Edited version of private advice

Authorisation Number: 1052315913745

Date of advice: 13 December 2024

Ruling

Subject: Legal v beneficial ownership

Question 1

Will capital gains tax ('CGT') event A1 occur pursuant to section 104-10 of the Income Tax Assessment Act 1997 ('ITAA 1997') when you dispose of the property for which you hold legal ownership (the Property)?

Answer 1

Yes.

This private ruling applies for the following period:

Year ended X June 20XX.

Year ended X June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You currently hold the title of a residential property comprising a freestanding dwelling situated on land of less than XX hectares in area (the property).

The Property was originally purchased by your relative (deceased) and their late spouse more than XX years ago.

In 19XX, the deceased's spouse passed away and the deceased began residing in the Property as their main residence at that time.

The Property was the deceased's main residence from 19XX until their death and has never been used to produce assessable income.

In 19XX, the deceased agreed to collateralise the Property as security for a relative (relative A)'s business loans owed to Bank A.

Relative A's business failed, and Bank A sought to enforce the mortgage registered on the dwelling.

Neither the deceased nor relative A had any finances to repay the debt to Bank A.

You obtained a Property loan from Bank B with the intention of providing the funds to the deceased to repay the debts to Bank A.

The condition of the loan from Bank B was that you must have enough collateral to secure both the mortgage on your own home, as well as the additional loan taken to extinguish the deceased's mortgage on the property.

Therefore, you purchased the Property from the deceased using the loaned funds along with a deposit which came from your own funds, and title (and therefore legal ownership) of the Property was transferred from the deceased to you on XX January 19XX.

The deceased used the proceeds from the sale of the Property to extinguish debts owed to Bank A.

Relative A has paid all mortgage repayments.

The deceased died on X February 20XX.

There was never a contemporaneous agreement between the parties around the time of the transfer in 19XX, or any other written evidence or documentation at that time, as to the intention of the transfer.

Assumptions

You will sell the Property in the 20XX-XX or 20XX-XX income year.

There will be no change to the factual scheme described in this ruling between the date of issue of this ruling and the date you sell the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Reasons for decision

Summary

You obtained full legal and beneficial ownership of the Property when you purchased it from the deceased. CGT event A1 under section 104-10 of the ITAA 1997 will occur when you dispose of the Property.

Detailed reasoning

Legal and beneficial ownership

The ATO 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.

A person's legal interest in a property is determined by the legal title to that property under the property law legislation in the State or Territory in which the property is situated.

Where it is asserted that the beneficial ownership and legal ownership of a property are not the same, there must be evidence to show that the legal owner holds the property in trust for the beneficial owner. Relevant evidence includes information that evidences the intentions of the parties at the time the property was purchased or transferred from one legal owner to another, and evidence of contributions made by the parties towards the purchase price.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) 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 paragraphs 38 to 41, It has been said that if the equitable interest does not follow the legal title, there is some basis for the profit/loss to be distributed on the equitable and not the legal basis.

It was explained in Calverley v Green 56 ALR 483, Dean J said (at p 500):

'It is simply that there are certain relationships in which equity infers that any benefit which was provided for one party at the cost of the other has been so provided by way of "advancement" with the result that the prima facie position remains that the equitable interest is presumed to follow the legal estate and to be at home with the legal title or, in the words of Dixon CJ, McTiernan, Fullagar and Windeyer JJ in Martin v Martin (1959) 110 CLR 297 at 303, that there is an "absence of any reason for assuming that a trust arose".'

Cases where the title includes the name of a person who is a nominee or trustee, must be decided on an individual basis on the evidence available to establish that fact. Authority can be found in Napier v Public Trustee (Western Australia) 32 ALR 153 where the court accepted there was sufficient evidence to establish that the equitable interest was different from the legal title. Aickin J said (at p 158):

'The law with respect to resulting trusts is not in doubt. Where property is transferred by one person into the name of another without consideration, and where a purchaser pays the vendor and directs him to transfer the property into the name of another person without consideration passing from that person, there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be. This proposition is subject to the exception that in the case of transfers to a wife or a child (including someone with respect to whom the transferor or purchaser stands in loco parentis ) there is a presumption of advancement so that the beneficial as well as the legal interest will pass. Each of the presumptions may be rebutted by evidence.'

Any capital gain or loss should also be apportioned on the same basis as the rental income or loss.

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.

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. As noted by Gibbs CJ, in Calverley v Green [1984] HCA 81:(Calverley v Green case). 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.

