Edited version of private advice

Authorisation Number: 1052351629359

Date of advice: 20 January 2025

Ruling

Subject: CGT - legal vs beneficial

Question 1

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 1

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

A number of years ago, you, your spouse and your parent-in-law purchased a property as joint tenants, the property comprised a number of allotments.

The purchase price included fees and charges.

You and your spouse contributed an amount to the purchase price and your parent-in-law contributed the remaining amount.

Your parent-in-law's contribution reflected the market value of the portion of the land that was going to be their main residence at the time of purchase.

You and your spouse moved into the existing house on one of the allotments.

Your parent-in-law built a new house on another allotment.

Your parent-in-law paid for the full construction costs at the time their new home was built.

You and your spouse did not contribute to the cost of the construction of your parent-in-law's property.

The property has been your parent-in-law's main residence since it was completed.

Several years ago, you and your spouse sold the allotment where you had been living.

Your parent-in-law was not reimbursed from the sale of the allotment but, on the basis of their contribution to the initial purchase, it was decided that they should retain sole ownership of the other allotment and the new house that had been built on it.

The Certificate of Title for the allotment lists you, your spouse and parent -in-law as joint tenants.

There was no written agreement entered into at the time the initial lots were purchased or when you and your spouse sold your property and decided to allow your parent-in-law to have sole ownership of the remaining lot.

You did not change the title to reflect that your parent-in-law was the sole owner of the lot.

You anticipate that the property will need to be sold to finance your parent-in-law's entry into an aged care facility and if this does not occur it will be sold upon their death.

You have supplied the following documents:

•                Cheque to builder for construction materials

•                Cheque to bank for purchase of property

•                bank statement

•                council rates notice

•                Water tax invoice

•                electricity tax invoice

•                Statutory declaration from builder

•                Statutory declaration from you

•                Statutory declaration from your spouse

•                Statutory declaration from your parent-in-law

•                Copies of certificate of title

•                Settlement statement

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

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 CGT event occurring. The most common CGT event, event A1, occurs under section 104-10 of the ITAA 1997 when there is a change in ownership of a CGT asset.

Accordingly, when applying the CGT provisions on the sale of property, ownership must be considered. It must be determined who had beneficial ownership of the property.

An individual can be a legal owner but have no beneficial ownership in an asset. This will ordinarily occur where the property is held on trust.

To establish occasions where legal and beneficial ownership are not the same (i.e. a trust), there needs to be evidence to rebut the standard presumption that legal and equitable interests are the same.

This evidence ordinarily includes:

•                contemporaneous documentation that clearly shows the parties' intentions at the time the property was purchased, and

•                documentation that clearly shows that the parties treated the property in accordance with those intentions during the ownership period.

Gibbs CJ stated in Muschinski v. Dodds [1985] HCA 78 that the relevant principles included there being contemporaneous evidence:

Where both transferees have contributed to the purchase money, the intentions of both are material, but where only one has provided the money, it is his or her intention alone that has to be ascertained. The evidence admissible to establish the intention of the real purchaser will comprise 'the acts and declarations of the parties before or at the time of the purchase... or so immediately thereafter as to constitute a part of the transaction' (Charles Marshall Pty Ltd v Grimsley [1956] HCA 28; (1956) 95 CLR 353 at 365)

In relation to evidence of a trust arrangement, the following should also be noted:

•                contemporaneous evidence includes any documents such as e-mails, diary entries, bank documents, correspondence with third parties involved in the transaction, etc., that were created at the time of the property's purchase,

•                where there is little or no contemporaneous evidence of intention and the terms of an arrangement, formal documents prepared many years after a property was purchased will be of little probative value, and

•                the evidence must be unambiguous.

In the absence of clear and compelling evidence to the contrary, the property is considered to be owned by the people registered on the title.

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 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 [1984] HCA 81).

If a resulting trust arises, the party, or parties, who hold the legal title is, or are, presumed to hold the property upon resulting trust in favour of those who contributed to its purchase cost.

That is, 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 other's name.

The presumption of resulting trust may be rebutted by:

•                a presumption of advancement that arises and is not rebutted, or

•                evidence of the contributors' common intention at the time of the property purchase contrary to the resulting trust arising: Calverley v. Green.

Application to your circumstances

In your case, there is no constructive trust as there has been no court or tribunal hearing which determined a constructive trust is in existence.

For the other two types of trust, clear contemporaneous evidence is required in order to either establish that there was an express trust or to rebut the presumption of advancement such that a resulting trust may have arisen.

We make the following comments in relation to documents you have provided:

•                Your signed statutory declaration along with those of your spouse, parent-in-law and the builder clearly states the intention regarding the property, but it is a very recent document so has little weight in the absence of contemporaneous evidence.

•                The payment of property expenses by a particular person is not evidence that there was a trust created when the property was purchased.

None of these documents evidence the intention to hold the property on trust - some point towards the property being dealt with as if the legal and beneficial interest were the same. None of them are contemporaneous.

As a result, we do not consider that sufficient evidence has been provided to establish that the equitable interests in the property were different from the legal title.

Consequently, CGT event A1 will happen to you in relation to your share of the ownership interest in the property when it is sold.