Edited version of private advice

Authorisation Number: 1052316303629

Date of advice: 15 October 2024

Ruling

Subject: CGT - legal v beneficial

Question

Did a CGT event A1 occur for you when you transferred your legal ownership of the Property?

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

Person A and Person B are married.

In XX 20XX, Person A and Person B engaged a real estate to source a property for your child (Person C).

In XX 20XX, Person A and Person B emailed a solicitor and explained that Person C wished to purchase a home. Person A and Person B advised the solicitor that they were intending to assist with the purchase, and you would be adding your names to the contract.

The Bank determined that Person C could purchase a property in the price range of around $XXX,XXX, dependent upon Person A and Person B providing the guarantee, using their family home. As a result, Person C did not require a deposit or mortgage insurance.

On XX XX 20XX, a contract of sale was signed, listing Person A, Person B and Person C as the buyers of the property (the Property). You each held a 1/3 share on the Property Title.

In XX 20XX, the Property settled.

Person C received the first home buyers discount on Stamp Duty.

In the 20XX income year, all three parties lodged income tax returns reporting rental income from the Property, which had a tenant in place.

In the 20XX income year, Person A, Person B and Person C claimed deductions for expenses incurred against that rental income. The deductions included:

• Borrowing expenses
• Council rates
• Insurance
• Interest on the loan
• Repairs and maintenance; and
• Water charges.

In XX 20XX, Person C got married to Person D.

In 20XX, Person A and Person B approached the Bank to discuss options available to Person C and changing the terms of the loan from interest only to a Principal & Interest loan.

In late 20XX, Person C and Person D sought a loan extension to undertake home improvements. To facilitate this, Person A and Person B both removed their names from the property title.

Person C and Person D secured a new loan, with another bank. The Property valuation was $XXX,XXX.

In XX 20XX, your solicitor advised that the 1/3 share of the Property, each held by Person A and Person B, had been transferred to Person C and Person D, by way of a gift.

Your solicitor advised you that you may be liable for Capital Gains Tax (CGT) after gifting the Property to Person C and Person D.

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 108-5

Reasons for decision

Summary

CGT event A1 occurs when you dispose of a CGT asset. The beneficial owner of the CGT asset will be liable to determine the capital gain or capital loss from the CGT event. In your case, we determine that you each had a legal and beneficial ownership in 1/3 of the property and the property was not held on resulting trust.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss as a result of a 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.

Under section 104-10 of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. This disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

When you dispose or sell of an asset

If you disposed of your ownership interest in an asset during an income year, such as property or shares, you need to work out your capital gain or loss for each asset.

If you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out at the time of the event.

You are required to obtain a market valuation when transferring property or shares between related parties, such as family members.

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, 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 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, in the works of Dixon CJ, McTiernan, Fullagar and Windeyer JJ in Martin v Martin (1969) 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 the 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 on 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 create 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 purchase 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.

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 less 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, three important principals in relation to the presumption of advancement 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 the purchase. If two parties have contributed to the purchase 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 on rebutting the presumption of advancement lies with the party who is considered as having gifted the property another (usually the purchaser). Evidence is required that demonstrates that the purchaser did not intend the property to be gifted to the other party.

In Commissioner of Taxation v Bosanac (No 7) the argument of a result trust versus the presumption of advancement was discussed at length. The court outlined the following principles:

• Although it is inferred 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 circumstances

You have each transferred your 1/3 share of the legal title to the Property, to Person C and Person D. To determine if you have a beneficial interest in the property, the facts and circumstances surrounding the property's purchase are considered in light of your relationship with Person C and Person D. We consider the intent of the parties when the property was purchased as well as evidence of the dealings between the parties initially and after purchase.

To establish the property was held on trust, we require evidence from the time it was purchased. With the absence of a declaration of intention, an express trust cannot be held.

The home loan lists all three parties as joint purchasers. However, no contemporaneous documentation was produced to establish that the property was held on trust by you for Person C, as the legal owners only, with no beneficial interest. In addition, all three property title owners have declared rental income and deductions in the relevant income year in which the Property was purchased.

When you each transferred your 1/3 share; you also gifted a portion to Person C's spouse (Person D). If you gift someone an asset, like a house, we consider that transaction to be the same as selling the house, and CGT will apply.

In your case, there is a presumption of advancement, to rebut the presumption of advancement, there is a requirement to consider the facts and evidence provided and, in your circumstances, there is no documented evidence to rebut the presumption of advancement.

TR 93/32 explains that we consider there are 'extremely limited circumstances' where the legal and equitable interest is different from the legal title. We will assume where taxpayers are related, that the equitable right is exactly the same as the legal title. The presumption must be rebutted with contemporaneous evidence of intention. The standard of evidence we require to show a separation of these interests is quite high.

You have not provided the Commissioner with sufficient evidence that Person C had 100% of the legal and beneficial ownership of the property when it was acquired. CGT event A1 will occur for you on your disposal of your interest under section 104-10 of the ITAA 1997, with both legal and beneficial interest having been held by yourself, XXX and XXX at all times. Any capital gain or loss you make from the removal of your name from the property title cannot be disregarded and must be included in your income tax return in the relevant income year.

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.