the time of transfer.

We acknowledge that XXX transferred a 1/3 interest to each of you with the intention of protecting the asset (the Property). You have advised that you were concerned about XXX experiencing financial and emotional abuse from XXX. As other efforts you had undertaken to protect XXX's interests were unsuccessful, you and XXX signed a Deed of Life Estate in an effort to ensure the Property was protected. Transfer was effective and resulted in XXX retaining a 1/3 interest in the Property. The remaining 1/3 of the Property passed to your sibling XXX at the time of XXX's death.

XXX made their will on the same day as you signed the Deed of Life Estate. In their will, XXX provided for the transfer of their 1/3 interest to XXX upon their death. This indicates that XXX was of the understanding that XXX only owned a 1/3 interest and the remaining 2/3 would be transferred to you following execution of the Deed of Life Estate and the consideration provided by you. In addition, your 1/3 interests are not listed as assets owned by XXX in the statement of assets and liabilities that was used for probate purposes

The Deed of Life Estate was created to ensure that XXX retained the use of the Property and any income generated from it during their lifetime. It also provided that XXX was responsible for paying any costs associated with holding the Property and would receive any associated rent. This does not mean that you held the Property on trust for XXX. Rather, it was part of the conditions associated with transfer of 2/3 of the Property to you.

As neither of you resided at the Property during your ownership period, you will not be eligible for any main residence exemption on disposal of the Property. As neither of you acquired the Property as a trustee or beneficiary of a deceased estate, you are not eligible for any main residence exemption in your capacity as beneficiaries of XXX's estate.