Edited version of private advice

Authorisation Number: 1052369475898

Date of advice: 11 April 2025

Ruling

Subject: Capital gains tax

Question 1

Are you liable for any capital gains tax (CGT) on your legal ownership in the Property and the subsequent transfer to the Estate?

Answer 1

No.

This private ruling applies for the following period:

Year ending X June 20XX.

The scheme commenced on:

X July 20XX.

Relevant facts and circumstances

The applicant married the deceased in 19XX.

The applicant and the deceased purchased the Property in 19XX as joint tenants.

The applicant and deceased had two children.

The deceased and the applicant separated in 19XX and it was agreed between the applicant and deceased that the deceased would receive the Property. The deceased remained residing in the Property with the two children and paid all costs and outgoings associated with it.

Despite this agreement, no steps were taken to change the legal title from joint tenancy to sole ownership of the deceased.

A dissolution of marriage was declared in November 19XX.

In December 20XX, the applicant married their second spouse.

In September 20XX, the deceased passed away.

In October 20XX, child X commenced proceedings in the Court, as the plaintiff, in their capacity as administrator of the Estate of the Deceased. The applicant in this ruling was the First Defendant in the Court proceedings.

In December 20XX, the Judge made the following final orders:

3. declares that pursuant to an agreement made for the purpose of dividing matrimonial property as a consequence of the dissolution of marriage between the deceased and the Defendant, the Property has been, since X November 19XX held by the Defendant on trust for the deceased until their death in September 20XX, and since then has been and is now held by the Defendant on trust for the Estate of the Deceased.

4. Orders that the Property vests in the Plaintiff in their capacity as Administrator of the Estate of the Deceased.

5. Orders that the Plaintiff in their capacity as Administrator of the estate of the deceased be recorded as proprietor of the Property pursuant to s 138 of the Real Property Act 1900 (NSW).

Legal title of the Property remained in the names of the applicant and deceased, as joint tenants, until January 20XX when legal title was transferred to child X in their capacity as administrator of the Estate of the Deceased in accordance with the Orders of the Judge.

The applicant was exempt from stamp duty at the transfer of legal title as it was held they only held bare legal interest.

Both the applicant and deceased signed statutory declarations in September 20XX declaring that an agreement was made between applicant and deceased that the property would be "owned entirely" by the deceased, who was then responsible for rates and upkeep of Property.

A Government department has taken the view that the applicant ought to have disclosed their interest in the Property on and from 19XX, which they did not to because of the dissolution of marriage and Order of the Family Court of 19XX.

Subsequently, the Government department claimed that the applicant owes them $XX in refundable benefits and their spouse owes them $XX in refundable benefits.

In February 20XX, a decision was handed down in Court setting aside the decision to cancel the applicants, and their spouses, pensions on the basis there was no overpayment, therefore there was no debt.

The applicant signed a Will in 20XX.

The applicant has appointed their spouse to be sole Executrix and Trustee of their Will and gives, devises, and bequeaths the whole of their estate to their spouse. The Will does not specify which Property they bequeath onto their spouse.

The property has been listed for sale with an auction scheduled for April 20XX.

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 106-50

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 128-50

Reasons for decision

Summary

CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and that other person was absolutely entitled to that asset as against the trustee. It has been determined that you held the Property on trust for the deceased, who was absolutely entitled to it, therefore CGT does not apply to your ownership of the Property.

Detailed reasoning

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset.

A property is a CGT asset under section 108-5 of the ITAA 1997.

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. Pursuant to subsection 104-10(5), the capital gain or capital loss you make is disregarded if the asset was acquired before 20 September 1985.

An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner that will have a CGT event upon sale of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust.

When considering the disposal of your interest in a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. It is possible for legal ownership to differ from beneficial ownership.

However, the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and that other person was absolutely entitled to that asset as against the trustee.

In such a case, the transfer of the asset from the other person to the legal owner on trust for the other person is not a transfer of ownership for CGT purposes and no capital gain or capital loss will result. This is because the CGT provisions consider the beneficiary to be the asset's owner, not the legal owner.

Joint tenant survivorship rule

Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset, constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

Under section 128-50 of the ITAA 1997, when a joint tenant dies, the surviving joint tenant is taken to have acquired their ownership interest on the date of their death.

Legal v beneficial ownership

In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset.

The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner.

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 paragraph 41 TR 93/32, the Commissioner 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. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other.

Absolute entitlement

A beneficiary of a trust is absolutely entitled to an asset of the trust if the beneficiary, who has a vested and indefeasible interest in the entire trust asset, has the ability to call for the asset to be transferred to them or to be transferred at their direction.

Section 106-50 of the ITAA 1997 states that from just after the time a beneficiary of a trust becomes absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being an asset of the beneficiary.

Taxation Ruling 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 (TR 2004/D25) states(at para 10) that the core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction (Saunders v. Vautier (1841) 4 BEAV 115).

Constructive trust

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, 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, however, dependent upon the order of the Court, even though that order may operate retrospectively by dating the origin of the trust from some earlier act.

Application to your circumstances

When determining legal v beneficial ownership, our starting point, as noted in TR 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.

The applicant and the deceased purchased the Property, prior to the introduction to CGT, as joint tenants. Upon separation in 19XX, the applicant was no longer involved in the Property. The deceased remained in the Property and paid all costs and outgoings associated with it.

The applicant has provided statutory declarations from 20XX, from both the applicant and the deceased, as to the intention behind the arrangement.

The court order handed down by the Judge in 20XX in the Court provides evidence that the Property was being held on trust by the applicant for the deceased. The Judge determined the commencement of the trust to be from the date of the dissolution of marriage in November 19XX, to the date of the deceased's death.

Further, the Judge ordered that legal title be transferred to child X in their capacity as executor of the deceased's estate. As outlined above, CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for another person and that other person was absolutely entitled to that asset as against the trustee.

Therefore, CGT will not apply to your legal ownership of the property and subsequent title transfer on XX X 20XX as the Property was held on constructive trust for the deceased, who was absolutely entitled to the Property as against the applicant.