Edited version of private advice

Authorisation Number: 1052319047015

Date of advice: 14 February 2025

Ruling

Subject:CGT - income tax

Question

Did capital gains tax (CGT) event A1 happen on DDMMYYYY when you transferred your legal ownership interest in the property to your child?

Answer

Yes.

This ruling applies for the following periods:

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

For the income year ended 30 June YYYY

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

You and your spouse, along with your child (joint names) purchased a property situated at X (the Property), for AUD$X with a contract dated DDMMYYYY as tenants in common with unequal ownership interests.

You provided your child a letter originally dated DDMMYYYY of your intention to make a gift to them approximately $X towards the purchase price of an unidentified property.

You and your spouse then transferred your child $X on DDMMYYYY which did not need to be repaid by them at any time as you considered it to be a genuine gift to assist them in entering into the Australian property market.

The purchase of the Property was financed with an investment home loan, approved for the full purchase price of $X with a standard variable interest rate of X% per annum over X years, in the joint borrowing names.

The banks security over the investment home loan was a registered mortgage over two properties.

The Property settled on DDMMYYYY.

The YYYY & YYYY landlord building and contents insurance for the Property was insured in joint names.

The Property was rented out from DDMMYYYY.

While tenanted, the monthly rent was directly credited to an offset account in the joint names. The mortgage to the bank was paid from this account.

The tenants vacated the Property on DDMMYYYY.

You and your spouse have never lived in the Property.

The YYYY building and contents insurance for the Property was solely in the child's name.

Your child moved into the Property with his spouse after getting married in MM YYYY.

On DDMMYYYY, you and your spouse transferred your individual ownership interests in the Property to your child who became the sole legal and beneficial owner of the Property.

In the YYYY - YYYY income years, you and your spouse each reported rental income and rental expenses on your tax returns in line with your legal ownership interest in the Property which was X% and X% respectively.

No contemporaneous evidence from the acquisition date has been provided to us to show the beneficial ownership of the Property was intended to be different from the legal title.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

Summary

CGT event A1 has happened to you and your spouse because you both owned an interest in the Property just before the transfer.

Any capital gain or capital loss you and your spouse made from the transfer of your ownership interest in the Property cannot be disregarded and your tax obligations from the CGT event must be reported according to your legal interest in 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 CGT event occurring. CGT event A1 arises when you dispose of a CGT asset (section 104-10 of the ITAA 1997). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event, or by operation of law (subsection 104-10(2) of the ITAA 1997).

When considering if a change of ownership of the property occurs, it must be determined who had ownership of the property.

The legal owner of the property is recorded on the title deed which is issued under that Australian state's legislation. There are limited circumstances where the legal title and the equitable interests in an asset are not the same. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be sufficient evidence at the time of acquisition that the legal owner holds the property on trust for the beneficial owner. The trustee of the trust is taken to hold their interest in the property for the benefit of the other. A beneficial owner is a person or entity who is beneficially entitled to the asset.

As per paragraph 54 of 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, absolute entitlement within the context of the CGT provisions cannot be satisfied if there are multiple beneficiaries in respect of a single asset such as land.

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

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 an express declaration, which can be effected 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 at acquisition.

A resulting trust arises by operation of law. The evidence of the actual intention of the purchasers at the time of purchase is important.

Dividing rental income and expenses according to legal interest

Co-owners of a rental property (who are not carrying on a business of letting rental properties) must divide the income and expenses in line with their legal interest in the property. This is despite any agreement between co-owners, either oral or in writing, stating otherwise.

Paragraph 6 of Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners states:

6. Accordingly, the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

Any capital gain or loss should also be apportioned on the same basis as the rental income or loss (paragraphs 41 and 42 of TR 93/32).

Main residence exemption

Subdivision 118-B of the ITAA 1997 provides for a capital gain or capital loss you make from a CGT event that happens to a dwelling that is a main residence. To be eligible for the main residence exemption, the property must have a dwelling on it and you must have lived in the property.

Where you transfer property or gift property for no consideration, the market value substitution rule for capital proceeds pursuant to section 116-30 of the ITAA 1997 applies. If this occurs, you are taken to have received the market value of the CGT asset that is the subject to the event, at the time of the CGT event. In general, you acquire a CGT asset when you become its owner (section 109-5 of the ITAA 1997).

Application to your circumstances

In this case no contemporaneous evidence from the time of acquisition has been provided to us to establish that the beneficial interest in the Property differed from the legal title.

An express trust was not created in writing at the time you purchased the property as tenants in common in YYYY. You and your spouse combined held X% legal title to the asset and your child was never a sole beneficiary as they only held X% legal ownership interest at the time of purchase until the transfer on DDMMYYYY.

There is also no existence of a constructive trust as this would be solely dependent upon a court order. No such evidence has been provided from a court of a constructive trust.

The investment home loan taken out in the joint names, and according to legal ownership also supports that at the time of purchase the beneficial ownership of the property was the same as the Property title. We consider this is sufficient evidence to rebut a presumption of a resulting or implied trust existing.

The rental income you and your spouse received from the Property was deposited into a joint offset account and the mortgage was then paid from this joint account. This does not in itself evidence that the beneficial interest was different from the legal title. You can direct money you're entitled to receive to another person without that person having a legal or beneficial interest that entitles them to that money. We therefore consider that you and your spouse were entitled to receive your share of the rental income, that was then used to pay the mortgage from the joint bank account.

In the years ended 30 June YYYY to YYYY, you and your spouse each reported rental income and rental expenses on your tax returns in line with your legal ownership interest in the Property. This evidences that legal and beneficial interest were the same from the time of acquisition.

Finally, as you and your spouse have never lived in the Property, you cannot apply the main residence exemption to disregard any capital gain or capital loss made on the transfer to your child. The dwelling was never your main residence throughout your ownership period.

The contemporaneous evidence provided to us was a letter dated originally DDMMYYYY of your intention to make a gift to them of approximately $X towards the purchase price of a yet to be identified property. This in itself does not show that the beneficial interest is different to the legal title.

From the date of acquisition in YYYY, you and your spouse each held a legal and beneficial interest in the Property. In working out any capital gain or capital loss made on the transfer of the Property to your child, you are taken to have received your share of the market value of the Property on DDMMYYYY as capital proceeds. When you each transferred your legal ownership interest on that date and they became the sole legal and beneficial owner.

Your tax obligations from the transfer must be reported according to your legal interest in the Property as CGT event A1 occurred.