However, there are instances where this application may not apply, including:

•                where there is evidence of a specific intention to hold beneficial interest in the property for another person who contributed no amount, or a lesser amount, towards the purchase price.

•                where the presumption of advancement applies.

Presumption of advancement

The presumption of advancement is an equitable principle where a person puts property in the name of another person with whom they have a close familial relationship. The presumption only applies to transfers and purchases made by people who stand in particular relationships, including parents and their children.

Under the presumption of advancement, the property is transferred with the intention of transferring both the beneficial interest in the property as well as the legal title. The parties hold their equitable interests in the property in the same proportions as their legal interests. In Calverley v Green (1984) 59 ALJR 111 Gibb CJ found:

•                Where one party purchases property in the name of the other, it will be presumed that the first party did not intend the other to take a beneficial interest unless there is such a relationship between the parties as gives rise to a presumption of advancement.

•                The sort of relationship where the presumption will arise is where the relationship is such that it is more probably than not that a beneficial interest was intended to be conferred.

•                The presumption of advancement may be rebutted by evidence of the actual intention of the purchaser at the time of purchase. If two parties have contributed to the purchase and the legal interest does not reflect the proportions of their contributions, the intentions of both parties at the time of purchase are important.

•                The onus of rebutting the presumption of advancement lies with the party who is considered as having gifted the property to another (usually the purchaser). Evidence is required that demonstrates that the purchaser did not intend the property to be a gift to the other party.

•                In Commissioner of Taxation v Bosanac [2016] FCA 448 he argument of a resulting trust versus the presumption of advancement was discussed at length. The court outlined the following principles:

•                Although it is referred to as a presumption of advancement, the dominant approach in Australia is that it is strictly not a presumption.

•                Rather it is a description of certain circumstances, being the existence of particular relationships, where the presumption of a resulting trust does not arise.

•                Generally, the court will look to the dealings, documents and communications at the time of the purchase to determine whether there was intention to retain a beneficial interest. However, evidence of the dealings between the parties after the time of purchase may be a relevant factor.

Application to your case

When determining legal v beneficial ownership, our starting point, as noted in Taxation Ruling 93/32 is that the beneficial ownership of the Property is the same as the legal ownership. The onus then lies with the taxpayer to rebut this conclusion through evidence to the contrary.

You advise that once legal title was transferred to you, you did not live in the Property or make any mortgage repayments. Although we accept that you have not directly benefited through your own immediate use and enjoyment of the property, you have exercised your ownership rights by providing the deceased with continued use and enjoyment of the Property under a private family arrangement.

Furthermore, you have not provided any written evidence or documentation from the time you purchased the Property to indicate that you were holding the Property on trust for the deceased, nor is there a written agreement providing the deceased with a formal right to reside or a life estate in the Property after you purchased it. While not in and of itself determinative, the absence of such evidence does not support the argument that the beneficial ownership lies with the deceased.

On the facts, you have obtained finance and used that money to purchase the Property from the deceased. This was done to clear the deceased's debt that was incurred through collateralising the house to the deceased's relatives' business and prevent the deceased from being forced to sell the Property by the bank. Irrespective of the percentage of the mortgage you provided as an initial deposit, you obtained beneficial ownership of the entire quantum of loaned funds when you signed the contract and therefore have assumed 100% of the risk of servicing the mortgage. As such, the obligation to service the mortgage as well as the ability to sell the Property and extinguish the mortgage lies with you.

Furthermore, if you had sold the property, you would have been entitled to the proceeds of sale, indicating that you held beneficial ownership of the property. This also applies similarly if you rented the Property out and received rental income. It is irrelevant whether either of these events actually occurred.

We accept that your purpose for obtaining finance and purchasing the Property was to prevent the deceased from losing the home they had lived in for many years. However, it does not influence our position on the ownership as the title to the Property was ultimately transferred to you for a sum of money. The deceased has then relinquished their rights over the Property and transferred the legal and equitable rights to you. Without contemporaneous evidence to prove that your intention was merely to hold the Property on trust for the deceased, we cannot conclude that you had any other purpose other than what is supported by the available evidence around the purchase, whereby you are taken to have obtained both legal and beneficial ownership of the Property.

To conclude, we have determined that you obtained both legal and beneficial ownership of the Property upon your purchase and acquisition of title, with CGT event A1 occurring in these circumstances at the time you dispose of the Property. As you have held the Property for longer than 12 months and are Australian residents for taxation purposes, you are eligible for the 50% CGT discount upon disposal of the Property.