Edited version of private advice

Authorisation Number: 7925157871827

Date of advice: 14 November 2023

Ruling

Subject: CGT - legal beneficial interest

Question

Did a CGT event occur in the year ending 30 June XXXX in relation to the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July XXX

Relevant facts and circumstances

A died on X December 20XX.

B died on X February 20XX.

The children of the individuals are executors of A's estate.

B's estate is being administered by the State Trustee.

A property was acquired by a company of which A and B were shareholders on XX September 19XX. The property was transferred from the company to A and B on XX December 19XX. (Pre-CGT asset). Since that date A and B were the legal owners of the property until A's date of death, B was then the sole legal owner until their date of death.

The individuals' wills do not list the property.

In the years where the property was used to generate income the property was treated as if it was held in the family trust. C is the trustee of the trust.

The trust lists the property in its records. In the years where the property was used to produce income, rent was paid into the Trust's bank account and distributed evenly between A and B except for the period between June 20XX-June 20XX.

In a 20XX lease: the landlord is listed as C.

On XX March 20XX, A completed a 'notification of lands held on trust' form, this was stamped by XXX SRO.

In a 20XX lease: the agreements is between the tenant and A and B.

For the tax year ending 1 July 20XX, A and B declared the rental income in their personal income tax returns and the trust did not reflect property or income in its accounting and tax records.

In 20XX the trustee paid land tax for the property. No other information has been provided regarding land tax over the ownership period.

On XX July 20XX, a transfer of one year's rental income was made to the trust from the personal accounts of A and B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Reasons for decision

Question

Summary

A CGT event did not occur in the 20XX income year when the rental income from the property were distributed directly to the personal accounts of A and B. A and B were the legal owners since 19XX, and there was no change in beneficial ownership when the rental income was paid directly to them.

Detailed reasoning

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. 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 operation of the law.

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 disposal of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust.

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, not the legal owner, to be the asset's owner.

Legal v beneficial ownership

Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated.

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.

If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by 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 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.

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.

Application to your situation

The property is held in the names of A and B but has generally been treated as if it was the property of the Trust. This has caused difficulties for the trustees of the deceased estates of the individuals as there is confusion over whether the property belongs to the Trust or forms part of the deceased estates. In particular, whether a CGT event occurred in 20XX when there were changes in how the rental income was paid to the individuals.

The Commissioner did not receive sufficient evidence to establish that the equitable interest was different to the legal interest.

There was no transfer of legal or beneficial ownership in the 20XX income year when the rental income was paid directly to A and B's personal accounts and a CGT event did not occur.