1 Do P1 and P2 have assessable capital gains (CGT) under Part 3-1 of the Income Tax Assessment Act 1997 in respect of the transfer of the title of the Property to P3?
No. This ruling applies for the following period : Income year ended 30 June 20YY The scheme commenced on: 1 July 20YY
1. P1 and P2 purchased a property (the Property). 2. P1 and P2 lived at the Property for several years. 3. Later, P1 and P2 sold the Property to P3. 4. The title of the Property was not changed at the time of sale. 5. Around the time of sale, P1, P2 and P3 executed a Deed of Trust in respect of the Property which confirmed that P1 and P2 held the Property on trust for P3 (the Trust). 6. P3 has lived at the Property from the time they purchased it. 7. P1 and P2 have had no claim to the Property since the time they sold it. 8. The title to the Property was changed in 20YY, and P3 is now the registered owner.
Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 106-50
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can only make a capital gain or a capital loss if a CGT event happens. Division 104 of the ITAA 1997 sets out the CGT events. Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset'. Subsection 104-10(2) of the ITAA 1997 provides that 'you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner'. In Ellison & Anor v Sandini Pty Ltd & Ors; FC of T v Sandini Pty Ltd & Ors [2018] FCAFC 44, Jagot J stated, the following about the meaning of 'beneficial owner' for the purposes of section 104-10 of the ITAA 1997: ... a "beneficial owner" of an asset has more than a mere proprietary interest in the asset. To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset... (at paragraph 99)
In the current circumstances, P3 purchased the Property from P1 and P2. At the time of purchase, it was agreed between P1, P2 and P3 that the title to the Property (legal ownership) would not be transferred to P3 but would stay with P1 and P2. P1, P2 and P3 executed a deed of trust whereby P1 and P2 held the Property (legal ownership) on trust for P3. In 20YY, the title of the Property (legal ownership) was changed from P1 and P2 to P3. A CGT event would have happened to P1 and P2 in respect of the Property when they sold it to P3 (the beneficial ownership of the Property changed) subject to the main residence exemption in Subdivision 118-B of Part 3-1 of the ITAA 1997. From that time until 2023 (when legal ownership changed to P3), P1 and P2 held the Property on trust for P3.
Subsection 106-50(1) of the ITAA 1997 states that '... from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust)'. Subsection 106-50(2) of the ITAA 1997 treats an act done in relation to the asset by the trustee as an act done by the absolutely entitled beneficiary. 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 (TR 2004/D25) states the following about when a beneficiary is absolutely entitled as against a trustee: 10. 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 ...
74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it. 75. Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event... 76. A beneficiary is a sole beneficiary in respect of a trust asset if no other beneficiary has an interest in the asset... 78. Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement ... that their interest in the asset be vested in possession and indefeasible. Therefore, a sole beneficiary in respect of a trust asset will be absolutely entitled to the asset as against the trustee if the beneficiary can (ignoring any legal disability) terminate the trust in respect of the asset by directing the trustee to transfer the asset to them or to transfer it at their direction. Under the terms of the Trust, P1 and P2 (Trustees) held the Property for P3.
P3 was the sole beneficiary of the Trust who had all of the interest in the trust asset (the Property) and could call on the Trustees (P1 and P2) to deal with the trust asset as they directed. P3 was absolutely entitled to the trust asset (the Property) as against the trustee of the trust. Paragraph 144 of TR 2004/D25 states that '...no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary'. Therefore, when the title of the Property was changed to make P3 the registered owner of the Property, no CGT event happened. As such, there was no capital gain from a CGT event and no amount of assessable income. P1 and P2 do not have any amount to include in assessable income in respect of the transfer of the title of the Property (legal ownership) to P3.