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1 Did capital gains tax (CGT) event A1 happen to your interest in the Property on the Separation date?

1 No. Question 2 Does your assessable income include 50% of the rental income derived between the Separation date and the date the Property was sold? Answer 2 Yes. Question 3 Can you claim a deduction for 50% of the rental expenses incurred between the Separation date and the date the Property was sold? Answer 3 Yes. Question 4 Did CGT event A1 happen to your interest in the Property when it was sold? Answer 4 Yes. Question 5 Are your capital proceeds from the sale of the Property 50% of the sale price? Answer 5 Yes. This ruling applies for the following periods : Year ended 30 June 20XX Year ended 30 June 20XX The scheme commenced on: XX November 20XX

In 20XX you and your spouse acquired an investment property ( The Property ) as joint owners. The Property was tenanted and earned rental income. It was managed by a Real Estate Agent. You and your spouse have now separated ( ex-spouse ). Discussions in relation to the separation began in mid October 20XX and were finalised on XX November 20XX ( the Separation Date ). In January 20XX a Statutory Declaration was prepared and signed as part of the separation process, detailing an agreed division of assets ( Statutory Declaration ). The following was stated in the Statutory Declaration: "As of November 20XX it is agreed between "Person A" and "Person B" that; We are in "agreement"

The following be binding and in place, all liability's future and past be distributed as nominated and agreed between both party's. No party will have claim and or suffer any loss to that which is not allocated or stated in this agreement. That the following has been in place and binding as agreed/ agreement between both party's since November 20XX. All party's are in "agreeance". All party's are in "agreement". All party's are not under any duress in any way, and in sound state of mind. This agreement is legally binding. This agreement is final. No party will have any claim thereafter. Asset Distribution House (50/50) " Equal share allocation " Land - 100% Asset allocation to "Person B" The Property - 100% Asset allocation to "Person A" Beach Shack - 100% Asset allocation to "Person A"." You did not go through the court system so there was no formal documentation in relation to the division of assets. There was no written document or record made or created in or around November 20XX in relation to the division of assets.

Since the Separation Date, the rental income received for the Property was paid into an account with the Real Estate Agent, and then into an account in your ex-spouse's name. All associated Property expenses have been paid from your ex-spouse's account including: •         Maintenance and repairs •         Property management fees •         Insurance premiums, and •         Loan repayments (including interest). On XX February 20XX the Property was sold and a capital gain was made. Proceeds from the sale were used to pay the Real Estate Agent's fees, any amount owing to the bank in relation to the Property, council rates, utilities and the strata levy, with the surplus funds being paid into an account in your ex-spouse's name.

Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 103-10 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 108-7 Income Tax Assessment Act 1997 section 116-20 Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3

Question 1 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. Section 108-7 of the ITAA 1997 provides that 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. Section 104-10 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a dwelling to someone or dispose of shares in a company. Subsection 104-10(3) provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs. 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.

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. 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. 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.

Trusts may be of three kinds: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same and there is sufficient evidence to establish that the equitable interest is different from the legal title. Express Trusts An express trust is one intentionally created by the owner of property 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 56 ALR 483). A trust is presumed in favour of the party providing the purchase money.

If an individual purchases and then pays for a 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 other's name. Application to your situation You and your ex-spouse jointly purchased the Property. The title of the Property was registered in both of your names as joint tenants. You signed the Statutory Declaration with your ex-spouse, that said that from the Separation Date, you were no longer the owner of the Property. The Property title was not changed to reflect your ex-spouse as the sole owner of the property at the Separation Date nor at the time you signed the Statutory Declaration. The Statutory Declaration was not signed until approximately 13 months after the Separation Date, in January 20XX. Since the Separation date, your ex-spouse has received 100% of the rental income and paid all the expenses from his own account.

The Statutory Declaration signed in January 20XX is not considered to be contemporaneous evidence. The Separation date occurred in November 20XX, but there is no written evidence from that time. As you did not go through the court system, there was no formal documentation in relation to the division of assets. We note that if you had sufficient evidence that you created a trust over your interest in the property in 20XX, a CGT event would have occurred at that time which would not have been disregarded under the marital breakdown rollover provisions. After considering all of the above matters, the Commissioner does not consider the beneficial ownership of the Property differed from the legal title. Consequently, the Commissioner will conclude that you did not stop being the equitable owner of the Property at the Separation date and that the equitable interests in the Property are exactly the same as the legal interests in it. Therefore, CGT event A1 did not happen to your interest in the Property on the Separation Date. Question 2 and 3

Section 6-5 of the ITAA 1997 provides that your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature. According to TR 93/32, the income/loss from a 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. An example of where the equitable interest may differ from the legal interest is when an owner is holding their share as trustee for the other owner. A Family Court order dealing with settlement of jointly owned property may also alter this equitable interest. A person's legal interest in a property

is determined by the legal title to that property under the land legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deed for the property issued under that legislation. Co-ownership Co-owners of a rental property will generally hold the property as joint tenants or tenants in common. An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines among co-owners of property, the division of the net income or loss from the property. Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - each owns an identical 50% share in a property. Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the co-owners, either oral or in writing stating otherwise.

Where a co-owner forgoes their share of the rental income and/or pays for all the expenses this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are legally entitled to their share of the income and liable for their share of the expenses. Paragraphs 48 and 49 of TR 93/32 provide the following example: Mr and Mrs Z rent out a house that they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.

Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interests, that is 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z. In your case, the equitable interest in the ownership of the property is not different from the legal title. Therefore, you must declare the income and claim the deductions with respect to the property in proportion with your legal interest in the property. As a co-owner of the rental property, there is nothing in the legislation which allows a choice to allocate income on a basis different to the legal title. While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to claim more or less than their legal entitlement to investment property income and expenses.

Question 4 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. In your case, you were the legal and beneficial owner of a 50% interest in the Property when it sold in February 20XX. Therefore CGT event A1 happened to you when the Property was sold. Question 5 Under subsection 116-20(1) of the ITAA 1997, your capital proceeds from a CGT event include the total of the money you have received, or are entitled to receive, in respect of a CGT event happening. These terms are further defined in section 103-10 of the ITAA 1997. It states this Part (Part 3-1), and Part 3-3 apply to you as if you had received money or other property if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct. In your case, you and your ex-spouse sold the Property, which triggered CGT event A1. Money was received in relation to the sale. 100% of the proceeds of the sale of the Property were paid to your ex-spouse, after the repayment of any real estate fees, rates, utilities, bank fees and the repayment of the bank loan.

Although you did not receive 50% of the proceeds based on your ownership share, it is considered that 50% of the proceeds has been applied for your benefit. The fact that the money went to your ex-spouse, and you did not physically receive the 50% portion, does not alter the calculation of your capital gain. The money is considered to have been dealt with as directed by you. The fact that your personal agreement with your spouse was that he received 100% of the residual proceeds, does not confer an additional 50% legal ownership of the Property on him. Such an arrangement is private in nature. The proceeds from the sale of the Property are to be shared between yourself and your ex-spouse according to your legal interests in the Property.